The Rich Are Still Spending And Boosting These Retailers

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the global economy has struggled over the past few years, there was one demographic that still did well--the rich. It is estimated that 1% of the world's population own 39% of the world's wealth. Companies that cater to this demographic have continued to perform well as the rich kept shopping through tough times. The economic downturn didn't stop them from going to their favorite retailers and buying new clothes and handbags. A sector that continues to prosper in the face of economic hardship is certainly a space I want to be in.

A one-stop shop for the rich and famous

Two companies that cater to the rich with their department stores are Nordstrom (NYSE: JWN) and Saks (NYSE: SKS). Nordstrom is the nation's largest luxury department store chain. There's been speculation that publicly-traded Saks and privately-owned Neiman Marcus could merge. So far, no word on if a deal is possible. The largest shareholder in Saks is the world's second-richest man, Carlos Slim. Any deal would require his blessing.

Nordstrom's latest quarter came in weaker than expected due to poor weather in its key markets. However, the summer season looks rather bright as the company continues to roll out Nordstrom Rack, and e-commerce sales are looking good--in fact, last quarter direct e-commerce sales rose 3.1%. The company has 127 Nordstrom stores and 127 Racks, 16 of which were just opened in the past year. has a lot of potential. The online retailer's motto is “Free shipping. Free returns. All the time.” The company has been successful at linking inventories in its stores with its online e-commerce site. This allows for fewer seasonal markdowns. The Nordstrom mobile app is proving to be quite popular and helping to boost online sales.

Saks is a takeover candidate, and the company has hired Goldman Sachs to help with a sale. Investors in Saks are banking on and anticipating that a deal to create shareholder value will happen. Besides Carlos Slim, Billionaire Ken Fisher owns 5.5 million shares, as well as Billionaire Bruce Kovner with 5.1 million shares. Carlos Slim dwarfs them both, though, with 23.125 million shares.

In my opinion Saks has a lot of potential. Same-store sales came in at 5.9%, which was the best among all the department store chains. There is also the potential to monetize the retailer's real estate assets. Estimates are that its flagship Manhattan location alone is worth more than $1 billion, almost half the retailer's current market cap.

The rich love these specialty retailers

Two high-end retailers that the rich love to shop at are Tiffany (NYSE: TIF) and Coach (NYSE: COH). Tiffany is famous for its high-end jewelry and diamonds, while Coach is famous for its handbags, but now sells watches, clothes, shoes and other lifestyle products.

One thing that Tiffany learned is to not discount its products. The company knows that the items it sells in the little blue box are status symbols and have customer loyalty. For Tiffany, the price is the price--take it or leave it.

Tiffany's first quarter sales came in better than expected. Comparable-store sales rose 8%. In China Tiffany is opening four new stores and will have a total of 26 by the end of this year. In Japan sales were up 2%, but would have been up almost 20% if not for the yen weakness. Overall, Tiffany earned $0.70 a share, whereas Wall Street only expected $0.52 a share.

Coach retails its accessories at its company-owned stores and through leading department stores. The company has a loyal customer base, and their handbags are extremely popular. This popularity has given Coach tremendous pricing power. Coach is now the number one brand of premium handbags and accessories in the U.S.

Coach touts its handbags and accessories as “accessible luxury.” Its handbags range in price from $298 to $1000. This attracts the shopper that sees handbags from other competitors like Louis Vuitton and Prada as being overpriced. Coach has been able to increase its sales at an annual rate of 21% over the past decade. This is further evidence that its pricing strategy works. All of this has benefited shareholders as Coach repurchases shares and continues to increase its dividend.

The rich love his clothes

The rich can't seem to get enough of Ralph Lauren's (NYSE: RL) clothes. They love how they look in his clothes and the image his clothes portray with his famous Polo horse symbol. That has benefited Ralph Lauren stock and kept the company churning out profits no matter how bad the economy got.

In the company's latest earnings report, Ralph Lauren missed on revenues, but beat on earnings per share. Margins increased across the board. Even though sales were slightly off, the company did a great job controlling costs and increasing margins. Earnings per share came in at $1.41, whereas expectations were for only $1.30.

The weakness in sales for Ralph Lauren came from a weak Europe. Sales were also lower because of the discounted American Living brand, which J.C. Penney used to sell. Ralph Lauren does see business picking up later in the year, and forecast revenues to rise 4% to 7% overall this year.

How they all stack up

<table> <tbody> <tr> <td> </td> <td> <p><strong>Nordstrom</strong></p> </td> <td> <p><strong>Saks</strong></p> </td> <td> <p><strong>Tiffany</strong></p> </td> <td> <p><strong>Coach</strong></p> </td> <td> <p><strong>Ralph Lauren</strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$11.47 billion</p> </td> <td> <p>$2.15 billion</p> </td> <td> <p>$9.92 billion</p> </td> <td> <p>$16.37 billion</p> </td> <td> <p>$15.92 billion</p> </td> </tr> <tr> <td> <p><strong>Revenue</strong></p> </td> <td> <p>$12.27 billion</p> </td> <td> <p>$3.19 billion</p> </td> <td> <p>$3.87 billion</p> </td> <td> <p>$5.01 billion</p> </td> <td> <p>$6.94 billion</p> </td> </tr> <tr> <td> <p><strong>Rev Growth</strong></p> </td> <td> <p>0.05</p> </td> <td> <p>0.05</p> </td> <td> <p>0.09</p> </td> <td> <p>0.07</p> </td> <td> <p>0.01</p> </td> </tr> <tr> <td> <p><strong>EBITDA</strong></p> </td> <td> <p>$1.69 billion</p> </td> <td> <p>$266.35 million</p> </td> <td> <p>$880.73 million</p> </td> <td> <p>$1.71 billion</p> </td> <td> <p>$1.39 billion</p> </td> </tr> <tr> <td> <p><strong>Gross Margin</strong></p> </td> <td> <p>0.37</p> </td> <td> <p>0.41</p> </td> <td> <p>0.57</p> </td> <td> <p>0.73</p> </td> <td> <p>0.60</p> </td> </tr> <tr> <td> <p><strong>Net Income</strong></p> </td> <td> <p>$731.00 million</p> </td> <td> <p>$50.73 million</p> </td> <td> <p>$418.20 million</p> </td> <td> <p>$1.06 billion</p> </td> <td> <p>$750.00 million</p> </td> </tr> <tr> <td> <p><strong>Operating</strong> <strong>Margin</strong></p> </td> <td> <p>0.11</p> </td> <td> <p>0.05</p> </td> <td> <p>0.18</p> </td> <td> <p>0.31</p> </td> <td> <p>0.17</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>16.33</p> </td> <td> <p>43.11</p> </td> <td> <p>23.86</p> </td> <td> <p>15.75</p> </td> <td> <p>21.89</p> </td> </tr> </tbody> </table>

Foolish assessment

All five companies have impressive gross margins that any company would love to have. They are able to maintain these gross margins because their loyal customer base is not affected by the economy. Sales and earnings have continued to be strong for these five stocks. Hopefully a Fool can get rich by investing where the rich love to shop.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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