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Is Frugal Out? Luxury Retail Stocks In


Women call it retail therapy.  In my house I call it American Express statement shock, but that’s another story.  Apparently, there was a lot of retail therapy going on in the third quarter.  This week we found out from a variety of retailers just how much people sought the solace of a gratifying purchase.

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Discount retail giant Wal-Mart (WMT) posted better-than-expected third-quarter results, as did Kohl’s (KSS), Macy’s (M), Urban Outfitters (URBN), American Apparel (APP), and Fossil (FOSL).  Just about every retailer so far in Q3 has reported a good quarter.  The one retailer that fell short of estimates was Nordstrom (JWM). Although the company didn’t miss estimates by much (just a penny), it did buck the recent trend in the sector of solid earnings beats.

Given the Nordstrom miss, some investors may be thinking that now is the time to look more closely at owning discount retail stocks.  After all, the economy isn’t out of harm’s way yet, unemployment is at levels we haven’t seen since President Reagan’s first term, and there’s still a lot of worry out there as to what 2010’s economic climate will be.  Given these conditions, some experts are suggesting that the new frugality embraced by consumers in 2008 is here for good.

I think the notion that many consumers are more acutely aware of what they spend these days is true; however, I think the idea that people are now permanently frugal shoppers only holds true for a small segment of the overall consumer base.  Rather than focusing on consumers who are either unwilling or unable to spend a lot of money on retail goods, I think your investment dollars would be better directed at stocks that cater to those who haven’t been as adversely affected by the Great Recession.  In other words, why bet on the frugal when you can bet on the free spenders?

Hey, it’s just a fact that while households with incomes of at least $100,000 only represent about 20% of total U.S. households, this group controls more than half of all income. A  2009 Ipsos Mendelsohn survey found several signs that so-called conspicuous consumption by this group is on the rise.  The findings also suggest that when the economy does finally turn the corner, it will be the affluent leading the way.

“On average, the affluent are 2.6 times more likely to buy everything, and when they do, they spend 3.7 times more,” said Bob Shullman, president of Ipsos Mendelsohn.  I concur with this thesis, which is why I think your best bet going forward is not on discount retailers, but on luxury retailers.

Despite their aforementioned third-quarter earnings miss, I think Nordstrom is an excellent luxury stock play.  The company knows how take care of its customers, and they have a loyal and affluent clientele.  Anyone who has ever been to a Nordstrom knows first hand that the service there is about as luxury as it gets.  

I expect Nordstrom to have a good fourth quarter on strong holiday shopping sales, so I say take advantage of any weakness in the shares here to accumulate a position in JWN.

Another of my favorite free-spender stocks is Tiffany (TIF).  This quintessential luxury brand, delivered via that little blue box that gets female hearts racing, has had tremendous earnings performance.  The company’s second-quarter results easily bested Wall Street estimates, prompting one analyst from Jeffries to describe the Q2 numbers as “inspiring.”  We’ll find out how well Tiffany did in Q3 on Nov. 25, but my guess is we could be equally inspired.  I say get into the shares now, before a stellar earnings report hits the Street.

In addition to Nordstrom and Tiffany, there’s one more free-spender retail play I like, and that’s Coach (COH).  The handbag, wallet, luggage and assorted luxury accessories maker has global appeal, and their more affordable line—the Poppy collection—has given Coach even more appeal to those willing to lay down a few bucks on luxury goods.  Buy COH shares now, before the holiday rush, and before the company reports earnings on Jan. 18, 2010.

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