On the last Monday in June, sales at the Michael Kors flagship
store in Midtown Manhattan were heating up right along with the
temperature in New York.
Customers snapped up watches, priced around $225, tote bags
for $298, small handbags for $188 -- you name it.
It's a sign of the times.Michael Kors Holdings (
) wows its customers with high-quality chic luxury goods at
accessible prices, hitting home runs with shoppers every quarter
since its December 2011 IPO.
Michael Kors is not alone in its good fortune. There continues
to be a bifurcation in retail, says Ken Perkins, president of
Retail Metrics. In the most recent first quarter, luxury
retailers such as upscale jeweler Tiffany & Co. (
) and department store operatorSaks (
) showed strong same-store sales growth, Perkins says.
Retailers that target the lower-and-moderate income consumer
-- like variety discountersDollar General (
),Dollar Tree (
) andFamily Dollar Stores (FDO) -- lagged with low-single-digit
As a group, luxury chains have outpaced all other retail
segments since the first quarter of 2010, according to an index
compiled by Perkins. In addition to Michael Kors and Tiffany,
Perkins' index tracks home-goods retailerWilliams-Sonoma (WSM)
and luxury handbag and accessories designer and retailerCoach
In the most recent quarter, reported May 29, Michael Kors'
earnings soared 138% as shoppers across Europe and North America
stepped up the spending on its chic luxury goods. It was its
second straight quarter of triple-digit profit growth and an
acceleration from the prior three months.
Total revenue, which includes licensing revenue, climbed 57%.
Net sales rose 59%. Global same-store sales soared 36.7% vs. a
year ago. Comps in North America surged 35%. Analysts see
first-quarter profits up 44%.
Luxury retailers typically cater to consumers with an annual
household income above $90,000 -- who have the ability to spend
more freely right now.
"High-end earners have seen their wage growth rise rather
sharply following the recession and have benefited from both the
rebound in the stock and housing markets," said Perkins.
Less-flush consumers have been more gun-shy about getting back
into the stock market after the recession, says Perkins. Many are
also still underwater on their mortgages or have little equity in
As a result, they haven't seen their net worth improve much.
This has direct impact on their spending and, ultimately, on the
performance of the discount space.
Dollar stores have seen their same-store sales growth drift
downward from about 6% two years ago to roughly 2.5% currently,
Discount giantWal-Mart (WMT), he adds, has had some tough
sledding, because its core customer is living
paycheck-to-paycheck with little spare income to spend.
In the first quarter, luxury segment earnings rose 26% vs. 5%
for the overall retail industry. Luxury revenue climbed 10% vs.
2% for total retail. Same-store sales rose 9% in luxury
categories vs. the industry's 0.2% gain.
Luxury retailers have done their fair share to lure
"We have global luxury companies which are executing well in
product innovation," said Citi Research analyst Oliver Chen. "The
marketplace has better fashion and newness with the use of color,
and the emphasis on arm candy accessories, including jewelry,
handbags and watches."
Chen calls these "globally relevant trend factors."
Companies like Michael Kors have really had "their finger on
the pulse of fashion, adds Perkins. The high-end fashion house is
"right on target," he adds, particularly with accessories, but
also with other apparel related products.
"Michael Kors is far and away the fastest-growing luxury
retailer," said Perkins. "Its store base is smaller, but it looks
to be taking share from other luxury-oriented retailers."
The awareness of the brand is growing so quickly, more people
are becoming exposed to the brand, adds Chen. And Kors' price
range -- around $190 to $395 -- represents a new kind of
"There hasn't been anyone who has really cornered the market
in that price range, which still has a high degree of fashion
credibility," said Chen.
Kors also benefits from aggressive store growth, product
category expansion, increased distribution and "shop-in-shop"
conversion, says William Blair & Co. analyst Amy Noblin.
"They have the right product," she adds. "In the end,
consumers vote their dollars for the product."
Noblin says she's "very positive" on Michael Kors. It's
recently stepped up its store growth rate for next year and
increased its potential number of stores globally.
Consumers are treating themselves to jewelry again, says Ken
Gassman, online research director for diamond trading platform
IDEX Online. He forecasts total fine jewelry and watch sales to
grow 7% this year.
That should be good news for Tiffany. The retailer had a
difficult 2012, in part because it was up against tough
comparisons from a strong 2011. It also continues to lose market
share in the silver category, up against other national and
international jewelers, boutiques and online venues. It's a very
competitive space, says Noblin.
"While the company had some success in diversifying away from
that category into higher-end jewelry, it was not enough to
offset the declines in silver," she adds.
But the blue-box icon turned out a solid first quarter. Sales
rose 9%, its best revenue gain since Q4 2011.
Global same-store sales popped 8% vs. a year earlier. It
enjoyed a nice lift from promotions around its 175th anniversary
and promotional events around the debut of "The Great Gatsby"
movie for which it designed the jewelry.
Analysts forecast a 3% rise in profits in the second quarter,
then a nice pickup in the year's back half.
"In 2013, the company is in the early stages of a multiyear
effort to elevate the brand by investing in design talent,
innovation in new metals, further distribution into higher-end
jewelry and revamped marketing, to emphasize the aspirational
aspects of the brand," Noblin said.
Noblin has a "market perform" rating on Tiffany.
"I'm optimistic," she said. "They're making the right changes,
but they're not without risks."
Luxury Treasure Hunt -- In Bulk
Giant wholesale club retailerCostco (COST) also caters to the
high-end crowd, says Perkins.
It's been one of retail's top performers for quite a while --
with 14 straight quarters of double-digit profit growth.
Costco's third-quarter earnings rose 19%. Total revenue,
including membership fees, was up 7.9%. Membership fees grew to
$531 million from $475 million a year earlier. Its same-store
sales grew 5% vs. a year ago -- with a 6% gain in the U.S. and a
4% rise overseas.
Costco's value proposition and shopping experience are
somewhat unique, Perkins says. It offers high-quality merchandise
such as steaks at "decent" prices. The store isn't necessarily
cheap for a single item, but customers who buy in bulk save.
Costco benefits from the "wow factor," adds Brian Sozzi, CEO
of Belus Capital Advisors.
Every time you walk into its stores, he adds, there's
something different than you saw in a previous visit that
"excites" you and makes you want to purchase something you don't
"They call it the treasure hunt," he said.
Perkins expects the current trend to continue. Wages for
moderate-income consumers are stalled or rising only slowly --
not likely, he says, to drive improved spending vs. the high
"Factoring out any implosion in the market, it's unlikely
we're going to see much change with the high-end outperformance
over the discounters in terms of earnings and comp growth," he
Consumers are also battling other head winds, including higher
gas prices in the year's first half as well as payroll tax
Liz Miller, president of Summit Place Financial Advisors, is
positive on the luxury group: "I think the higher-end retailers
and product companies continue to be well positioned," she said.
"I don't know that any of the stocks are inexpensive, but that
area of the consumer discretionary sector still has some