The recovery of the all-important S&P 500 Index to post-2008 highs this month is certainly disheartening for the bears and confusing for the bulls considering that economic data has been decelerating globally.
The slow-growth environment has caused a narrowing of the U.S. stock market, where only stock-picking has been working of late while the broader quasi-indexing game is producing sub-par results. If stocks only cared about earnings, the S&P 500 should make all-time highs in 2013 despite this economic deceleration. The index is forecast to end 2012 with record EPS of $103.19 — but without (yet) a fresh all-time high — and index EPS is forecasted to grow another 10.75% in 2013.
This peculiar economic and stock market environment gave me some food for thought: What sector could do well in it? I stopped on a counter-intuitive (on the surface) candidate: luxury goods. See, luxury goods seem like an unlikely choice in this environment since it’s impossible to forecast how far this economic deceleration will go. In such a situation, investors usually turn towards more defensive, low-end retailers.
In the past three years, though, we have seen recurring bipolar performance in the retail sector where “dollar” stores like Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG) have had great same-store sales and luxury retailers like Coach (NYSE:COH), Ralph Lauren (NYSE:RL) and super-luxury Tiffany & Co. (NYSE:TIF) have also been beating sales records.
Tiffany & Co., to start, is probably the most sensitive to the whims of the stock market due to the cost of its merchandise and how those purchases are funded. Weaker stock prices have chilled the desire of nouveau riche emerging market consumers to spend big on bling, while also decreasing the funds available to affluent U.S. consumers. And as the situation in Europe deteriorated and emerging market economies slowed down, Tiffany has missed EPS estimates for the past three quarters.
This is typical of ultra high-end retailers, but new all-time highs in the S&P 500 Index — if they come in 2013 — will most likely mean new sales records for Tiffany. Tiffany has record trailing 12-month sales of $3.71 billion but no record share price (similar to its main benchmark index). Sales for fiscal 2013 ending in January 2013 are estimated to come at $3.83 billion — and a decent stock market offers upside to those estimates.
Plus, EPS estimates have come down some since TIF, once again, missed three times in a row. A stronger stock market makes it easier for TIF to beat the lowered estimates and gives the company more upside.
When it comes to Coach and Ralph Lauren, on the other hand, both have relatively small emerging markets exposure — which is usually seen as trouble but turned into a blessing this year. Why? Because BRIC economies have been slowing down and developed economies in Europe have been dealing with the euro-zone sovereign debt fiasco. Both Coach and Ralph Lauren are less affected by the above-stated issues that plague many luxury brands from Europe, and thus have been able to keep breaking sales and EPS records.
Coach has 354 retail stores and 169 factory stores in North America at last count and is expanding its men’s offerings in this well-covered market. In China, Coach has only 96 locations but sales there grew over 60% to top $300 million in fiscal 2012. Clearly, more stores in China are coming as Chinese sales are small compared to overall direct-to-consumer sales of $4.23 billion, which rose 16% in 2012 from $3.65 billion in fiscal 2011.
There are also 187 locations in Japan, seven locations in Singapore and 27 in Taiwan. As this store breakdown demonstrates, emerging markets are not well-covered and remain a vast opportunity for Coach in the next five years. Based on the roll-out of the current expansion, Coach is estimated to deliver sales of $5.31 billion in 2013, up 10.5% year-over-year, as well as another 10.6% boost in 2014.
Ralph Lauren is in a similar situation with only 38% of net 2012 revenues outside of the U.S. A big chunk of that comes from developed markets in Europe, where performance is spotty. The rest is in emerging markets that are doing better than Europe but are likely to do even better when the local economies grow at full potential. Analyst estimates are for Ralph Lauren to hit new sales records of $7.15 billion in fiscal 2013.
All in all, retail has seen bipolar success in today’s market environment. In tomorrow’s environment, though, the high-end side should see the most gains.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions in Coach, Dollar General, and Dollar Tree for its clients. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities.