Luxury Retailers Stand To Continue Producing Strong Numbers

Upper-end retailers, like Saks Inc. (SKS) and Neiman Marcus Group Inc., saw their fortunes dinged by the recession, but they were the first to bounce back and their lead is likely to continue.

Luxury customers, while thrown by the economic downturn, held onto their jobs to a greater degree than lower-income consumers, government data show. As a result, the effect on the upper end was more psychological as they hunkered down, but were hardly destitute.

"During the recession, people, shoppers at the high end still had money, but there was embarrassment," said Barbara Kahn, director of the Jay Baker Retailing Center at the University of Pennsylvania's Wharton School. "Now, we're in a recovery where there is less of a patina."

There is also greater wealth as the stock market has mounted a significant recovery.

"The strength of our business--luxury--is typically tied to how our customers feel about their personal financial situations," said Julia Bentley, spokeswoman for Saks. "The financial markets are a good barometer of this."

But customers are not in a freewheeling mood. "They remain very discriminating in their purchases," Bentley said. "They are responding to special, differentiated products" and a more personalized shopping experience.

Some luxury retailers also say they have not really seen a return of the "aspirational" customer--someone that wants to be associated with the upper-end but pulled in their horns during the recession. Mark Aaron, spokesman for Tiffany & Co. (TIF), cited softness in "entry-level price point silver jewelry." For some consumers, "The environment may be too difficult for them to make that modest investment," Aaron said.

The still-restrained approach to spending and an aspirational customer that remains relatively scarce could produce a bump when they do open their wallets and add to the spending the luxury retailers are already seeing. As a result, higher-end retailers like Tiffany, Saks, Nordstrom Inc. (JWN), Coach Inc. (COH) and Neiman Marcus, some of which had very dark days a couple of years ago, stand to continue delivering solid sales.

For March, the latest available period, same-store sales gains were 11.1% for Saks; 5.1% for Nordstrom; and 7% for Neiman Marcus, which includes its Bergdorf Goodman stores. For more mainstream retailers, Kohl's Corp. (KSS) showed a 6.5% decline in comparable-store sales; J.C. Penney Co. (JCP) a 0.3% drop; and Target Corp. (TGT) a 5.5% fall, all off of declines the prior year.

"In the middle market, employment is getting better, but more slowly," Kahn said.

Middle-class consumers are also facing higher prices because of the greatly increased cost of cotton and higher labor and transportation costs. Those factors could continue making that group reluctant to spend.

A number of higher-end retailers, while facing the same forces, say they don't expect to be hit as hard because their merchandise has more embellishments, which can equate to less use of cotton. They also aren't mass merchants, buying, for instance, cotton tee-shirts in bulk, and having to charge their customers higher prices.

There are, however, some potential stumbling blocks for luxury retailers that most mainstream stores are likely to duck. The earthquakes and tsunami in Japan are crimping tourism to and from that country, cutting out a solid revenue source for many upper end retailers.

There is also discussion of raising taxes for the wealthy to help fund raising the debt ceiling--the limit on how much the U.S. government can borrow. The move could crimp upper-end and aspirational buying.

"When the government intervenes and decides to raise, taxes it will impact discretionary spending," said Michael Londrigan, head of fashion merchandising at LIM College, which teaches business courses in retailing.

But the setbacks may not be too severe. "Right now, you're seeing luxury shoppers carrying two, three bags instead of one, and I see that happening for some time," Londrigan said.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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