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2 Companies Banking on Consumer Confidence

Maybe it's the long actual winter, maybe it's the long metaphoric winter, but either way, people are feeling good about the future. March's consumer confidence rose to the highest point that the index has seen in six years, according to the Conference Board. We're still worried about income growth, but jobs are still not looking great. Consumers are also hopeful about the next few months, believing that the economy might have a chance to "pick up a little steam," said the Conference Board. 

A bounce in outlook is good news for businesses because it means people who have been holding back might be more inclined to spend. On the other hand, the dry predictions for income growth might keep customers from whipping out their wallets until they're sure things are safer.

Two businesses that benefit from a bounce
While the whole retail sector is likely to see better results when consumers are happy, a few brands should get an extra boost. For the past year, retailers of non-essential goods have been suffering from household fiscal responsibility. Consumers have been holding off on new clothes, accessories, and non-sale items in general.

The 2013 holiday season was a bust for many retailers, and margins were hammered across the board. A return to some sort of confidence would help these companies push revenue and margins up, and could offer excellent opportunities for investors.

Looking at who can turn good news into good sales, my eye falls on Gap (NYSE: GPS  ) and Tiffany (NYSE: TIF  ) . Both companies have clear strengths, strong brands, and rely on consumers who have "excess" cash that they feel like they can spend instead of saving.

The driving force behind aspirational purchasing
Let's start with Tiffany, the clearest example of a business that wins when consumers spend freely. Tiffany is an aspirational brand, appealing to broad swaths of the middle class because of its strong name recognition and high-but-not-too-high price points. Over fiscal 2013, the business's North American division had a 2% drop in comparable store sales as customers pulled back on purchases. That was coupled with a drop in margins as customers held back on the company's mid- and lower-range products that offer it higher margins.

Over fiscal 2014 -- ended Jan. 31 this year -- things started to turn around. As consumers got more confident, North American comparable sales rose, but the company is still suffering from a product mix problem. While it has no problem selling the higher priced items like diamonds, Tiffany is still working to bring back in aspirational middle-class shoppers. Those buyers drive sales of its higher margin goods, and a return to confidence would hopefully get them back in Tiffany's North American locations.

Mom, I need new clothes
For Gap, the problem has been less noticeable for most of the year. Back-to-school is the company's big chance to make good on a renewed sense of consumer confidence. Last year, the company's July and August sales were lackluster, especially in its Old Navy brand.

On the company's second-quarter results conference call, CEO Glenn Murphy said Old Navy was "really the only brand that participates in back-to-school." In the 2012, Old navy put up fantastic comparable store sales increases in both months. While 2011 was an easier comparison, Old Navy still should have done better in 2013.

This year, consumers are telling the market they're ready to spend again. Gap and other teen retailers might get a nice summer boost from that feeling, and they could even see a bump as we move into spring -- if we ever move into spring. It snowed yesterday.

The bottom line
Everyone is in a place to benefit if the hive-mind is right and things are starting to get better. Hopefully, as the year moves on, we'll also see an increase in incomes, which will be the real driver of changes in spending and savings habits down the road. For Tiffany and Gap, any good news for Americans is going to be good news for the business. Investors looking to capitalize on a rebound in the economy -- if this can be called a rebound -- should take a closer look at these kinds of consumer-driven brands.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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9/1/2015 4:02 PM
GPS $32.27 Down -0.54 -1.65%
Gap CAPS Rating: ***
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Tiffany & Co. CAPS Rating: ***