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.
Better than the 'real world'
This contrast makes it pretty clear that the current relapse in the economy seems to be hitting the wealthy much less than everyone else.
"There is a clear bifurcation between the low-end and high-end consumer, which has been evident in same-store sales for the past several months," says JPMorgan Chase analyst Virginia Chambless. At the high end, Nordstrom and Saks see "no indication" that the consumer is slowing down, she says. On the flip side, Kohl's has been posting results at the low end of its expectations, says Chambless. J.C. Penney has cut expectations.
In fact, the rich have been spending more freely than the rest of us for more than two years -- ever since they shook off the shock of the 2008-09 market meltdown.
A look at the stock charts since mid-2009, when the recession ended, supports this. Tiffany, Nordstrom and Saks have vastly outpaced Wal-Mart Stores (WMT, news), Target (TGT, news) and J.C. Penney, which cater to the middle and working classes. Their stock results are good proxies for the divergent fortunes of the well-to-do versus the middle class in this uneven recovery.
Will it last?
With their stock prices relatively low, these luxury retailers certainly look tempting.
But the key question is: Will the rich continue to spend? After all, they did pull back a lot in 2008-09, when the economy and market got really scary. Eventually, if we get a repeat, even the wealthy will slow their spending.
But I don't think we're heading back to a recession. It was reassuring last week to hear that Buffett unambiguously agrees, based on his insider's look at the trends at the 70-plus companies owned by his Berkshire Hathaway (BRK.B, news).
If he's right, the wealthy should continue to open their wallets even as millions worry about jobs and mortgages. They'll snap up Burberry Tassel Check Print satchels, which go for $1,995 at Nordstrom, or those cute snowflake diamond pendants that will set you back $40,000 at Tiffany.
After all, if the August sell-off didn't scare the wealthy, they probably aren't going to get too spooked in a sideways-to-up market, which is what I expect.
"As we understand it, there hasn't been a big shift in spending in the luxury sector," agrees Roseanne Morrison, the fashion director at the Doneger Group, which tracks retail fashion trends. "Luxury consumers are sitting on lots of cash. So unless there is a sustained depression in the market, I don't think it affects the luxury consumer the way it affects the mass-market consumer."
The rich say they're going to keep shopping
It's not just the experts. The wealthy say the same thing. There's a whole cottage industry of analysts who use surveys and industry contacts to track the spending habits of the rich. I couldn't find one who concluded that the wealthy are going to pare spending much because of the recent ruckus in the market. In contrast, they're finding that the wealthy remain sanguine, at least when it comes to spending.
Let's start with Nielsen, which tracks consumers in its Global Consumer Insights division. Surveys conducted since the market pullback began in early August confirm that luxury consumers have different spending plans from the rest of us.
Wealthier consumers, which this survey defined as households earning more than $100,000 a year, continued to increase their spending and the number of trips to stores. In contrast, all other consumers were cutting back. "We see a widening of the gap," says James Russo, a global consumer trends analyst at Nielsen. It's the same for expected holiday spending. About 58% of wealthy shoppers recently polled said they will spend as much this holiday season as they did last year. But only 46% of households earning less than $50,000 a year planned to spend as much.
Walter Loeb, the president of retail consultancy Loeb Associates, and Stephen Wyss, a partner in the retail and consumer product practice at BDO, an accounting firm, agree with the gist of these findings.
And I hear a similar tale from the Luxury Institute, based in New York, which conducts regular surveys of wealthy consumers, those with annual incomes of $150,000 or more and median net worth of $1.2 million. Surveys done since the market meltdown started this summer found that despite such weakness, significantly fewer wealthy consumers say they will cut back on luxury-goods spending, compared with the previous two years. "They are feeling a little bit of the pain, but it is not dramatic," says Milton Pedraza, Luxury Institute's CEO.
Interestingly, wealthy consumers say they are likely to spend more on travel during the next 12 months. This confirms some bullish insider buying I recently spotted at Morgans Hotel Group, a chain of luxury hotels that recently expanded into the Bahamas. Morgans Hotel Group just reported revenue gains of 16% for the second quarter. And, like the spending on a lot of luxury goods, luxury hotel spending growth held steady at 7.4% in August, the same as in July, according to Goldman Sachs.
In other words, when the going gets tough, the rich don't just go shopping. They hit the road, too.
At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column. He has recommended Morgans Hotel Group to his newsletter subscribers.
Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.
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