Early Wednesday morning last week, in what used to be an anonymous, somewhat-drab lunch spot for the lawyers, financial analysts and other office workers that labor in downtown Manhattan, dozens of people milled about basking in the unexpected warmth of a sunny, 62-degree November day.
Many of the people, part of the Occupy Wall Street movement that has gathered in a private plaza near the World Trade Center to protest income inequality in this country, had recently woken up. Emerging from their tents to the uncharacteristically gorgeous day, they smiled.
Some 3.5 miles north of where those people stood, a 15-minute cab ride up New York's famed Broadway to the culturally-ambiguous area where the Garment District overlaps Times Square, a group of executives sat in a high-floor office delivering an update on their quarterly business performance to investors. They, too, were smiling.
The executives, leading the earnings conference call for Liz Claiborne, Inc. (NYSE:LIZ), told the people on the other end of the line -- mostly financial analysts in offices very close to where those protesters were enjoying the Autumn sun -- just how well their business had done.
And it was doing quite well, indeed. Despite having experienced a massive business reorganization in the quarter, selling the company's core middle-brow brands to department store operator J.C. Penney Inc (NYSE:JCP) to focus on its luxury portfolio, Liz Claiborne was posting a surprise profit.
For the quarter being discussed, the firm noted earnings of 2 cents a share from continuing operations, while Wall Street analysts had expected a loss of 5 cents per share. The news sent company stock prices to a peak of $9.18, more than double the price shares had sold for just two months earlier.
Liz Claiborne's expectation-crushing results that day were no anomaly. It's been a sunny day, a sunny week, a sunny month, and a sunny year for companies selling luxury products to American consumers. As the rest of the country has cautiously measured its spending power in the face of recessionary pressures, the high net-worth individuals who patronize the nation's luxury retailers have been shopping as if nothing were askew.
These retailers, even in an environment where the cost of the goods they sell is up sharply, have thrived.
Since August 9, when it briefly touched an intraday nadir of 347.42, to Monday's close, the Dow Jones U.S. Retail Index has been up 18.23 percent. Shares of luxury retailers have blown that benchmark away.
Upscale fashion retailer Saks Incorporated (NYSE:SKS) is up 26.87 percent for that period. High-end jeweler Tiffany and Co. (NYSE:TIF) is up 27.93 percent. Fine leather handbag maker Coach, Inc. (NYSE:COH) is up 31.76 percent. Luxury goods designer Ralph Lauren Corp. (NYSE:RL) is up a dizzying 48.52 percent. Liz Claiborne, Inc., which saw its stock price jump after the announcement earlier in the quarter that it had completed its move to a pure-luxury player, is up 94.67 percent.
Past Performance and Future Results
The reasons for these companies' outstanding performances vary, but most subscribe to a similar narrative. Following a trend that's been in play since at least mid-2010, retailers have been able to sell an increasing number of items without the discounts they were forced to apply during the worst of the 2009 financial panic. Pricing moves have been such that, in spite of the inflationary pressures on cotton and precious metals that translated into higher cost for these retailers, all reported higher gross margins in their latest quarterly reports.
Other, more recent trends, have also been positive for the companies. The last year has seen a sharp jump in direct-to-consumer sales for retailers that use various marketing channels. In other words, companies like Coach that sell their products both through third-party department stores and Coach-branded outlets have seen costumers gravitate to the latter, which are more profitable for the company. An increase in online sales which, contrary to popular assumption, are more likely than not to be for full-priced items, has also padded bottom lines.
Several of these trends were given concrete examples by William L. McComb, chief executive of Liz Claiborne, during that morning conference call with analysts and investors. McComb noted how the company's success was coming as it positioned itself by turning its now-core brands (Juicy Couture, Lucky Jeans and kate spade) into channels for fully-priced aspirational luxury products.
Kate spade had been first in the up-pricing McComb described as reimaging the retail stores and marketing, refocusing the target audience and strengthening direct-to-consumer capabilities, and the results were showing. Year-to-date direct-to-consumer revenue growth for comparable sales was 74 percent, McComb said.
Lucky Brands had been targeted more recently, McComb explained, but was also showing the same momentum.
This absolutely defies the trend out there, and we're -- it's not like there's just -- like we hit it with one good item. It's really the entire collection that's really performing, McComb explained, referring to results since the brand repositioning.
The last brand to be revamped, Juicy Coutoure, was undergoing what McComb called the re-couturing of the Juicy stores so that no items will be available for less than $100.
The consumer trend of happily buying up luxury products as prices were going up was echoed across town in another conference call to analysts and investors to discuss quarterly earnings. In this case, Roger N. Farah, president and COO of Ralph Lauren Corp., brushed aside concerns about pricing pressures brought up by Goldman Sachs' senior retail analyst, Adrianne Shapira.
If it's a new product and they're excited, they buy it, Farah said, referring to patrons. And the relative pricing of that is immaterial. I think when there's something that catches their attention, that's new and different, that's been a nonissue.
The management of another luxury retailer, Coach, Inc. would likely agree with that assessment. On October 25, they reported earnings results for the latest quarter that exceeded Wall Street analyst consensus expectations by three cents, on a 14 percent net earnings jump from the previous year. Web commerce was highly touted as helping deliver those results. So was a developing trend where wealthy Chinese on vacation were driving sales at the company's North American stores from New York to Hawaii.
But selling goods for prices much higher than what they cost to manufacture, the basis of any luxury retailer's business model, was still king. Christine Chen, an analyst at Needham & Co., told the Wall Street Journal the company's results were positively impacted by the fact sales of handbags going for more than $400 were growing at a brisk pace.
A global trend
The image of Chinese tourists riffling through Coach bags on New York's Madison Avenue (ironically, perhaps, at the same time as many New Yorkers waded through Chinese-made Coach knockoffs further downtown), is not an incongruous at it seems at first.
The success of high luxury is a global occurrence, driven at least partly by the minting of a new class of wealthy consumers from China.
According to a report on the global retail luxury industry prepared by the Milan office of management consultancy Bain Co. (and released on October 17), the global luxury market is on a roll, poised to show double-digit sales growth in both 2010 and 2011.
In spite of challenges this year including the Japan earthquake and, tellingly, socioeconomic turbulence, the Bain report predicted 13 percent real growth in revenue for the sector worldwide (on a currency adjusted basis, the weakening dollar causes revenue growth to be 10 percent).
Growth has been especially driven by a sub-sector traditionally known as 'hard luxury,' the Bain white paper stated, given a full recovery of jewelry and watches as sales drivers.
Growing consumption by Chinese tourists in North America is noted. So is the €23.4 billion (approximately $32.37 billion) that people throughout China, Hong Kong, Taiwan and Macau are expected to spend on luxury goods in 2011, a figure that entails growth of over 30 percent from the prior year.
The U.S. consumer, however, still has no peer, delivering double-digit growth that drives the total Americans will spend on luxury items this year to over €50 billion (approximately $69.17 billion), according to the report.
The Income Differential Issue
Belying the success of the entire sector, however, is something chief executives and analysts will rarely discuss publicly: growing income inequality.
As the recessionary conditions worldwide have overwhelmingly contributed to a growing divide between top earners and the rest of the working population, the people who can afford to buy luxury goods have been able to buy more of them.
The effects of this growing inequality in distribution can be seen through even a whirlwind assessment of the wider retail industry. Besides luxury brands, off-price and discount retailers run by corporations like the TJX Companies, Inc. (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST) are doing splendidly well. Middle of the way store operators, like Macy's (NYSE:M), J.C. Penney (NYSE:JCP) and Sears Holdings Corporation (NASDAQ:SHLD) are struggling.
Sometimes, the acknowledgement that inequality is the catalyst to the industry slips out. In the Bain Co. report, it was noted that 2010 had seen what the paper termed increasing polarization, specifically in the men's retail sector. Lower-priced accessible brands were doing very well, as were ultra-luxurious absolute brands. Mid-priced aspirational brands were getting squeezed, growing at a lesser pace than the two other categories.
Perhaps more tellingly was an interview given on November 5 to the San Antonio Express-News by Steve Sadove, chief executive and chairman of Saks Incorporated.
When asked by the newspaper What gives you cause for concern?, the executives answer started off Occupy Wall Street, before mentioning other political events like the EU's euro problem spreading and ending up with the platitudes of jobs, the employment situation and education issues.
In that same interview, Sadove crystallized the reason why a movement speaking out against vast differences in wealth is a cause for concern to a luxury retailer like Saks where high-end customers are buying much more at the higher price points than they were a year ago.
Tuesday, Sadove reported Saks third-quarter results, noting a 5.8% rise in year-to-year comparable store sales achieved in spite of further reductions in our promotional activity, a situation that contributed to a substantial increase in the company's gross margin.
As for the Occupy Wall Street protesters Sadove expressed concern about, they were woken up around 1 a.m. Tuesday morning under orders from New York City's mayor and evicted from the private park they had been camping in. It was still unseasonably warm in New York, but the day started out cloudy, and the forecast calls for rain.