Luxury Stocks are Safer Bets in the Holiday Season

RL: Ralph Lauren logo
Ralph Lauren

Holidays luxury retailers have been less affected by the ongoing economic uncertainty versus there more budget focused peers. While low end shoppers are getting more frugal, the high end customer base is less affected and not pulling back on spending.  In addition to this spending in rapidly growing economies are supporting sales for luxury brands like Ralph Lauren (NYSE:RL) and Coach (NYSE:COH) while value oriented retailers such as Gap Inc. (NYSE:GPS) and Aeropostale (NYSE:ARO) struggle.

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While value retailers are losing their customers, luxury retailers’ customers base remains intact

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In the current tough macro-economic conditions, brand loyalty in the low end apparel market has lost its relevance. As the highly promotional nature of apparel market continues, a value customer is in the lookout for best promotional deals without caring much about the brand. This in turn has culminated into ferocious competition between the value retailers with every company trying to outsmart its competitors with heightened promotions in order to woo consumers. The result ultimately echoes through significant declines in gross margins as Average Unit Retail (AUR) is staying much low to the comfort of value retailers.

Holiday Spending

Source: National Retail Federation

Additionally high unemployment rate and economic uncertainty have ensured that holiday spending growth remains much less in 2011 compared to that in 2010. Thus value retailers are taking a dual brunt: with their margins plummeting because of high promotions and their sales are falling due to economic slowdown.

On the other hand, the situation is totally opposite for luxury retailers.

Brand loyalty is much more evident in the high-end apparel market as the luxury shopper is more immune to the recession. Less concerned about the near term outlook, the luxury customer is still going to the brand of his or her choice. Historically also, luxury apparel retailers have posted strong results with both Ralph Lauren and Coach posting stunning last quarter results despite concerns regarding slowdowns in the U.S., Europe or China. And with the trends as evident from Black Friday weekend, this may well continue through the Christmas holidays too.

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