Why Luxury Goods Are So Strong

Coach has confirmed that global luxury brands are in good shape. Coach reported astonishing numbers, well above expectations (gross margins of 74.2%!) with strength not just in Asia but also in the U.S.

The Big Story: From LVMH (big increase in champagne sales!) to Luxottica (premium sunglasses strong!)...the entire affordable luxury cycle of sunglasses, handbags, fashion watches, fashion boots is accelerating domestically and remains strong in emerging markets.

Traders have noted that companies like Fossil , Coach , Tiffany , Deckers , Steve Madden , Ralph Lauren have well surpassed their 2007-08 prior peak earnings and are growing nicely. "The global consumer loves branded fashion," one trader wrote to me.

One point: this does not mean that holiday will be strong for everyone. It's the luxury retailers that are stronger. Holiday will be a category-by-category story.

Why are luxury retailers doing better than overall retailers? Traders tell me that:

1) they gain share relative to smaller brands who got crushed in the recession;

2) they can spend huge on marketing;

3) they are taking huge advantage of opportunities in emerging markets where they have brand awareness but little store presence and a sales shift to direct sales on the internet boost their already strong margins.

3) they innovate and the consumer responds to the innovation. Think Tiffany's Key to My Heart. Fossil's Ceramic or white plastic band watches. Coach's Poppy and Madison.

One other point: inflation is beginning to matter; record cotton prices are a topic of discussion among traders. Investors who are fearful of higher cotton costs hurting margins are finding that higher end companies with low cotton to no cotton content—watches, sunglasses, boots, handbags, and leather goods—are more insulated from global inflationary pressures, one trader wrote to me.

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