10/4/2011 6:59 PM ET|
Time to check out Saks, Tiffany?
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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