Luxury Stocks at a Discount

Prices of most retail stocks got slashed last week after retailers reported their worst December results since 2002. So much for all those upbeat forecasts after "Black Friday" and anecdotal tales of shoppers thronging the malls and ordering on web sites. This week we learned that December retail sales actually declined 0.4%

Shares in high-end retailers, the ones whose customers were supposed to be immune from the multitude of woes now afflicting the average American consumer, were especially hard hit. Tiffany & Co. (TIF) lowered its forecast and luxury bellwethers Nordstrom (JWN) and Saks (SKS) reported less-than-stellar results. Tiffany hit a new low for the year, and at a recent $35, its $22 off its peak in October. That's a discount you won't find on its Elsa Perretti necklaces.

I warned about problems for the high-end consumer in my Nov. 27 column, and if anything, their problems have only intensified. True, they may not be that concerned about gas prices. But they certainly do care about the value of their stock portfolios and real estate (often highly leveraged), both of which have been suffering. This puts quite a chill on the so-called "wealth effect," which I suspect accounts for more high-end discretionary purchases than is often recognized.

I realize it's hard to generate much sympathy for a group that spends more on jewelry and art than most households earn in a year, but based on what is admittedly anecdotal evidence, many of them are strapped for cash and have been living beyond their means for years. They paid exorbitant sums for primary residences, as well as second and even third homes on which they have multiple jumbo, nonconforming first and second mortgages. Add in the car payments, the private school tuitions, the insurance to cover all that art and jewelry, and they have fixed monthly payments that would make most of us feel faint. Even as the subprime crisis morphed into a credit crunch, these people kept spending, as if denial would somehow stave off a slowdown that might actually affect them. Some of them are now in financial trouble. American Express (AXP) reported that even high-end Platinum cardholders were falling into delinquency last month. Where are these shoppers cutting back on their shopping? Not at Wal-Mart (WMT) or Costco (COST).