Retail: Luxury Brands Vs. Discount Brands

While consumers of “average” means began cutting back over four years ago, most of the wealthiest consumers have continued to spend. This split in spending patternrns created a bifurcated retail landscape.

Many luxury brands continued to do well after the market crash that bottomed in early 2009. With wider profit margins (that could be compressed a bit, if needed) and clientele much less sensitive to the whims of the economy… luxury brands have outperformed discount brands during much of the “recovery.”

To illustrate, we could look at any number of “luxury vs. discount” brand match-ups so let’s randomly consider Tiffany (NYSE: TIF) vs. Gap (NYSE: GPS)…

Both stocks bottomed out at the same time in March 2009. But Tiffany & Co. staged an impressive recovery rally through 2011, gaining 394% in less than three years!

Gap’s recovery was much more modest, gaining 90% between 2009 and the start of 2012.

But… 2012 is painting a different picture for the two retailers. Tiffany & Co. is down 7.6% year-to-date while Gap is up 87%! This is a dramatic shift. I’m not suggesting Tiffany’s former customers have downgraded to plastic necklaces they can buy at Gap. But it does seem the world’s luxury buyers are pulling back. And, discount brands are starting to figure out how to adjust their business models to accommodate the new budget-conscious shopper.

If you haven’t done so already read the Survive & Prosper issue on “Lack of Consumer Spending is Slowing the Economy.”

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.