Luxury Retailers Shine While Discount Chains Lag


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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 ( WSM ) doesn't need a sale to lure customers or deliver solid profit growth.

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 . ( TIF ) andSignet Jewelers ( SIG ) and high-end fashion houseMichael Kors Holdings ( KORS ) all posted double-digit earnings growth, while luxury home furnishings retailerRestoration Hardware ( RH ) 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 Metrics.

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 money.

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 these assets.

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 decline."

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 manufacturers."

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 benefits.

Luxury retailers, meantime, have done their fair share to lure consumers.

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 quarters.

Thomas says one reason for the company's strong results "comes down to their omnichannel model, which it does better than just about anyone."

"Omnichannel" refers to the fact that each of the company's brands sells through its own stores, online and through their catalogs.

"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 internationally."

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 gains.

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 General."

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 retail powerhouse.

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) Express stores."

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 prices."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Investing Ideas
Referenced Stocks: WSM , TIF , SIG , KORS , RH

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