Luxury Retailers Boom While Discounters Lag
On the last Monday in June, sales at the Michael Kors flagship store in Midtown Manhattan were heating up right along with the temperature in New York.
Customers snapped up watches, priced around $225, tote bags for $298, small handbags for $188 — you name it.
It's a sign of the times. Michael Kors Holdings (KORS) wows its customers with high-quality chic luxury goods at accessible prices, hitting home runs with shoppers every quarter since its December 2011 IPO.
Michael Kors is not alone in its good fortune. There continues to be a bifurcation in retail, says Ken Perkins, president of Retail Metrics. In the most recent first quarter, luxury retailers such as upscale jeweler Tiffany & Co. (TIF) and department store operator Saks (SKS) showed strong same-store sales growth, Perkins says.
Retailers that target the lower-and-moderate income consumer — like variety discounters Dollar General (DG), Dollar Tree (DLTR) and Family Dollar Stores (FDO) — lagged with low-single-digit comp gains.
As a group, luxury chains have outpaced all other retail segments since the first quarter of 2010, according to an index compiled by Perkins. In addition to Michael Kors and Tiffany, Perkins' index tracks home-goods retailer Williams-Sonoma (WSM) and luxury handbag and accessories designer and retailer Coach (COH).
In the most recent quarter, reported May 29, Michael Kors' earnings soared 138% as shoppers across Europe and North America stepped up the spending on its chic luxury goods. It was its second straight quarter of triple-digit profit growth and an acceleration from the prior three months.
Total revenue, which includes licensing revenue, climbed 57%. Net sales rose 59%. Global same-store sales soared 36.7% vs. a year ago. Comps in North America surged 35%. Analysts see first-quarter profits up 44%.
Discounters Discounted
Luxury retailers typically cater to consumers with an annual household income above $90,000 — who have the ability to spend more freely right now.
"High-end earners have seen their wage growth rise rather sharply following the recession and have benefited from both the rebound in the stock and housing markets," said Perkins.
Less-flush consumers have been more gun-shy about getting back into the stock market after the recession, says Perkins. Many are also still underwater on their mortgages or have little equity in their homes.
As a result, they haven't seen their net worth improve much. This has direct impact on their spending and, ultimately, on the performance of the discount space.
Dollar stores have seen their same-store sales growth drift downward from about 6% two years ago to roughly 2.5% currently, Perkins says.
Discount giant Wal-Mart (WMT), he adds, has had some tough sledding, because its core customer is living paycheck-to-paycheck with little spare income to spend.
Accessible Luxury
In the first quarter, luxury segment earnings rose 26% vs. 5% for the overall retail industry. Luxury revenue climbed 10% vs. 2% for total retail. Same-store sales rose 9% in luxury categories vs. the industry's 0.2% gain.
Luxury retailers have done their fair share to lure consumers.
"We have global luxury companies which are executing well in product innovation," said Citi Research analyst Oliver Chen. "The marketplace has better fashion and newness with the use of color, and the emphasis on arm candy accessories, including jewelry, handbags and watches.
Chen calls these "globally relevant trend factors.
Companies like Michael Kors have really had "their finger on the pulse of fashion, adds Perkins. The high-end fashion house is "right on target," he adds, particularly with accessories, but also with other apparel related products.
"Michael Kors is far and away the fastest-growing luxury retailer," said Perkins. "Its store base is smaller, but it looks to be taking share from other luxury-oriented retailers.
The awareness of the brand is growing so quickly, more people are becoming exposed to the brand, adds Chen. And Kors' price range — around $190 to $395 — represents a new kind of "accessible" luxury.
"There hasn't been anyone who has really cornered the market in that price range, which still has a high degree of fashion credibility," said Chen.
Kors also benefits from aggressive store growth, product category expansion, increased distribution and "shop-in-shop" conversion, says William Blair & Co. analyst Amy Noblin.
"They have the right product," she adds. "In the end, consumers vote their dollars for the product.
Noblin says she's "very positive" on Michael Kors. It's recently stepped up its store growth rate for next year and increased its potential number of stores globally.
Consumers are treating themselves to jewelry again, says Ken Gassman, online research director for diamond trading platform IDEX Online. He forecasts total fine jewelry and watch sales to grow 7% this year.
That should be good news for Tiffany. The retailer had a difficult 2012, in part because it was up against tough comparisons from a strong 2011. It also continues to lose market share in the silver category, up against other national and international jewelers, boutiques and online venues. It's a very competitive space, says Noblin.
"While the company had some success in diversifying away from that category into higher-end jewelry, it was not enough to offset the declines in silver," she adds.
But the blue-box icon turned out a solid first quarter. Sales rose 9%, its best revenue gain since Q4 2011.
Global same-store sales popped 8% vs. a year earlier. It enjoyed a nice lift from promotions around its 175th anniversary and promotional events around the debut of "The Great Gatsby" movie for which it designed the jewelry.
Analysts forecast a 3% rise in profits in the second quarter, then a nice pickup in the year's back half.
"In 2013, the company is in the early stages of a multiyear effort to elevate the brand by investing in design talent, innovation in new metals, further distribution into higher-end jewelry and revamped marketing, to emphasize the aspirational aspects of the brand," Noblin said.
Noblin has a "market perform" rating on Tiffany.
"I'm optimistic," she said. "They're making the right changes, but they're not without risks.
Luxury Treasure Hunt — In Bulk
Giant wholesale club retailer Costco (COST) also caters to the high-end crowd, says Perkins.
It's been one of retail's top performers for quite a while — with 14 straight quarters of double-digit profit growth.
Costco's third-quarter earnings rose 19%. Total revenue, including membership fees, was up 7.9%. Membership fees grew to $531 million from $475 million a year earlier. Its same-store sales grew 5% vs. a year ago — with a 6% gain in the U.S. and a 4% rise overseas.
Costco's value proposition and shopping experience are somewhat unique, Perkins says. It offers high-quality merchandise such as steaks at "decent" prices. The store isn't necessarily cheap for a single item, but customers who buy in bulk save.
Costco benefits from the "wow factor," adds Brian Sozzi, CEO of Belus Capital Advisors.
Every time you walk into its stores, he adds, there's something different than you saw in a previous visit that "excites" you and makes you want to purchase something you don't need.
"They call it the treasure hunt," he said.
Outlook
Perkins expects the current trend to continue. Wages for moderate-income consumers are stalled or rising only slowly — not likely, he says, to drive improved spending vs. the high end.
"Factoring out any implosion in the market, it's unlikely we're going to see much change with the high-end outperformance over the discounters in terms of earnings and comp growth," he said.
Consumers are also battling other head winds, including higher gas prices in the year's first half as well as payroll tax increases.
Liz Miller, president of Summit Place Financial Advisors, is positive on the luxury group: "I think the higher-end retailers and product companies continue to be well positioned," she said. "I don't know that any of the stocks are inexpensive, but that area of the consumer discretionary sector still has some upside."
