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TWST: What is the current state of the retailers from the investor’s viewpoint?

Mr. Schick: The primary thing to remember is that retail is an interest rate sensitive group. In general, these stocks move in the opposite direction of interest rates. When the Fed cuts rates, investors tend to discount a freer spending consumer into positive multiple expansion for retail stocks. On the flip side, as the Fed raises rates, you tend to see a disappointing view or multiple contraction in the stocks. There are, of course, other themes within the retail group. You have, for instance, the growth aspects of the various subgroups. Some retailers are putting down large amounts of new square footage. Other retailers are bumping up against potential saturation. We’ve studied Fed rate moves in a slightly different way; we have found a clearer performance pattern emerges for the retail stocks. There are generally two periods of benefit to the retail stocks when the Fed cuts rates. Those periods seem to be “quarter one” following the cut and “quarter four” following the cut. Here’s how: as the Fed cut rates aggressively, it’s a very good bet that the retail stocks will instantly outperform — about an 80% chance that they’re going to outperform during the immediate quarter, and outperform significantly by between 10% to 15%.

Tiffany (NYSE:TIF) really stands out in terms of brand management in my opinion, which is especially important in luxury brands. The most important thing is to grow your business, but to grow it inside your own business plan and protect the brand. Tiffany has in our opinion come up with a superior mechanism for doing that in their slightly smaller store; they are opening up three or four or five US branch stores a year. They’re growing footage by 8% or so. At the same time, the natural run rate for Tiffany comps is quite strong because they continue to gain share in not only fine jewelry sales but also occasion-related businesses. While they’re growing it through their own stores, they have made the important move to exit wholesale business, so they’re protecting their brand. Tiffany wants the customer to buy Tiffany goods from somebody who is involved with Tiffany. That is critical “brand protection.” When a brand has a choice of how to grow, they can grow by selling into more channels (such as department stores), or they can remove channels and grow their own channel. Tiffany’s position as a luxury brand is important; you don’t want to see it sold in the wrong way, because then the whole story can unfold. Meanwhile, new stores do incredibly well because they’ve developed some things in their slightly smaller store format that drive return on invested capital higher, and that’s going to take this stock much higher over time. It’s theoretically a tough time to be buying a luxury goods retailer when the market and the wealth effect has swung so negative and we have recently addressed that phenomenon in our estimates. In a long-term sense, this is an excellent entry point for Tiffany. This is actually a point — in the 28 range — where the company bought back stock during 2000.