NEW YORK – Upscale U.S. retail stocks have fallen out of favor with investors even though high-income Americans are generally positive about the economic outlook.
Shares of Nordstrom have lagged behind the Standard & Poors 500 Index by about 12 percentage points since July 1, while Ralph Lauren Corp. has trailed the benchmark index by almost 14 percentage points. As these stocks have weakened, the S&P 500 has rallied 8 percent, closing at a record high Oct. 18.
This shows that some analysts and investors have become too pessimistic about these retailers earnings and customer base, said David Yucius, who oversees $250 million in assets as president of Aurora Investment Counsel Inc. in Atlanta. Their concern may be misplaced because people who shop at these stores seem to be doing just fine, and there isnt evidence to suggest a decline or even stress among these consumers.
Sentiment among Americans earning more than $100,000 averaged 16.7 in the four weeks ended Oct. 13, up from 15.2 in the four-week period ended June 30, as measured by the Bloomberg Consumer Comfort Index. While it fell to 14 from 19 in the most recent survey released Oct. 17, this remains the only income group with a positive reading.
These consumers – the primary customer base of affordable luxury companies such as Coach, Tiffany & Co. and Michael Kors Holdings – arent necessarily immune to everything, said Paul Lejuez, a New York-based analyst at Wells Fargo & Co. Many have chosen to spend their money on cars, electronics or home furnishings instead, he said.
While this has contributed to weaker sales and earnings forecasts, Lejuez said he maintains market perform recommendations on Seattle-based Nordstrom and Tiffany and Coach, both in New York.
Slower sales earlier this year for these companies were attributed in part to higher taxes for wealthy Americans. On top of an increase for all employees in the tax that funds Social Security benefits, theres also a new 0.9 percent surtax on wages and 3.8 percent added tax on investment income for individuals making more than $200,000 a year and for couples making more than $250,000.
Additionally, Congress set the top income-tax rate at 39.6 percent on taxable income above $400,000 for individuals and $450,000 for couples, compared with 35 percent last year.
The changes – along with budget battles in Washington and rebounding automobile and home sales – serve as a headwind to discretionary spending at luxury retailers, said Walter Bucky Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Ala.