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7 ways to bet on rich spenders
Shoppers flush with cash (or who just want to look like it) have lifted sales at the likes of Saks, Nordstrom and Tiffany. But like the goods they sell, most of these stocks look a little rich.
By Robert Walberg
Luxury goods are back, and fancy retailers are basking in the glow of an improved domestic economy. With this new zip from a rebound in spending by rich folks after a couple years of scrimping, its easy to see why stores such as Tiffany (TIF, news, msgs), Coach (COH, news, msgs) and Nordstrom (JWN, news, msgs) are posting healthy sales gains.
But a rebounding economy can carry a company only so far. Ultimately, the winners are determined by management skills and product mix. So in my last installment on the retailers before the holiday, I set out to find the real gems among the luxury stores.
I broke the group down into two categories: apparel and specialty. Lets begin with the apparel companies, of which there are four -- Saks (SKS, news, msgs), Nordstrom, Polo Ralph Lauren (RL, news, msgs) and Neiman-Marcus Group (NMG.A, news, msgs).
If youve been following my series on the retailers, then you probably know by now that I love to shop for clothes and that I demand quality.
Few as stylish as Saks
When it comes to true luxury and style in clothing, few shops hold a candle to Saks. The store on Fifth Avenue in New York is heaven on earth at this time of year. For my purposes, the stores on Michigan Avenue in Chicago had to suffice. Either way, the experience is delightful. Saks sports a broad range of quality merchandise in an appealing setting (in other words, the merchandise isnt crammed so tightly together that you cant see it or walk around it). Equally as important, the sales help actually knows something about fashion. Prices range from OK to ouch. There were a number of items on sale, though there were fewer incentives this year than last.
Neiman Marcus is another high-end fashion retailer, though the scope of merchandise is limited and the price range tailored to the very wealthy. In todays economy, thats not bad, as higher-income consumers are feeling better about loosening their purse strings than they have in a few years. Thats music to the ears of Neiman Marcus management. Its just that these stores appeal less to consumers looking to trade up to luxury items, as in most cases the merchandise is priced out of reach. In other words, while some buyers will trade up to a $200 sweater, few are willing to go north of $400. Nevertheless, sales growth over the past several months has been strong, and based on the crowds in the Chicagoland stores, theres no reason to think that Neiman Marcus will experience a letdown.
Another chain that looks poised for a happy holiday is Nordstrom. After a few years in which management struggled to get the mix right, particularly in the womens department, Nordstrom is back on track. The companys clothing for men features many popular, mid- to upper-end brands such as Joseph Abboud, Hugo Boss, Tommy Bahama and Zegna. The merchandise is right in line with the current shift to earth tones. Same goes for the womens line, which has found the right balance between the companys tradition of classic elegance and the need to provide more fashion-forward design. From what I can tell on my regular visits to these stores, the merchandise mix is resonating with consumers, as plenty of folks are shopping and buying.
The final fashion retailer is Ralph Lauren. Laurens styling is too conservative and too American for my taste, but the stores are beautifully appointed, the sales help generally good (though less knowledgeable than at Saks or Neiman Marcus) and the merchandise of fine quality. Lauren stores also suffer from a more limited range of styles. The merchandise is an affordable trade up, but until the merchandise mix broadens, Im not sure the stores will keep pace with peers.
On to bags and baubles
Now lets turn our attention to the specialty retailers in this class. First there is Tiffany. An American classic, this company is a true gem. Whether youre seeking a diamond engagement ring or a simple silver bracelet, Tiffany has it all. And the company is doing a good job of letting consumers know that not everything in the store requires a second mortgage on your house in order to come up with the necessary cash. There are many items in the $150-$300 range, and they all come in that famous little blue box.
Trust me -- if you want to win points with that special someone this holiday, present them with something from Tiffany. The stores are always crowded (actual lines to get to the silver counter), which bodes well for the holiday season. Given that Tiffany is still underrepresented across the country, theres plenty of room for additional store growth; and thats good news for the long-term prospects of this icon.
Next stop is Coach. Now, I readily admit to not understanding the huge success of this brand over the past couple of years. Coach has been one of the better performing retailers throughout the economic/market downturn, with sales growth north of 30%. Though the designs are generally conservative in nature, what sets the company apart is that the prices are considered reasonable. A Coach purse can be had for under $300, which in the world of Louis Vuitton, Gucci and Prada is a real bargain. My guess is the same working women that are shopping at Ann Taylor (ANN, news, msgs) are stepping over to Coach and buying a relatively affordable, yet still prestigious, handbag, shoes, wallet and/or briefcase. Apparently, theres enough cachet in the Coach brand that women are willing to wear shoes branded with the label. Theyre ridiculous looking to this shopper, but I watched three women buy pairs in the 10 minutes I was in the store, so go figure. From what the salespeople tell me, business this season has been very strong, so look for Coach to sustain its momentum through the holiday and beyond.
My last stop on the retail journey was Sharper Image (SHRP, news, msgs). For some reason, these stores are destination points for shoppers. They are always crowded, though the days of lines outside the door are long gone. While the stores are filled with the usual collection of electronic gadgets, there doesnt appear to be any huge seller this year. Consequently, I suspect that sales at Sharper Image might prove a bit disappointing to an investment community expecting big things from luxury brands.
Luxurious stock prices, too
From an investment standpoint, the luxury retailers are well-positioned to enjoy decent sales growth in the months to come as the global economy continues to expand. However, as you can see from the price/earnings and price/sales ratios listed below, much of the good news already has been priced in. Consequently, theres little to no room for disappointment. In fact, theres been some profit-taking in recent days amid growing concern that the holiday season wont live up to advanced billing. Im here to tell you that few of the luxury retailers need to worry about a letup. Business is brisk and the current pullback is providing a decent entry opportunity.
My favorite from both a merchandise and investment standpoint is Tiffany. At 25 times next years earnings, the stock isnt cheap. But given the growth potential, its also not overly expensive. As long as the company continues to deliver solid sales performance, the stock should outperform. Other winners include Nordstrom and Saks. Coach also would fit in this category if not for its high valuations and expectations, thereby making the risk factor too high for my liking.
Valuations are decent for Sharper Image, Neiman Marcus and Ralph Lauren, but Im not convinced that the product mix for any of these stores is broad or attractive enough to sustain the type of sales momentum necessary to drive prices materially higher from here.
| High-end retailers | | Company | Price 12/27 | Market cap (mil.) | Price/sales | Price/earnings | % chg YTD | Dividend yield | ROE | StockScouter rating | | Tiffany (TIF, news, msgs) | $42.81 | $6,285 | 3.26 | 25.4 | 79.84 | 0.5 | 14.4 | 5 | | Coach (COH, news, msgs) | 35.33 | 6,438 | 6.30 | 26.6 | 114.64 | NA | 44.5 | 7 | | Nordstrom (JWN, news, msgs) | 32.19 | 4,401 | 0.86 | 16.9 | 72.47 | 1.4 | 14.1 | 8 | | Saks (SKS, news, msgs) | 14.42 | 1,946 | 0.32 | 20.5 | 22.83 | NA | 3.1 | 6 | | Polo Ralph Lauren (RL, news, msgs) | 27.76 | 2,875 | 1.15 | 11.6 | 28.08 | 0.4 | 14.9 | 6 | | Neiman-Marcus Group (NMG.A, news, msgs) | 50.15 | 2,410 | 0.78 | 14.8 | 65.02 | NA | 12.1 | NA | | Sharper Image (SHRP, news, msgs) | 29.20 | 442 | 0.73 | 15.9 | 67.53 | NA | 14.8 | 5 |
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Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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