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Indulge in 6 'new luxury' stocks
It's called trading up -- buying a little better than you have to, just because you deserve better. These are the companies shoppers turn to for retail therapy.
By Michael Brush
When Jim Koch quit his day job to start a small beer brewery back in the mid-1980s, he had no idea he would be tapping one of the most powerful new economic trends of his generation.
The Bostonian figured it would take five years to get the annual volume of his obscure but tasty beer up to 5,000 barrels. To his surprise, he sold that much in just five months. Now the boss of Boston Beer (SAM, news, msgs), which makes the world-famous Samuel Adams beer, Koch likes to think his brew caught on because he uses a favorite family recipe handed down through six generations. No doubt, thats part of the success.
But he also knows that another, more important factor is at work, as well. By making a beer superior to most of what was on the market back in 1983, Koch unwittingly put himself on the very crest of an emerging consumer wave thats now so big, its a major force in the retail world.
Its called trading up.
And its the power behind nearly a half-trillion dollars in retail spending, a number that many believe will double in the next six years. If so, it will drive enormous sales gains at companies playing to the luxury trend, like Coach (COH, news, msgs), Williams-Sonoma (WSM, news, msgs), Neiman-Marcus (NMG.A, news, msgs), Tiffany (TIF, news, msgs), Inter Parfums (IPAR, news, msgs) and Carnival (CCL, news, msgs).
Affordable indulgences
Simply put, trading up is about consumers spending more for affordable indulgences. They do this for a couple of reasons. Many simply appreciate the superior quality. Others are looking to reward themselves for surviving some emotional turmoil.
To many investors, trading up may sound like so much psychobabble. Besides, the concept of retail therapy, or going shopping to make up for negative feelings, isnt new.
But marketing experts who study consumer behavior insist trading up is something different. Its a deep-set cultural trend that could drive $1 trillion in consumer spending by the end of the decade, says Michael Silverstein, a Boston Consulting Group partner and author of Trading Up: The New American Luxury, released in October. Among other things, Silverstein's book gives investors a handle on how to play this trend on Wall Street, but well get to that in a moment.
Old luxury vs. new luxury
First, a key point about this consumer movement: Its not at all about luxury as we used to know it. Its not about Jaguars, million-dollar Tiffany necklaces, or products that are so rarified that only the true aristocracy can afford them.
Thats old luxury.
In contrast, new luxury is about digging a little deeper into your pocket than you must simply because you like the reward of better quality goods, even when those goods dont cost a million bucks. It's about buying Sam Adams beer instead of Budweiser, a $4,000 Viking range instead of a basic range that might run you $600. It's about buying Ben & Jerrys ice cream or a finely crafted leather handbag made by Coach. It's about paying close attention to true value -- the fine balance between extra cost and extra return.
But the "new luxury" is decidedly not about buying a Jaguar.
Why not? Because ultimately, high-end autos like Jaguars may not be the best quality cars, and certainly they may not represent the best value in the eyes of consumers. I have a friend who had a Jaguar, says Koch. Sure, its a fancy name, but the reliability problems and extra maintenance costs meant the Jag wasnt really a luxury for the owner. I drive a Honda Accord, and it is a well-made car, so it is a joy, says Koch. I believe Ive got the luxury car.
The Jaguar-vs.-Honda example offers a good lesson about how consumers have reinvented the concept of luxury.
People became more educated consumers, and they began to look past the old image-based definition of quality, says Koch. Instead, they look at real product quality, which in some cases is performance-based, and, in some cases, flavor-based. Sam Adams is very affordable and very accessible. But it is trading up. You dont need little German elves in leather pants to make a good beer.
For retailers (and their stockholders), the virtue of this trading-up trend is that luxury goods sell at tidy premiums -- typically 20% to 200% over the price of commodity goods, says Silverstein. And new luxuries are selling at much higher volumes than old luxuries. All this translates into excellent profit margins for providers of new-luxury goods and services.
Affording the new luxury
Where is all the money coming from to trade up? Silverstein cites the following sources.
Two-income couples. The typical new luxury consumer, whose annual household income runs between $50,000 and $150,000, is in a marriage or relationship where both partners work. Indeed, in 24% of those households, women earn more than men. About 85% of new luxury goods are purchased by women, says Silverstein. It is a trend about women being empowered to spend their money.
Even the affluent like discounts. Silverstein estimates that lower prices at discount chains such as Wal-Mart (WMT, news, msgs) and Costco (COST, news, msgs) have handed American households a $100 billion annual windfall. New luxury consumers -- even those that most of us would classify as "rich" -- shop heavily at discount chains like these for the basics of life. The money they save can be used to trade up to new-luxury goods that matter the most to them. One piece of evidence that the wealthy buy necessities at discount warehouse stores: Costco has become the biggest vendor of wine in the United States.
The refinancing boom freed up cash. Finally, the home-mortgage-refinancing boom has played a big role in providing money for trading up. Homeowners pour many of the gains from refinancing right back into new luxury investments -- like a better kitchen or bathroom.
Beneficiaries of the trend
Silverstein says four emotional factors determine what consumers buy when they trade up:
- Personal indulgence.
- Expressing a personal sense of style.
- Connecting.
- Questing or adventure.
Things for the home -- from bedding and home theatres to granite countertops and gourmet coffee machines -- are big on the new luxury-shopping list. But so are travel, cars, restaurants, jewelry, pet care, shoes, clothing and accessories. Here are some of the companies likely to benefit from the trading-up trend.
Coach: This retail chain, which sells fashionable leather goods and accessories, is up four-fold since we first wrote about it in this column in 2001. Coach sales have jumped in part because of a successful move into Japan. The trading-up trend should help contribute to even further gains. Coach is really in the sweet spot, says John Barrett, retail stock analyst for Columbia Management Group. It has a desirable brand yet affordable prices. The average price for a Coach handbag is $250, compared with $500 for a Prada version.
Recently, Coach has been expanding the number of goods with the Coach name on them -- from key chains and childrens clothes to smaller, more affordable wallets. Putting the name on less expensive items like wallets will help Coach appeal to consumers who are trading up, says Dwight Cowden, a retail stock analyst with Mellons Private Wealth Management group. People who are trading up are on a limited budget, but they want to have that brand name cache, he says. It is easier for them to afford a Coach wallet than a Coach handbag.
Williams-Sonoma: One of the leading specialty retailers selling upscale home furnishings and cooking accessories, Williams-Sonoma is a perfect example of a chain catering the new luxury trend, says Silverstein. Sales at stores open more than a year grew at a healthy 5.6% in the most recent quarter.
Neiman-Marcus: Same-store sales at this luxury retail chain were up 5.6% over the past year, well above declines of 1.8% at department stores overall. Nieman Marcus is a pure play because it does not have divisions selling mid-range goods.
Tiffany: You can spend upward of a million dollars to put a necklace in famous blue Tiffany's box for a loved one. But the upscale retailer always has had lots of items -- from bracelets to candy dishes -- down in the $100-$200 range. Over the past several years, Tiffany has been advertising to let consumers know this. The result: a boost from the trading-up trend.
"We just felt we had to build awareness because we thought there were a lot of customers out there who had yet to discover Tiffany, partly because of intimidation," says Mark Aaron, who handles investor relations for the company. "We are not trying to reach everybody. We are simply targeting consumers who really appreciate value and high quality. There are people who want to trade up, and they are willing to pay more to get better quality." Indeed, sales have grown 11% annually over the past five years, says Morningstar analyst Heather Brilliant.
Inter Parfums: With a market cap of just $392 million, Inter Parfums is one of the smaller plays on the trading-up theme. But a recent flurry of upward revisions to earnings estimates suggests it could be one of the bigger winners. The company reported third-quarter revenue gains of 53%, thanks to an 83% jump in sales of its high-end fragrances such as Burberry Brit, S.T. Dupont and Paul Smith. About 75% of its sales are in luxury fragrances.
At prices of just $70 to $80, high-end fragrances hit the mark as an affordable luxury. "They are probably the least expensive way for consumers to have a feel-good connection with designer names they see advertised," says Russell Greenberg, the finance chief at Inter Parfums.
Inter Parfums launched its Burberry Brit fragrance for women and a Diane von Furstenberg high-end cosmetic line this fall. It plans to roll out four new fragrance lines for 2004. The company sells in 100 countries, but thats not a problem because the trading-up theme is international, Silverstein says.
Carnival Cruise Lines: Investors have been concerned about an aggressive build-out of capacity in the cruise line business, casting doubt on how much stocks like Carnival can advance from here. Indeed, the stock has been stuck in a four-month trading range between $33 and $36. But J.P. Morgan analyst Dean Gianoukos expects capacity growth to slow down after 2004. Barring another war or major terror strike, however, sales will continue to be strong. Expect possible rough sailing near-term, but longer-term trends are favorable, especially given the strong demographic trends as the population ages.
Beware some seasonal turbulence
Anyone buying retail stocks on the trading-up theme should beware that December can be a bad month for retail stocks, says Mellons Cowden. "Everybody gets nervous about Christmas because these companies have such a high reliance on Christmas sales," he says. So investors step to the sidelines. Typically, though, Christmas doesn't turn out to be the disaster investors fear it will be, and the retail group tends to recover in the first quarter.
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