Kanye West-the hip hop artist whose number-one hit "Gold Digger" epitomized the blingy excesses of the mid-2000s-made news earlier this month by going on an anti-luxury-good tirade:
"It's like [luxury brands and retailers] want to steal you from you, and sell you back to you after they stole it… They want to make you feel like you less than who you really are."
If Kanye West is really turning his back on conspicuous consumption, it is a sign of one (or all) of three things:
- The end of days is drawing nigh.
- Kanye West is crazy-as in truly schizophrenic and/or suffering from multiple personality disorder.
- The luxury goods business is in deep trouble and facing a real consumer backlash.
While the first two explanations are definitely plausible, I'm going to focus on the third. It's been rough for luxury retailers of late. Coach (NYSE:COH) has seen its U.S. domestic sales virtually collapse as upstart Michael Kors (NYSE:KORS) has crowded its turf. But even Kors has hit something of a brick wall of late, and its share price has been heading lower since late May on valuation concerns and lower margins.
Going higher upmarket, you see a slightly different dynamic. Luxury leather goods and drinks conglomerate LVMH Moet Hennessy Louis Vuitton (OTCPK:LVMUY), high-end watchmaker Swatch (OTCPK:SWGAY) and Remy Cointreau (OTCPK:REMYF) have also seen uneven growth over the past two years, though the primary driver here was a crackdown by the Chinese government on bribery and excessive gift giving.
Returning stateside, the simplest explanation for Big Luxury's woes are simple supply and demand. There are more luxury brands than ever competing for a customer pool that has been forced to scale back its buying due to years of high unemployment and sluggish economic growth.
But might the winds of fashion be changing as well? And could demographic trends be at play?
Let's break down America by its major demographic groups. Though U.S. stocks have long since blown past their pre-crisis highs, and home prices have recovered substantially in most markets, the 2008 meltdown and Great Recession that followed were devastating to the retirement plans of many Baby Boomers. The Boomers are more focused than at any point in their lives on securing their nest eggs for retirement. Bling spending is simply not a priority for all but the highest-income Boomers.
And my generation-Generation X? Gen Xers are now in the primes of their careers, earning more than they ever have. Unemployment among Gen Xers is the lowest of all major demographic groups. But Gen Xers also got hit the hardest during the housing bust, as they were the most likely to be recent buyers with large mortgages, and Gen Xers are at the stage of life in which most disposable income gets spent on their kids. And let's not forget, the Gen Xers are a significantly smaller generation than the Boomers they followed.
That leaves the Millennials. Millennials are, as a general rule, known for being a little flashier and more brand conscious than Gen X, but this is also the generation that has most embraced the bearded hipster movement.
Hipsters are an odd lot. They eschew branded goods yet will pay a large premium for hybrid automobiles, organic groceries and even organic cotton clothes. (Seriously guys, last I checked you weren't supposed to eat your t-shirts. Not sure I understand the appeal here.)
Somehow, hipsters have turned antibranding into a brand that they are willing to pay a premium to own. And their tastes are gradually going mainstream.
What this means is that "luxury goods" are not dying, but the notion of what constitutes a luxury good is. Americans are still willing to pay a premium for things that they value. It just happens that they are increasingly valuing different things.
Earlier this year, I wrote about the business of organic groceries, though I stopped short of recommending the stocks of Whole Foods (NASDAQ:WFM) due to valuation concerns and the reality that groceries are a rotten business. But I do believe that "upscale" fast food restaurants like Chipotle Mexican Grill (NYSE:CMG) are attractive stocks to buy on dips. Chipotle has seen mild margin compression due to rising food costs but remains wildly profitable and continues to add new locations.
Where does this leave the traditional luxury goods makers? Clearly, not all young Americans with higher-than-average incomes are bearded, brand-eschewing hipsters. I expect to see the industry return to more consistent growth as the economy continues to heal and as unemployment drops.
But China remains the real wildcard. As goes China, so goes the luxury industry. If China can avoid a true hard landing-and if the bling crackdown proves to be a short-term blip, like previous crackdowns-then the luxury goods makers should enjoy a solid finish to 2014 and a strong 2015. I don't consider LVMUY, SWGAY or REMYF to be screaming buys at current prices, but I would consider all three to be good stocks to consider on any substantial pullbacks.
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