Luxury Retailers are Feeling the Heat

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The next time that your wife demands a fantastically expensive Christmas present, such as Louis Vitton shoes or a Prada purse, you can still roll your eyes at the impracticality of the request, but the price tag itself may be more appealing than you'd think.  Luxury retailers have had a downright terrible 2015 as a dearth of spending on high-value goods sends some of the biggest names in the fashion and apparel industry looking for an alternative to the status quo.  A variety of companies are engaging in severe discounts to pull customers back into their stores and stay afloat until the holiday season provides a welcome oasis to a drought of spending.  Are there are hopes on the investment horizon for some of the world's most ostentatious brands?

Discount Dollars

If you judge the health of the American economy by the Dow Jones (which economists say isn't terribly accurate, but nevertheless is as good a shorthand as any), it's clear that the past four months have done few favors to the average American worker.  That likely explains as well as any other factor why discount spending has accelerated rather than fallen as the unemployment rate drops to a very-favorable 5.4% and businesses begin to report labor shortages.  Look at the success of discounter extraordinaire TJ Maxx (TJX on the NYSE, trading for $71.49 a share), who have watched their stock price gain nearly 20% in the past 52 weeks, including an August spike that rocked the retail world.  Customers are looking for cheaper buys and retailers are rushing to fill the void.  Macy's (M on the NYSE, trading for $54.17 a share) announced they would open four stores in the New York area strictly devoted to discount clothing in order to capitalize on the cheaper-is-better fad, a move to combat the drop in their share prices from a peak of nearly $75 just one month ago.  TJ Maxx appears to hold all the cards over competitors like Kohl's, Nordstrom's, and Macy's as the companies head into the holiday season with high hopes for October, November, and December.  Gallup reports that pre-holiday spending through 2015 is the highest it has been since before the recession, suggesting a lot of companies will be comfortably in the black come New Year's.  The companies that are proud to offer no discounts -- such as Nieman Marcus, for whom two in five customers have a net worth of over a million bucks -- may not feel the rising tide.

Bigger Is Always Better, Except When It's Not

One of the worst performing luxury brands on the stock market is Tiffany's (TIF on the NYSE, trading for $79.42 a share), who has seen 50% losses in their value since 2014 rolled into 2015.  Tiffany briefly tried to appeal to the discounting craze by selling lower-quality jewelry at smaller price tag during the spring: the move backfired so badly that it put off high-end customers who had no interest in browsing among price tags with only two or three numbers.  The reputation to the brand in tandem with the slowdown in luxury spending pushed Tiffany's CEO Michael Kowalski to retire in July.  His successor, Frederic Cumenal, took over and promptly saw a mirror-image nosedive on the market; the company badly needs a miracle this holiday season.  What held true for Tiffany's held true for Michael Kors (KORS on the NYSE, trading for $43.16 a share), who saw their stock drop by no less than 20% in a single day after their management team announced they would pull back sales of handbags after the North American market performed more poorly than anticipated.  Rival handbag manufacturer Coach (COH on the NYSE, trading for $29.10 a share) has followed suit, watching their asking price drop by 50% in the past 52 weeks.  Coach fell out of favor with customers when they became too big, too generic, and too cheap, instead of staying small and individual and expensive.  They're a reflection of a luxury industry that could use a mink-coated Hail Mary pass to bring them out of a nasty funk.

  • The Takeaway: retail stock will be a hot commodity going into the Christmas season and investors will get a lot of mileage out of proven, successful discounters like TJ Maxx.  Come the waves of Christmas shoppers, however, it appears that most will eschew the bigger brand names in favor of goods on the verge of liquidation.  It's time to start looking for stocks to ride through the holiday bump, but there's little indication that luxury designers have enough cards up their sleeves to provide a good return on the investment.
  • Investors with a very high tolerance for risk can choose to invest in luxury brands due to almost every single company trading well below (usually 30-50% below) their 52-week max.  There's a guarantee of value, but no guarantee of growth, for these companies are failing to adapt to a changing customer dynamic that no longer prioritizes brand name at the expense of price.

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