Scott Patterson provides a good summary of the most important trend driving retail stocks in this weekend's Wall Street Journal (paid sub req'd). Luxury retailers, such as Nordstrom (JWN), Tiffany (TIF), Abercrombie & Fitch (ANF) and Coach (COH) have generally outperformed the stocks of retailers that appeal to more budget-conscious customers, such as Gap (GPS), Costco (COST), and Target (TGT). The reason?
Lower-income Americans... haven't enjoyed as much growth in prosperity as the wealthy. According to the Economic Policy Institute, a Washington, D.C., researcher, average weekly earnings for a full-time worker near the bottom of the income scale declined 2.2% to $314 in 2005 from $321 in 2000. In contrast, the weekly pay of a worker nearer the top of the income charts rose 4.4% to $1,524 from $1,461.
Stocks leveraged to lower-income spenders, such as the beer manufacturers Anheuser-Busch (BUD) and Molson Coors Brewing (TAP), and supermarkets such as Safeway (SWY) and Kroger (KR) have underperformed competitors with more upscale brands, such as beer company Boston Beer (SAM), maker of Sam Adams, and upscale grocery chains Whole Foods Market (WFMI) and Wild Oats Markets (OATS). (The supermarkets have also been squeezed by Walmart's (WMT) expansion into groceries.)
But some value managers are now attracted by the discounters' stocks. Warren Buffett bought shares of Anheuser-Busch in early 2005, and John Buckingham, lead manager of the Al Frank Fund, is now looking at the discounters. With the risk that economic growth slows, he argues, the luxury retailers are too expensive and too exposed.
Mr Patterson's article omits one crucial factor, however: the opportunity for luxury retailers to expand into emerging markets. The China Stock Blog, for example, has consistently carried articles by Ezra Marbach illustrating that luxury retailers are more and more focused on the Chinese opportunity.