Investment Contrarians

How the Fed Gave a Boost to Luxury Stocks

By for Investment Contrarians |

Fed Gave a Boost to Luxury StocksIn a recent editorial, I talked about QE3 (a third round of quantitative easing implemented by the Federal Reserve) and how it was a reward largely for the upper echelons of income-earners. The middle class will benefit due to the lower carrying costs, but the rich will really be the net benefactors of this monetary policy.

The A.T. Kearney Consumer Wealth and Spending Study writes, “The richest consumers have a higher percentage of discretionary spending, and dominate not only such categories as hotel stays and financial services, but also hospital and outpatient services, as well as newspapers and magazines.”

Let’s not beat around the bush. The reality is that QE3 will help people who carry significant debt to lower financing costs for another three years. The low interest rates mean cheaper cash will be available for the rich to make more money and finance spending, whether this spending is on investments, housing, or other high-cost ventures. This means the rich, with their larger pool of capital, can continue to increase their net wealth at a faster rate than the average American.

A viable strategy to play the QE3 effect is to first determine the benefactors of the policy in the retail sector: we know these benefactors will be the higher-income earners with major disposable income.

A contrarian high-end retail sector play that could benefit from the decision of the Fed to launch QE3 is Saks Incorporated (NYSE/SKS), a seller of men’s and women’s fashion apparel, shoes, accessories, jewelry, cosmetics, and gifts. Its most well-known banner is its “Saks Fifth Avenue” (SFA) stores that are free-standing or located in higher-end malls.

Saks has been closing underperforming stores recently. As of September 5, its retail network included 45 SFA stores and 64 “OFF 5TH” stores, along with saks.com.

I believe Saks has good potential to advance in the retail sector, especially given that QE3 will largely benefit the top five percent who control the majority of the country’s financial assets, along with those in the upper middle-class segment.

QE3 will also reward Coach, Inc. (NYSE/COH), a seller of high-end bags, purses, and accessories. Coach fell short on its fiscal fourth-quarter sales, but, longer-term, I see above-average potential for the luxury bag maker in the retail sector, especially in China, where same-store sales grew at double digits, versus a muted 1.7% in North America. The growing importance of Asia is crucial, with 317 Coach stores in Asia, versus 523 in North America.

On the jewelry end, Tiffany & Co. (NYSE/TIF) is tops in the retail sector for high-end jewelry, but, as is the case with Coach, Tiffany & Co. is trying to negotiate some near-term bumps. The company is also keen on the Chinese retail sector for high-end goods. The retailer has plans to open the most global stores in China by 2013 with around 25 to 30 stores.

While Coach and Tiffany & Co. face some growth issues in the retail sector, you cannot say the same for high-end clothing retailer Michael Kors Holdings Limited (NYSE/KORS), which is estimated to report sales growth of 36.9% in fiscal 2013 and 25.3% in fiscal 2014. Michael Kors beat on earnings-per-share (EPS) estimates by 122% in its fiscal third quarter and by 37.5% in its fiscal fourth quarter. The company has five stores in Mainland China, with plans to have 15 stores in the greater China retail sector (Mainland China, Hong Kong, Macao, and Taiwan) by the end of this year; it also has ambitious plans to grow its network to 100 stores in the Greater China retail sector within three to five years. Based on the operating results, Michael Kors could be a special stock in the retail sector going forward.

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