The Williams-Sonoma store on Manhattan's Upper East Side drew
a nice crowd during its summer clearance sale on the last
Wednesday in July.
But customers weren't only drawn to the bargains. They were
also snapping up pricier items like carving boards that cost
$79.95 to $99.95 and bottles of organic olive oil for $24.95,
while at least one browser eyed a Nespresso Maestria Espresso
machine for $699.95.
Judging from its financial results,Williams-Sonoma (
) doesn't need a sale to lure customers or deliver solid profit
The luxury home goods retail operator has grown earnings by at
least double digits in all but two of the past 16 quarters.
During this year's first quarter it logged a 17% year-over-year
increase in EPS and 10% gains in both overall sales and
comparable brand sales.
Tiffany, Kors Shine
Williams-Sonoma isn't the only luxury retailer on a roll. In
the first quarter, upscale jewelersTiffany & Co . (
) andSignet Jewelers (
) and high-end fashion houseMichael Kors Holdings (
) all posted double-digit earnings growth, while luxury home
furnishings retailerRestoration Hardware (
) saw a triple-digit gain.
In contrast, retailers that target the middle- and
lower-income consumer -- including deep discountersFamily Dollar
Stores (FDO) andDollar General (DG) as well as giant
discounterWal-Mart Stores (WMT) -- reported little or no growth
during the latest quarter.
As a group, luxury retailers have outpaced the broader market
since the first quarter of 2010 and discounters since the fourth
quarter of 2009.
The luxury group's Q1 profit rose 9% from the prior year. That
compares with a 7% drop for the discount group and a 4.5% decline
for the retail industry, says Ken Perkins, president of Retail
Luxury retailers typically cater to consumers with an annual
household income above $100,000. For obvious reasons, these
consumers can spend more freely than those who make less
Affluent consumers have benefited from the rise both in real
estate and equity markets during the economic recovery, Perkins
says. Most moderate-to-low-income consumers did not benefit from
In addition, Perkins added, "the economy has been unable to
generate enough well-paying jobs to generate a higher level of
consumer spending. That's had an impact on many middle- and
lower-income consumers. Their wages are stagnant or in
Analyst Bradley Thomas, who covers retail hardlines for
KeyBanc Capital Markets, offers a similar take.
"There's definitely a bifurcation, he said. "Clearly, the
wealth effect is the tailwind for high-end retailers and
Williams-Sonoma and Restoration Hardware have had "standout
results," Thomas says. But chains that are more exposed to
low-income consumers -- such as rent-to-own
operatorsRent-A-Center (RCII) andAaron's (AAN) -- have had a
"fair amount of weakness this year."
The low-end consumer also has been faced with a "litany of
small cost increases that really add up," Thomas says. These
include a reduction in food stamp benefits and unemployment
Luxury retailers, meantime, have done their fair share to lure
Take Williams-Sonoma, whose lineup of retail operations
includes Williams-Sonoma, Pottery Barn and West Elm. It has seen
double-digit profit growth in all but one of the past nine
Thomas says one reason for the company's strong results "comes
down to their omnichannel model, which it does better than just
"Omnichannel" refers to the fact that each of the company's
brands sells through its own stores, online and through their
"Williams-Sonoma has omnichannel in their DNA dating back to
their heritage as a catalog business, which has translated very
well into being an online business as well as a brick-and-mortar
retailer," Thomas said.
In a July report initiating coverage on Williams-Sonoma with a
"buy" rating, Nomura analyst Jessica Schoen Mace said the
company's "numerous store formats, strong retail brands and
established e-commerce presence (44% of the business) should
result in continued market-share growth both in the U.S. and
This in turn should help Williams-Sonoma exceed its planned
mid- to high single-digit revenue growth and low- double-digit to
mid-teens EPS growth, Mace added.
Real Estate Restoration
Restoration Hardware has also been a standout, with a long run
of double-digit or better earnings and sales growth. The company
is undergoing a real estate transformation that involves
scrapping some smaller stores in favor of bigger ones, including
Full Line Design Galleries of 25,000 to 60,000 square feet.
As part of the transformation, Restoration Hardware is also
revamping its supply chain and system platform. These initiatives
have helped the company deliver industry-leading same-store sales
But times have been tough on the discount front -- so tough
that even the world's biggest retailer, Wal-Mart, has seen
several quarters of declining U.S. same-store sales.
Company officials hope a management shakeup will help turn
things around. On July 24, Wal-Mart announced that its U.S. CEO,
Bill Simon, is stepping down and being succeeded by Greg Foran,
president and CEO of Wal-Mart Asia.
Wal-Mart's core customer "has been under pressure since the
recovery," Perkins said. "It's being forced to broaden its online
effort to bring in more customers, and to expand its
(small-format) Neighborhood Market stores to capture some of the
business they've been losing toDollar Tree (DLTR) and Dollar
Perkins points out that Simon noted just last month that the
middle-to-low-end consumer has not seen much recovery.
Deep Discount Powerhouse
Meanwhile, Wal-Mart might be facing more competition. Deep
discounter Dollar Tree, which sells everything for $1 or less,
announced on July 28 that it had agreed to buy struggling Family
Dollar in an $8.5 billion deal that would create a new No. 1
player in the deep discount space and create a 13,000-store
The merger should result in improvements at Family Dollar,
says Wedbush analyst Joan Storms. "It clearly would improve its
merchandise assortment. That will lead to increased store
productivity and operating margin expansion, which would make it
a stronger competitor to the likes of Wal-Mart (smaller format)
One thing many agree on is that the bifurcation between the
low-end and high-end retail consumer will continue.
"It's not because the 'have nots' are getting worse, but
because the 'haves' are getting better faster," said Joel Bines,
managing director at consultancy AlixPartners.
This has allowed luxury retailers to increase prices and
create an even bigger separation between the two segments, he
says. "This also puts enormous pressure on retailers who cater to
the lower-end consumer since they can't grow by raising