If Tiffany & Co. (TIF) were the only retailer raising a red flag of late, this trend might not even be worth pointing out. But it wasn’t just luxury retailer Tiffany & Co.
Several luxury stocks, including Michael Kors Holdings Ltd (KORS) and Coach Inc. (COH), have been recent victims of worries and warnings. Specifically, Tiffany cautioned TIF shareholders on Monday that sales in November and December were weak, particularly in the United States.
That news followed a downgrade of KORS stock last week, and lackluster enthusiasm regarding an announcement from Coach that it was acquiring its way into the high-end shoe business.
Is it just a coincidental string of bad luck for luxury stocks? Or, is there a bigger theme in play here that investors would be wise to accept at face value?
Too Many Red Flags
Last year’s holiday-driven, gift-giving spending may have been firmly up from 2013’s Christmas spending levels, but it wasn’t more high-end jewelry consumers were buying. Tiffany & Co. reported that sales for the last two months of 2014 were down 1% on year-over-year basis, with sales in the Americas being the most disappointing of all.
Removing the ill effects of currency volatility on its foreign sales, revenue actually grew 3% over last year’s holiday top line. Still, same-store sales were flat, putting a damper on whatever positive spin could be mustered from the numbers.
It didn’t take long for prolific stock-picker Jim Cramer to suggest the weak results from Tiffany were company-specific. But were they really? Other luxury stocks have struggled in similar ways in recent weeks, suggesting this may be a systemic, industry-wide problem that should concern owners of COH stock and KORS stock too.
Case in point: Michael Kors Holdings. KORS stock took an 8% tumble on Tuesday of last week on the heels of a downgrade from Credit Suisse, which is now only neutral on Michael Kors Holdings. The prompt for the downgrade was the degree to which the handbag retailer was forced to discount its merchandise sold via its website in December. At one point last month, nearly 2/3 of its e-commerce merchandise was discounted.
Even Coach — formerly one of the market’s most iconic luxury stocks — couldn’t get any positive spin on what should have been a bullish catalyst for COH stock.
Last week, Coach Inc. announced it was going to widen its product line by acquiring privately-held luxury shoemaker Stuart Weitzman at a price of $574 million. On the surface, it seems like a much-needed shot in the arm for the struggling company. And perhaps it is.
But Wall Street isn’t convinced this is the time for Coach to make a deal. As Jefferies analyst Randal Konik noted, “In our view, Coach may have been better served keeping its sole focus on its own transformation.”
Outlook for Luxury Stocks
Given Coach’s ongoing handbag struggle (bringing Stuart Weitzman under the umbrella won’t help), Michael Kors’ extreme sales-pricing, and Tiffany’s letdown at a most critical time of year, we can conclude luxury stocks as a whole are on the wrong side of a budding problem … consumers are falling out of love with luxury.
It’s a premise that’s admittedly materializing at an odd time. A Gallup poll published last week pointed out that daily consumer spending last month was tied for the highest monthly level of spending we’ve seen since before the recession, and the trend is most definitely pointed higher. However, luxury goods aren’t the sought-after prize they once were.
What gives? Well, there are multiple reasons for waning luxury consumption.
Perhaps one of the most significant impasses is an economic slowdown in China, underscored by a government crackdown on lavish government spending. The impact was a net decrease of 1% in the country’s luxury spending in 2014, according to data from Bain & Company.
While optimism of a 2015 revival of luxury spending in China remains high, most analysts believe the heyday of high-visibility and vanity consumption in China has run its course.
Meanwhile, Europe is running into an economic headwind, plain and simple.
As for the United States — still the most important luxury market for many higher-end brands — domestic luxury spending was expected to be the one sure thing in 2015. After Tiffany & Co’s genuine surprise that sales in the America’s actually slumped in November and December, though, it may be worth rethinking what U.S. consumers are truly looking to spend money on this year. “Luxury” doesn’t have to mean apparel.
Whatever the reason, none of these headwinds are apt to go away anytime soon. This year could be a long one for luxury stocks.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
