10/4/2011 6:59 PM ET|
Time to check out Saks, Tiffany?
The economy is slowing, and most consumers are cutting back -- but it looks like the well-heeled have barely noticed. That means the stocks of luxury retailers may be in for lift.
Do we have "class warfare" in the U.S.? You bet. And the rich are winning.
Don't take my word for it. No less an expert on affluence than Warren Buffett said it in an interview with Charlie Rose last week: "In fact my class is not just winning, we're killing. It's been a rout."
Buffett was talking about a pet peeve of his: tax rates that mean effectively lower taxes for the well-heeled. It could just as easily apply to the well-documented and growing gap between the rich Americans and everyone else.
I've written more than once about the problems this gap creates and about how the recession has only made it worse. But there's also an investing angle we shouldn't miss.
With the economy slowing again and ordinary Americans again cutting back, this has been a brutal summer for retail stocks. Luxury retailers have been sold off like everything else -- on the assumption the well-to-do will have to cut back with the rest of us.
Except that, well, they haven't. To the victors go the spoils, so the rich are still buying.
This tells me that for investors, it's time to consider the places the rich go shopping. Let's take a look at why luxury retail stocks are poised for bounce in an increasingly tough market -- and why names like Nordstrom (JWN, news) and Saks (SKS, news) might belong on your shopping list.
Stumbling, but still rich
By any measure, August was a tough month for the stock market and the economy. September brought more volatility and not much good news. The evidence suggests that consumers were pinching pennies as they digested all the bad news from Washington and Europe.
The market seemed to assume this consumer crunch applied across the board and that the wealthy would be putting off purchases of TechnoMarine watches, Gucci handbags and Miu Miu footwear.
The shares of luxury retailers have all been hammered. The stocks of Tiffany (TIF, news), Saks, Coach (COH, news) and luxury chain Morgans Hotel Group (MHGC, news) have fallen 25% to 30% from their July highs. Nordstrom is down about 12%. In contrast, the Standard & Poor's 500 Index ($INX) is off around 18%.
But in fact, the rich barely blinked.
"We are seeing that even when the stock market trembles, the affluent don't get scared as easily as they did," says Candace Corlett, the president of WSL Strategic Retail, a consultancy. The rich lived through the 2008 market meltdown and the recession that followed with their wealth "intact enough," she says. So now, "they don't panic like they did in 2008."
Where the top shops
We'll know how true that is as sales reports from September roll in. But here's where some of the key players stand now.
- Nordstrom: In early September, Nordstrom reported that August sales at stores open more than a year were up 6.7%, compared with the year before. That was virtually no different from the 6.6% gains in July. And it's essentially the same as the year-over-year gains the retailer posted for the first half of the year. Including revenue from new stores, sales were up more than 12% during the first half of the year, a pace that continued in August.
- Saks: This chain did report a significant decline in same-store sales growth for August to 6.1%. In contrast, it reported 12.7% year-to-year growth for February through July. But still, 6% growth isn't bad at a time when consumers overall have pulled back sharply. And Wall Street analysts are predicting no slowdown at Saks for September. They expect 6% growth, according to Thomson Reuters.
- Tiffany: This high-end jeweler doesn't report monthly sales. But the company reported total worldwide sales growth of 30%, and a 25% gain in U.S. sales, for the quarter ending in July. Sales at its New York flagship store surged 41%, in part because of spending by Chinese tourists. Tiffany has also been raising prices, which hasn't fazed shoppers looking to take home a splurge in one of the luxury retailer's coveted blue boxes. The company noted particular strength in sales of items costing more than $20,000. But it was also helped by the fact that luxury jewelry was the strongest retail category in the second quarter, posting sales gains of 8.4%, according to American Express Business Insights, a division of American Express.
- Coach: This bag-maker also doesn't report monthly sales results. But it has also been shooting out the lights. Coach saw revenue jump 17% in the second quarter. The U.S. retailer's success in Japan over the past few years has proved that it can hold its own against Old World European luxury brands. Now, Coach is building on its strengths to grow rapidly in China and other developing markets. Of course, a slowdown in China will hurt Coach. But I don't believe leaders in China will run the risk of civil unrest that a significant economic slowdown would bring.
In contrast to these luxury stores, more pedestrian retailers like J.C. Penney (JCP, news) and Kohl's (KSS, news) are expected to post same-store sales growth of only 1.2% and 1.7%, respectively, as they report this month, according to Thomson Reuters.
Expect this dichotomy to continue during the holiday season. Since the market turmoil started Aug. 1, Wall Street analysts have raised fourth-quarter earnings estimates for luxury retailers, while cutting them for J.C. Penney, Kohl's and similar chains catering to lower-income shoppers, according to data provided by Thomson Reuters.
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