The Outlook for Luxury Apparel in 2014

According to market analysts, U.S. consumer confidence is headed for a rise in 2014, leading to renewed interest in luxury apparel and accessories.

Feb 19, 2014 at 4:00PM

Luxury apparel retailers have been on a bit of ride recently, with ups and downs sudden enough to turn even the toughest stomach. Brands at the highest end of the spectrum seem to have found the price ceiling for customers in new international markets, while aspirational brands have had success. At home in the U.S., results have been mixed as new competitors come into play, pushing old favorites out of the limelight.

A study from Euromonitor anticipates a better year all around in 2014. Leading the charge, they say, will be the U.S., spurred on by the whip of increased middle-class consumer confidence. Those aspirational brands, like Coach (NYSE:COH), Michael Kors (NYSE:KORS), and Kate Spade (NYSE:KATE) must be excited about the change. Although we're already seeing strength in 2014, holiday consumer confidence was lackluster at best. 

Consumer expectations are also on the rise, up to a four-month high on rising wage expectations. Incomes in the U.S. stagnated in 2013, putting pressure on retailers to deliver cut-rate prices to drive foot traffic. Companies are hoping that 2014 may be the year they return to the strength of old.

Not everyone was a loser
While the picture painted of 2013 above may seem dire, strong consumer brands actually did very well. Michael Kors continued its charge to the front of the mall-based luxury sector, pushing up sales across its U.S. and international stores without damaging its bottom line. While Kors -- the man, the myth, the legend -- is no longer a judge on Project Runway, the name he made for himself lives on.

Likewise, Kate Spade -- nee Fifth & Pacific -- has shed its figurative baggage. Once just a third of a portfolio alongside Lucky Brand and Juicy Couture, Kate Spade is now out on its own, leading the Kors life and garnering strong sales across the U.S. Unlike Kors, Kate Spade's margins have fallen because of the ongoing costs of rapid expansion. A change in U.S. confidence in 2014 offers the company a way to keep its foot to the floor without sacrificing too much of the bottom line.

In 2014, Spade and Kors should be able to maintain their strong consumer positions. The only potential bump in the road would be an IPO from fashion designer Tory Burch. Burch has effectively mimicked Kors' early rise to the top, but has yet to dip into the public markets to finance faster, more expansive growth. An IPO seems imminent, but it's been almost a year coming -- ever since Burch's ex-husband divested himself -- and so far, nothing definitive has happened.

Some people lost
Coach didn't come out on top, and 2014 is a chance for it to fix its U.S. business before things get any worse. Coach has focused so much energy on its international and men's segments that the company lost sight of its core focus -- North American women's handbags.  

This year represents an important potential turning point for Coach. The company has a chance to stage a small comeback, showing consumers that it can continue to be a desirable brand even after a bit of weakness. Of course, competing with Kors, et al won't be simple, but it will be much aided by renewed confidence in American shoppers.

For the rest of the year, keep an eye on middle-class confidence, which has such a direct impact on the success of these aspirational brands. While their prices are within shoppers' reach, these items aren't everyday purchases. If things continue to look like they did over the holidays, more and more consumers are going to snap their wallets shut, locking out luxury sellers in order to fund other things -- like life.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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