Why This Downturn Is Different

By Alex Dumortier, CFA
December 5, 2008 | Comments (3)

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On Wednesday, Ken Chenault said that high-income earners were pulling back on their spending -- in contrast to previous periods of economic downturn. He should know: As the CEO of upscale payment card issuer American Express (NYSE: AXP), he's got a prime perch from which to observe the spending habits of mass affluent consumers.

That spells bad news for AmEx and its competitors Visa (NYSE: V) and MasterCard (NYSE: MA), but it also highlights two other sectors that could be particularly vulnerable to this downturn: luxury brands such as Tiffany (NYSE: TIF) and Ralph Lauren and high-end retailers like Nordstrom and Saks.

Last month, at the 2008 Luxury Briefing Conference, Claire Kent -- a former Head of Luxury Research at Morgan Stanley -- said the "bursting of the 'It' bag bubble" was imminent. She also singled out brands whose strategy relies on customers "trading up" as being particularly vulnerable. That's two strikes against handbag and accessories maker Coach (NYSE: COH), for example.

Bad for chic, good for cheap
For investors, it's not all bad news, though. When consumers are forced to trade down instead of up, that can create opportunity for a different set of companies. Target's (NYSE: TGT) "cheap and chic" positioning -- not to mention Wal-Mart's (NYSE: WMT) "just plain cheap" approach to retail -- look a lot better suited to this environment than Coach's "masstige" strategy.

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Fool contributor Alex Dumortier, CFA has a beneficial interest in Coach, but not in any of the other companies mentioned in this article. Wal-Mart Stores and American Express Company are Motley Fool Inside Value recommendations. Coach is a Motley Fool Stock Advisor selection. The Fool owns shares of American Express Company. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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  • Report this Comment On December 05, 2008, at 12:26 PM, Decibel45 wrote:

    I remember reading a few months ago that American Express was greatly reducing the amount of credit that they were extending to people, trying to focus back to lending to the most affluent. I'm wondering if that's what's impacting their cash flow.

  • Report this Comment On December 05, 2008, at 5:50 PM, tvadamfool wrote:

    American Express, apparently in their race to become a "bank," has performed a re-evaluation and has turned over thousands of accounts, many of them payment-current, for third-party collections. This is being done in a random and erratic fashion, and their own employees appear to have no clue as to how and when these accounts are being selected for closure. I smell an accounting scam.

    Although those first, belligerant phone calls can be quite unpleasant, this may ultimately be the best possible news for the Amex customers involved. The repayment plans they will be able to negotiate with the collectors are certain to be much more favorable than what they have been charged by Amex, whose interest rates, penalties, and fees are among the very highest in the industry.

    I don't know what they were thinking, and I absolutely oppose their receipt of a single penny in bailout funds, but good for those consumers who may be able to gain some breathing room!

  • Report this Comment On December 06, 2008, at 10:15 PM, ARJTurgot wrote:

    AMEX has been a mess for a long time. This will just be yet another action that will lose customers. I suspect what has kept them going has been monopoly status at costco. Not hugely profitable, but solid cash flow. Even Buffett won't be able to bail them out this time.

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12/2/2009 4:00 PM
AXP $41.04 Down -0.26 -0.63%
American Express C… CAPS Rating: ***
MA $242.42 Down -0.57 -0.23%
MasterCard, Inc. CAPS Rating: **
TIF $43.07 Down +0.00 +0.00%
Tiffany & Co. CAPS Rating: *
V $82.22 Down -0.75 -0.90%
Visa, Inc. CAPS Rating: ***
TGT $47.72 Up +0.94 +2.01%
Target Corp CAPS Rating: ***
WMT $54.57 Down -0.18 -0.33%
Wal-Mart Stores, I… CAPS Rating: ***
COH $35.80 Up +0.38 +1.07%
Coach, Inc. CAPS Rating: ***

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