Jubak's Journal
Recent articles:
• Ask the Fed about a year-end rally, 10/11/2005
• Wal-Mart's pricey gamble, 10/7/2005
• Let's talk trash: 5 post-hurricane picks, 10/5/2005
More...
| | Jubak's Journal
4 stocks to ride the backs of big spenders
Rising energy costs have tapped lower-income consumers. But luxury brands will thrive as the wealthy keep on shopping.
By Jim Jubak
"The very rich are different from you and me," Hemingway wrote. "They have more money."
Keep that in mind if you want to make any profits from retail stocks for the next six months.
Retail stocks with big exposure to lower- and moderate-income customers have taken a hit this year on worries that higher energy prices will slow spending. Gasoline prices were up 56% on Oct. 11 from the average 2004 price, and shares of Wal-Mart (WMT, news, msgs) are down 15% for 2005.
Sales at retailers that cater to upper-end customers -- and the more upper end the better -- are not just untouched by higher energy prices but positively booming. At Tiffany & Co. (TIF, news, msgs), sales climbed 10.5% in the second quarter of 2005 from the same quarter in 2004, and are projected to climb 10.4% in the third quarter and then 7% in the fourth quarter. Tiffany shares are up 24% for 2005.
An unbalanced impact
Why the difference? Because the rich are, well, rich.
Take a look at spending on gasoline by lower and upper income U.S. families. On average all U.S. families spent $1,597 on gasoline in 2004. The families in the highest 20% of incomes far out-spent -- at $2,458 -- the families in the lowest 20% -- at $725 -- annually.
But that $2,458 hurt far less than that $725 did. It represented just 1.8% of income, according to Legg Mason, for the families in the richest 20% of U.S. families. In contrast, the families in the lowest 20% of incomes spent 8.8% of their income on gasoline in 2004.
Mind you, those numbers are from 2004 when regular gasoline averaged $1.84 a gallon. On Oct. 11, according to AAA (formerly the American Automobile Association), regular gasoline averaged $2.87 nationally. That's 56% higher than in 2004.
More from MSN Money
Some back-of-the-envelope calculations show why a 56% increase in the price of a gallon of gasoline would be a pinprick to the very rich and a wallop between the eyes for lower-income consumers. A 56% increase in the price of gasoline would cost a family in the top 20% $1,376 more -- but that would drive spending on gasoline to just 2.8% of income for these high-income families. A family in the lowest 20% of incomes would wind up spending just $406 more for gasoline but see that spending on gasoline climb to 13.7% of family income.
See why lower-income families might be cutting back their non-energy shopping more than high-income families?
It turns out that high-end retailers have two other trends going for them this season. First, there is the economic recovery in Japan. After years when sales dropped quarter after quarter, luxury retailers saw increases in same-store sales in the second quarter and project continued growth for the second half of 2005 and into 2006. Second, Chinese incomes have climbed high enough to make the world's fastest-growing major economy a major consumer of luxury goods. China's per-capita consumption of luxury goods and services is still low, but with so many capitas now wearing Chanel and Prada sunglasses and drinking Glenmorangie single malt, China now accounts for 12% of the global market for luxury goods and services. That makes the country the third largest market for goods and services after the United States and Japan.
| |
|
|
|
|
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.
|
