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  • Luxury spending drives recovery 0 comments
    Apr 29, 2011 12:06 PM | about stocks: TM, TIF, ZLC, COH, M, TGT, WSM
    By IBISWorld Retail Analyst Nikoleta Panteva


    In December of 2010, luxury jewelry retailer Tiffany & Co. (NYSE:TIF) proved that analysts’ earnings forecasts were grossly underestimated. And the company’s earnings were not a fluke: year-end financial data shows that Tiffany grew 13.9% in 2010, despite the fact that its jewelry sells for an average price of $1,802. Lower-tier jewelry brand Zales (NYSE:ZLC), whose average price point is a much lower $730, actually recorded revenue decline in 2010. From 2009, company revenue fell a significant 9.2%. The Jewelry Stores industry also declined over the year at a rate of 2.5%, so while Zales continued falling, Tiffany actually outperformed its lower-end counterpart and the entire industry. At the same time, Americans’ per capita disposable income inched up only 0.3% during the year (compared to prerecession growth of 3.0% in 2006) and unemployment grew to a new high of 9.6%. Nevertheless, an elite set of companies like Tiffany & Co. fared rather well. These contrasting trends then spur the question: Is luxury spending leading the economic recovery?

    Jewelry Stores isn’t the only industry displaying this trend. For example, luxury brand Coach Inc.(NYSE:COH), part of the Handbags, Luggage and Clothing Accessories Stores industry, also outperformed its competition. Coach grew 11.7% in 2010, far faster than the industry’s 2.4% rate. Likewise, luxury department retailer Saks Inc. (NYSE:SKS) grew a strong 5.9% during the year. Meanwhile, Department Stores industry revenue dropped an estimated 1.8% in 2010, following a 6.6% drop in 2009. Even high-end furniture purchases have rebounded quicker than their lower-priced competitors. For example, Williams-Sonoma (NYSE:WSM) – the parent company of brands like Pottery Barn and West Elm – recorded a sales increase of 12.9% in 2010 (its most recent financial data available) to $3.5 billion. By contrast, the Furniture Stores industry only grew 0.5% over the year to $59.8 billion.

    Car company Toyota Motor Corporation (NYSE:TM) has displayed a similar trend, with its Lexus division rebounding much quicker than its Toyota division.

    Despite Lexus’ higher starting price (about $33,000 for the base IS model versus Toyota Camry’s $19,000 starting price), the brand’s US sales increased 6.2% in 2010, while Toyota’s US sales actually declined 0.5%. IBISWorld estimates that Lexus and other luxury car brands are responsible for pushing New Car Dealers industry revenue up to 9.2% in 2010. Could this mean that consumers are shifting gears toward luxury goods?

    Gen Y in the driver’s seat
    Generation Y consumers – people born between 1979 and 1993, roughly between the ages of 17 and 32 – are notorious for shopping. Despite the ensuing recession, data from the Bureau of Labor Statistics shows that 25- to 34-year-olds continued to increase their total spending over the five years to 2009 (the latest data available). This age group’s expenditure grew at an average annual rate of 2.3% to $931.9 million, while their older counterparts – namely, those between the ages of 35 and 44 –increased total expenditure at a much slower 1.0% per year to $1.3 billion.

    Perhaps this spending increase is due to Gen Y’s income growth. After all, a greater number has entered the workforce over the past five years. The data, however, indicates otherwise. Average post-tax annual income for 25- to 34-year-olds grew at an annualized rate of 2.4% to about $57,000 over the five years to 2009. This rate is well below 35- to 44-year-olds’ income growth of 3.5% per year to $75,000. In fact, Gen Y income increased slower than the income of any other age group, including those younger than 25, whose average annual income grew by 2.5% to $26,000. Despite Gen Y’s lower after-tax income, these consumers still outspend their older counterparts.

    This trend is largely due to the rise of the aspirational shopper, which is a middle-income earner who displays high-end taste. The Gen Y group is littered with aspirational shoppers, which explains their expenditure trends. This type of consumer typically makes single purchases averaging $300, so their luxury options are limited. Luxury brands have noticed this pattern and altered their product lines to capture Gen Y’s dollar. Is this just the beginning of a new standard?

    The future of luxury brands
    Successful luxury brands that are leveraging Gen Y’s spending patterns include high-end handbag maker Coach. In July 2009, the company debuted a brightly colored, age-appropriate line of purses and perfumes under the less-pricey Poppy brand. Poppy is aimed at the Gen Y consumer and retails for as low as $198. Likewise, fast-fashion retailers like H&M and Forever 21 have partnered with well-known designers in high-low collaborations. In 2010, H&M’s Lanvin collection boosted the retailer’s revenue 15.0% from 2009. The most expensive item in the collection was a $350 coat, which still accommodated the expensive-taste Gen Y shopper.

    Mass merchandiser Target (NYSE:TGT) has also made efforts to bridge the gap between high-priced luxury and affordable fashion through limited-time designer collaborations in its stores. The clothes are typically carried in the store’s juniors section, which targets the hip Gen Y consumer. Target’s program Go International kicked off in 2006 with a special line by Luella Bartley. Prices for the line stayed below $150 and targeted the young aspirational shopper. Since then, the retailer has carried a myriad of other designers, including Alexander McQueen, Zac Posen and Thakoon. In early 2011, Target even rereleased some of its most popular lines. Also, on April 13, department store Macy’s (NYSE:M) released its exclusive collaboration with designer Matthew Williamson.

    During this transitional year, will more high-end brands take on similar approaches to reach their young, yet budget-conscious audience? The answer is most likely! Demand for luxury items stems from consumers’ perception of their quality. Gen Y spenders, especially, are aware of brands and the messages they send. But because many in this age group will remain unemployed in 2011 due to their general lack of experience, brands and retailers alike will lower the prices of their luxury items and make them more accessible to these avid shoppers. This, in turn, will build loyalty and create return shoppers out of the still-young Gen Y consumers. As their budgets grow, so will the sizes and frequencies of their purchases.

    IBISWorld estimates that Gen Y spending grew about 2.0% in 2010, despite counterintuitive economic factors. The increase is forecast to be even greater through 2011 – an expected 3.4% – as unemployment drops 4.2% and consumer confidence climbs 7.0%. Luxury brands and mass markets will continue to join hands to deliver high-end goods at affordable prices.
    Stocks: TM, TIF, ZLC, COH, M, TGT, WSM
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