There’s a belief that the rich become richer because they are frugal and know how to save. The budget cuts and tax increases at the beginning of the year saw higher income taxes for those earning over $400,000 annually. President Obama had hoped to place higher taxes on those making over $250,000 annually but had to settle for $400,000 as a compromise.
With the higher taxes, there was widespread fear that the affluent would halt their spending, which would ultimately impact consumer spending in the retail sector and gross domestic product (GDP) growth.
Well, here we are, four months into the year with higher taxes, and it appears that the affluent have continued to spend in the retail sector. The Shullman Luxury and Affluence Monthly Pulse is an excellent metric, detailing the spending habits of the wealthy in the retail sector. The research focuses on the luxury consumer group who spends on luxury goods, comprising of those households with income levels in excess of $500,000. The “affluent” group is defined as those households where the income is between $250,000 and $499,000.
The Shullman research indicated that 55% of the luxury consumers polled said the advent of higher taxes has not impacted their spending pattern in the retail sector. Moreover, about 61% of the affluent group offered a similar response. (Source: Frank, R., “Wealthy Say Higher Taxes Don’t Hurt Spending,” CNBC, March 27, 2013.) According to the research, less than 25% of luxury consumers said they would change their spending pattern this year.
Given the findings, it appears the luxury brand stocks will continue to fare well in the retail sector.
Below are my picks for the top luxury retailers that will continue to benefit from the luxury consumers who still have the inclination to spend in the retail sector.
At the top of the luxury chain is Michael Kors Holdings Limited (NYSE/KORS). The operating results point to a company that continues to be firing on all cylinders. In the fiscal third-quarter earnings season, the company blew away Wall Street’s expectations when it reported revenue growth of 70.4% to $636.8 million, well above the Thomson Financial consensus estimate of $540.3 million. And more staggering were a superlative 41.4% rise in the key comparable store sales and a 58% surge in comparable store sales in Europe.
On the high-end jewelry front, the top player is Tiffany & Co. (NYSE/TIF) in the retail sector. The company fell short of the Thomson Financial earnings-per-share (EPS) estimates in the last four quarters, but it came back with a slight outperformance in the fiscal fourth quarter. My concern is that the estimated revenue growth of 6.1% and 6.9% for fiscal 2014 and fiscal 2015 are weak, especially when compared to the 63.4% and 33.0% for Michael Kors in its fiscal 2013 and fiscal 2014.
An interesting bottom-feeder luxury stock is high-end handbag-maker Coach, Inc. (NYSE/COH), which is trading just above its 52-week low, where I see a contrarian play in the retail sector.
George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)