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Two Companies Set to Have Happy Holidays

By: Martin Tillier
Posted: 11/14/2013 10:55:00 AM
Referenced Stocks: COH;JCP;KORS;KSS;M;TIF;UA;WMT

In the last week or so we have seen US retail sale numbers that beat expectations, a continuing decline in consumer sentiment, encouraging words from under pressure retailer JC Penney (JCP) and a big beat of earnings expectations by Macy’s (M). This morning saw slightly disappointing Q3 earnings for retail giant Wal-Mart (WMT) and a big fat miss from department store Kohls (KSS). Last month, Coach (COH) reported so-so numbers, but the stock was punished for falling US sales. Michael Kors (KORS), meanwhile, continues to grow.

If you take all of this data together you end up with a picture of the US consumer that is as clear as mud. The only clear thing is a clear warning as to the dangers of placing too much faith in any single indicator. It is hardly surprising that messages are mixed, however. No matter how convenient it is to think of “the US consumer” as one entity, it isn’t.  A look at the numbers shows that some parts of the consumer body are doing OK, while others are still feeling the pain.

Those at the very top are doing fine and the very bottom is still struggling. Tiffany (TIF) continues to trade around all time highs and Lamborghini sales are holding up, but there are still a record number of food stamp recipients. In the middle, however, where real economic growth is driven, there are encouraging signs.

If you put your rose colored specs on, then the juxtaposition between consumer spending and sentiment can be seen as a positive. The Thompson Reuters/University of Michigan index of consumer confidence was reported at 72.0 last week, the lowest level for several years while, at the same time, consumer spending increased by 0.2%. Now it should be said that a 0.2% increase in spending is hardly robust, but any increase as confidence falls is notable.

The differing fortunes of the Macy’s of this world compared to Wal-Mart and Kohls is also a reason for cautious optimism. What has been missing in this slow, grinding recovery from the events of 2008/9 is, as politicians constantly remind us, a robust middle class. A shift away from big box discount stores and back to mall department stores is, therefore, a welcome thing.

When this early evidence of a subtle shift in retail is combined with a slight slowing of the last year’s robust vehicle demand in the US, the outlook for certain sectors of consumer goods and retail is extremely positive. The US middle class seems to have made the big pressing purchases (cars) and is moving on to more frivolous things such as clothing and consumer durables.

So, as usual, one question stands out. If the middle class really is recovering and spending is likely to increase, how should traders and investors play that move? Which companies serving the consumer market will have Happy Holidays?

In general I have an intense dislike of trendy stock as it is prone to get overvalued very quickly and trends come and go just as fast. When it comes to brands that appeal to the middle class “aspirational” shopper, however, trendiness is what it’s all about. The obverse of this is the reason even acceptable quarterly numbers from COH saw the stock lose 10%. Rapid growth in the US has slowed. A case can be made that it has been surpassed by meteoric rises in Chinese sales that bode well for COH in the future, but that loss of trendiness in the core market worries many. The problem with aspirational shoppers is that, once they make something popular that very popularity causes it to lose its appeal.

For that reason, I think COH will have a disappointing holiday season, at least at home. There are two other companies that serve that middle class market, however, that I believe will continue to grow as gifts are bought. Both Michael Kors (KORS) and Under Armor (UA) have had phenomenal years, with their stock up 61% and 70% respectively year to date. This would normally be a warning sign, but in clothing, trendy is what counts.

Anecdotal evidence is not normally a good basis for stock picking, but in the case of trendy sectors such as clothing it can help to judge sentiment. My wife has come recently to the KORS brand, while my 11 year old son shows a marked preference for UA, not just in sportswear, but in clothes in general. In many ways, we are fairly typical of the aspirational, middle class shopper that we are talking about here, so it isn’t too much of a stretch to believe that out Holiday expenditure on these brands will be widely replicated.

As the Holiday season approaches there are, I believe, clear signs that the US middle class is recovering.  This means that somebody will win big. The popularity of both KORS and UA will undoubtedly wane at some point in the future, but for now they seem best placed to benefit from any wallet loosening that we may see in the next two months. May I be the first to say “Happy Holidays” at least to KORS and UA.