Alexandra Zendrian, 03.30.10, 06:00 AM EDT
Luxury retailers are reaping the benefits of a more confident, wealthy consumer. Buy Nordstrom and Coach.
During the housing boom in the middle of the last decade, luxury retailers reaped the benefits of home-rich consumers, many of whom sucked out their home equity as soon as it built–or even more quickly–taking out home equity lines and spending like the proverbial drunken sailor, but these sailors had style and a taste for the finer things.
All of the flashy spending made everybody a little giddy. In May 2005 private equity investors Texas Pacific and Warburg Pincus paid $5.1 billion for Neiman Marcus Group, parent of the eponymously named poster child for needless indulgence, Neiman Marcus, and its Bergdorf Goodman subsidiary.
When the housing market headed south and eventually imploded, there was a lot of omelette du fromage on the face to go around as the erstwhile nouveau riche profligate home buyers came up dry on equity and went back the dollar store. For many of the high-end retailers, comparable sales numbers plunged more than 20% for three quarters in a row at the end of 2008 and into 2009.
With the housing market minting no more millionaires, the luxury market if it were to boom again would need a new driver of wealth creation–and it found it in an old friend, the stock market.
Nordstrom, like other high-end retailers, has seen a sales boost lately as consumers emerge from the recession more confident and better able to spend more–not to mention a little richer than they were a year ago thanks to the sharp rebound in stocks since last March.
Investors in luxury retail stocks have already benefited handsomely, maybe even enough to indulge in a few $25,000 Neiman Marcus cupcake cars. Since the market bottom last March, Nordstrom shares have zoomed higher by 246%, Coach is up 247% and Saks has been a monster stock, gaining 395%. The consumer recovery is concentrated at the higher end, which benefits luxury retailers such as these.
Now the millionaires are back and ready to spend. The number of U.S. households with a net worth of $1 million or more went up 16% to 7.8 million from the end of 2008 to the end of 2009, according to a recent Spectrem Group survey. The millionaire count had dropped 27% in 2008.
It’s not only the millionaires who are back. The mega-millionaires, or those with more than $5 million of net worth, were up 17% last year to 980,000, and the affluent population with more than $500,000 in net increased 12% last year to 12.7 million people.
In the market downturn, consumers at every economic level fled the retailers. Luxury Institute CEO Milton Pedraza says millionaires and multi-millionaires came back into the market in the fourth quarter of last year after their fears of continued balance sheet losses were quelled.
Proof of the high-end consumer retail recovery is in the pudding. Nordstrom’s February same-store sales were up 10.3% from a year ago. Saks’ comps were up 2% in February, building on a strong January with sales up 7% from a year before. Even Neiman, which routinely posted monthly drops in same-store sales in excess of 20% produced a 6.2% increase in February–the chain’s third straight month of positive comps. Retailers overall posted a 3.7% gain in same- store sales last month, according to the International Council of Shopping Centers. The low end fared the worst; Wal-Mart came in with a minuscule 1% gain in February.
Thomas Weisel analyst Liz Dunn has buy ratings on Nordstrom and Coach. Of Nordstrom, Dunn says it was able to maintain its top-line well as well as focus on inventory control and cutting costs. Coach has also done well adjusting its price to suit the more value-conscious consumer, she adds.
Sterne Agee analyst Jennifer Milan also has a buy rating on Coach based on the store lowering the price of about half of its collection to under $300, which has allowed the retailer to stay relevant during the downturn and broaden its customer base. Although excessive discounting runs the risk of diminishing a luxury brand’s luster, she’s confident that Coach hasn’t dented its reputation excessively through the lower price point items.