2 top luxury stocks trading for under a tenner

Shares are cheap and prospects are bright for these luxury retailers.

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Shares of luxury shoe designer Jimmy Choo (LSE: CHOO) are up over 18% in the past year to stand at 154p as well-executed expansion plans and a series of positive trading updates have boosted investor confidence.

The key reason for increased investor positivity is the ambitious expansion plan that saw the group open nine new directly owned stores in 2016 as well as convert 16 older stores into its new concept store layout. Compared to larger rivals such as Burberry, Jimmy Choo still has plenty of room to continue growing its footprint as it only had 150 directly owned stores at the end of December.

The company also has a few other interesting growth levers available to it as online sales only represented 6% of total sales at year-end and men’s product was less than 10% of revenue in H1. Furthermore, developing Asian markets are still largely untapped with only 15% of H1 sales coming from non-Japanese countries in the region.

While Chinese luxury sales have been negatively affected by the government’s anti-corruption drive in the short term, this huge and increasingly wealthy market should be a tempting target for Jimmy Choo in the long term.

The downside for potential investors is that the company’s shares currently trade at 23 times forward earnings, which suggests the valuation has already taken account of significant future growth. Another issue to keep an eye on is the fact that like-for-like sales reversed 1% in 2016 due to challenges in the US and the temporary closure of several flagship stores for refurbishment. While these are hopefully short-term issues, interested investors should keep a close eye out for a return to organic growth in the coming quarters.

Driving shareholder returns higher

Global car distributor and dealership group Inchcape (LSE: INCH) represents luxury brands from Rolls-Royce to Porsche and Jaguar. A new CEO coming on board with ambitious expansion plans has helped send shares of the company up over 9% in the past year to their current 739p price.

Despite five straight years of earnings growth, shares of the company currently trade at a sedate 13 times forward earnings, which is reasonable considering the cyclical nature of the luxury auto market.

However Inchcape is less cyclical than many pureplay car dealerships as 78% of the group’s trading profits last year came from its distribution business. This segment imports and exports vehicles, takes care of the distribution and works with OEM partners to source after-care parts. The 9.9% profit margins the distribution business posted last year are also much higher than the 1.9% margins from the retail network.

The company’s healthy balance sheet also means it can take advantage of any downturn to make strategic acquisitions at attractive prices. We’re already seeing this in action as weak trading in Latin America allowed Inchcape to purchase the leading distributor of Subaru and Hino vehicles in December for a relatively cheap £234m, or 8.6 times full-year EBITDA.

Inchcape certainly isn’t immune from any downturn in the global auto market but its high-margin distribution business, a healthy balance sheet and well-covered 2.8% yielding dividend still make it an interesting stock I’ll be keeping a close eye on.

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.

Ian Pierce has no position in any shares mentioned. 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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