Recession? So what? The rich will always keep spending ... right?
Riiiiight. Just like home prices will always keep rising, and teenagers won't change their spending habits in the face of a recession. Truisms like these are getting blown to bits left and right as the economy worsens, and mounting evidence now suggests that the wealthy -- contrary to popular opinion -- may be tightening their purse strings right along with the rest of us.
Looking for Mr. Cheapskate
Economically speaking, teenagers are acting terrifyingly out of character lately. Now "wealthy" consumers might be joining them. A recent Bloomberg article discussed how Saks' (NYSE: SKS ) troubles may foreshadow tougher times ahead for other high-end retailers such as Nordstrom (NYSE: JWN ) and Neiman-Marcus.
The article opened with a moving story of nervous consumers and disintegrating profit margins, discussing a Dolce & Gabbana messenger bag that Saks was peddling for a whopping 60% off (from its original $1,995 price tag).
This may be the dawning of the Age of Cheapskates, with even supposedly well-heeled customers ratcheting down their frivolous purchases of high-end luxury brands. The superwealthy get rich for a reason, and in bad economic times, I have a feeling many of them may be getting even stingier than Joe and Josephine Six-Pack.
Even the wealthiest man in America, Berkshire Hathaway's (NYSE: BRK-A ) Warren Buffett, isn't exactly known for his showy displays -- he still lives in the Omaha, Nebraska home that he bought decades ago for $31,500, for example.
The Bloomberg article pointed out many pressures now affecting high-net-worth individuals, including the collapse of the financial industry and its subsequent job cuts. (I suspect the investment banks spurred quite a lot of conspicuous consumption). In addition, the housing bust and the stock market's recent bearishness impact individuals across the board.
Wealthy or wannabe?
The luxury goods market has also been buoyed by artificial forces, including the massive consumer feeding frenzy over the last decade or so. Paper gains in back-to-back asset bubbles -- first the tech boom, then the housing bubble that softened the former's implosion -- apparently further reinforced America's inner spendthrift. Worse yet, the housing bubble and its insanely lax mortgage structures made it seem hip, even sensible, to spend money you didn't actually have.
I'd argue that the proliferation of McMansions, luxury automobiles, and other status goods all stemmed from this wannabe-wealthy culture. And so do Dolce & Gabbana bags, right? No wonder companies like Saks are quaking in their designer imported boots. How much luxury spending was fed by capital that has now disappeared in a puff of smoke?
Looks like this particular hangover will require much more than a couple of aspirin and a sick day from the office.
Forget Saks -- there's a sale on Wall Street
The near term might be super-tough for the luxury goods market. If people aren't in the mood for a $4 cup of Starbucks (Nasdaq: SBUX ) coffee, I doubt most will turn around and shell out $2,000 for a handbag, either.
Then again, the tough times won't last forever. It's a great time for investors with a long-term horizon to carefully add high-quality, beaten-down stocks to their portfolios. How about Coach (NYSE: COH ) ? It has a solid, aspirational brand, a reputation for quality, and the ability to extend its appeal beyond the super high-end demographic by offering some of its wares through outlets.
Coach shares have fallen 41% over the last 12 months. They now trade at just 14 times earnings, and the stock sports a PEG ratio of 0.78. The company has a solid balance sheet, too, with $616 million in cash and just $13.9 million in debt.
It may be a good while before $2,000 handbags come back into favor. Still, this is a great time to search for some of the greatest stocks you can think of at fire-sale prices. How's that for affordable luxury?
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