With all the talk of penny-pinching and belt-tightening that followed the great financial crisis of 2008, there’s a common perception that the low-end retailers catering to the 76% of Americans living paycheck to paycheck must be doing well.
Yet, high-end retailers have smoked their discount-focused competitors over the last four years. And we can thank Ben Bernanke for that.
Unprecedented levels of stimulus from the Fed have worked to push up the price of risk assets like stocks. This has disproportionately benefited the wealthiest 10% as they’ve always been more invested in the stock market than the average Joe.
As the Fed pumped money into the system, the wealthiest of the wealthy were cushioned from the worst of the fall. That meant they still had discretionary income to spend at luxury retailers like Nordstrom.
On an aggregate basis, consumers actually have more disposable income (the green line in the chart below) and are spending more money (the blue line) than prior to the 2008 meltdown. Take a look…
While the data charted above isn’t broken down by income or wealth levels, it’s highly likely that the top 20% of consumers are driving these numbers higher.
That’s because, as Harry’s demographic research shows, the spending of high-income earners peaks about five years later than the population as a whole. So while most Americans hit their peak spending years in 2007, the top 20% has continued to spend.
These factors combined have led to a divergence in the retail arena, where the high-end luxury retailers have fared much better. While discount retailers have been forced to cut prices to the bone to keep volume steady, luxury retailers have maintained strong pricing power.
This advantage has clearly translated to stronger earnings-per-share (EPS) growth for luxury retailers.
Below, I’ve analyzed a subset of luxury retailers (Nordstrom, Michael Kors and Tiffany & Co.) and a subset of discount retailers (Wal-Mart, Target and Family Dollar). Check it out…
Over the last 10 quarters, earnings-per-share growth among the three luxury retailers I used for this comparison (in blue) has been 140% stronger than the three discount retailers I selected (in red), which have essentially flat-lined on this basis.
Moving one step further down the chain, stronger earnings-per-share growth has made stock investments in luxury retails a more lucrative bet.
As we head into 2014, I see no reason why this trend of outperformance in the luxury sector won’t continue.
Typically, signs of trouble first appear in earnings-per-share trends, with a couple of bad quarters prompting investors to shift toward other investments. That’s not the case today. With momentum at their backs, watch for high-end retailers to dominate their low-end peers through at least the first half of next year.
Managing Editor’s Note: Eddie Speed, our real-estate guru, has created a free training webinar for you. It’s called Cash Flow For Life and in it he’ll show you how to set up a cash flow stream from real estate that’s very lucrative, but doesn’t involve all the usual suspects, like becoming a landlord or flipping property. In fact, you’ve probably never even thought of this stream of income before. We’ll broadcast it on December 30. Register here.
Ahead of the Curve
According to RealtyTrac, September 2013 pre-foreclosure filings were down 38.9% from last year. The same study shows bank-owned REO (real estate owned) filings are down 25%.