Why Jimmy Choo plc is one of my top picks after today’s update

Jimmy Choo plc (LON: CHOO) has long-term capital gain potential.

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Luxury brand Jimmy Choo (LSE: CHOO) has released an upbeat trading update today that shows it’s performing in line with expectations. That’s despite a difficult trading environment, which indicates that it has the potential to be a relatively consistent and fast-growing stock for the long term.

Jimmy Choo’s revenue growth in the period since 30 June has largely been driven by new store openings and improved retail trading across all of its regions. It has benefitted in particular from continued strength in China, with the brand continuing to attract new customers as well as develop improved customer loyalty with existing customers.

During the period, Jimmy Choo has opened four new stores, one in each of the regions in which it operates. Three stores were converted into its new store concept, while its like-for-like (LFL) sales in the second half of the year have moved back into positive territory despite the closure for refurbishment of its flagship store in Milan.

Jimmy Choo’s operating changes are set to improve its overall financial performance. Its anticipated delivery of cost reductions means that margins are set to increase for the full year, with Jimmy Choo’s underlying cash generation also set to rise and contribute towards a deleveraging of the business. And with weaker sterling having a positive impact on its bottom line and set to continue to do so over the coming months, the outlook for Jimmy Choo is upbeat.

Earnings surge?

In fact, it’s expected to deliver a rise in its earnings of 28% in the current year, followed by further growth of 27% next year. This is an impressive outlook for the company – especially when the challenging operating environment is taken into account. It shows that Jimmy Choo has a high degree of customer loyalty, as well as the right strategy through which to diversify and broaden its product offering.

Despite such strong growth, it trades on a price-to-earnings growth (PEG) ratio of only 0.6. This indicates that it has a sufficiently wide margin of safety to merit purchase. Its appeal is greater than that of sector peer Burberry (LSE: BRBY) in terms of valuation and growth potential. Burberry is expected to record a rise in its bottom line of 7% this year and 8% next year. Alongside its PEG ratio of 2.2, this means that Jimmy Choo could outperform Burberry over the medium term.

Of course, Burberry remains a logical buy for the long term. Its high degree of customer loyalty, sound strategy and diversity mean that it’s likely to deliver impressive capital gains. However, with Jimmy Choo having a wider margin of safety and superior growth forecasts, it’s the better buy at the present time. While both stocks could suffer from further volatility within the global luxury fashion market, now could be an opportune moment for Foolish investors to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Burberry and Jimmy Choo. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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