Retail sales for May in the U.S. fell for the first time in 11 months. That is the bad news; the good news is that sales were not as bad as expected, and this ignited a one-day stock market rally.
Bright spots in the report included an increase in sales at clothing stores by 0.2% versus a drop of 0.7% at department stores. Sales at non-store outlets, such at catalogs and online stores, rose by an impressive 1.2%. When delving even further into the sector, it is clear that one area - the luxury retailers - is holding up well even though sales are not as robust as they were last year.
Two luxury retailers that have been able to sidestep any slowdown in spending are Coach (NYSE:COH) and Tiffany & Co. (NYSE:TIF). Both stocks hit new all-time highs in late May on strong sales numbers in the U.S. and overseas.
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The Luxury Leaders
The company with the little blue box, better known as Tiffany's, reported first quarter sales that rose 20% and earnings that increased by 26% at the end of May. The strong report sent the stock up 9% in one day to hit its best level ever. Not only did the company see continued spending from its high-end customers, it also mentioned strong sales from the aspiring middle-class of the lower-priced merchandise.
Coach rallied on the same day as TIF reported earnings, as investors assumed they would ride the coattails of the luxury brand. COH is best known for its handbags, shoes and other accessories. Similar to TIF, COH is focused on international expansion, particularly in Asia. The company plans to open 30 stores annually for the next three years in China. This appears to be a good move for a company that expects sales to jump to $185 million in 2011 in China from $100 million in 2010. (For related reading, see The 4 R's Of Investing In Retail.)
Three other luxury consumer stocks have not had the same success as TIF and COH, but they could begin to find more buyers as the trend to the high-end continues.
Nordstrom (NYSE:JWN) is the high-end retailer that operates 214 stores in 29 states throughout the U.S. The stock did hit a three-year high in May, but it lost almost 15% in the following month. Now that the stock is back to support near the 200-day moving average ($44) and with a forward P/E ratio of 12.6, it may be time to revisit buying some Nordy stock.
Saks Holdings (NYSE:SKS) has really struggled over the last four months, losing over 20% of its value and trading at a 2011 low. The operator of 103 retail stores has broken long-term support, and on a valuation basis it trades with a forward P/E ratio of 21.6, much higher than JWN. This is one stock I would continue to avoid.
The two retailers mentioned sell the products made by this company: True Religion Apparel (Nasdaq:TRLG). The company best known for its $300-plus jeans came close to an all-time high in late April, but since that time it has lost nearly 20% as investors rushed out of the stock. With the stock now trading with a forward P/E ratio of 12.1, it is tough to ignore the possibilities of a long-term buying opportunity near $26 per share. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)
Every sector has risk, and with the luxury goods it has to do with the global economy, and in particular the high-end consumer. If the economy slows, it initially hurts the low end, but eventually the luxury goods will be hurt as the wealthy sit on their hordes of cash. If the global economy starts to crack - beware. (For related reading, see Analyzing Retail Stocks.)
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