Indications of Pickup in Luxury Sales May Mean Quicker Recovery

December 21, 2009

Recent signs of improving luxury goods sales may be an indicator of a broader consumer spending trend: a quicker rebound among higher-income individuals.

According to Oppenheimer & Co. Senior Analyst Brian Nagel, despite easy comparisons to last year’s retail lows, one of the biggest drivers of better spending among consumers with more discretionary income this holiday season will be the stock market.

“We’ve seen the stock market have a pretty amazing run since its March lows, that I think helps to improve confidence broadly and really helps improve this spending ability of higher-income consumers,” said Nagel, whose luxury coverage universe includes Tiffany & Co. (TIF) and Williams-Sonoma (WSM).

Nagel is particularly positive on Tiffany, highlighting the luxury retailer’s cost-controlling measures and brand protection throughout the downturn.

“They didn’t resort to discounting and thereby did not train their customers to look for discounts in stores. They really protected the brand. So from a sales perspective, they basically just took their lumps,” said Nagel, who has a $50 price target for TIF stock.” When you look at comp store sales in the U.S., they’re tracking down to 30%-plus, so they took the lumps. They offset some of it with better cost controls. And then the cost controls, they actually protected operating margins probably by about two percentage points.”