Luxury Brands Are Back In Style as America's Wealthy Return to Their Wears

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The U.S. unemployment rate may still be high, but that hasn't stopped consumer spending from rallying. And in contrast to the darkest days of the financial crisis, when discount retailers like Family Dollar Stores Inc. (NYSE: FDO) and Wal-Mart Stores Inc. (NYSE: WMT) ruled the day, luxury brands have been doing the heavy lifting.

Indeed, bolstered by the extension of the Bush tax cuts and strong demand in Asia, luxury brands are coming back into style.

LVMH Moet Hennessey Louis Vuitton SA (PINK: LVMHF), Burberry Group PLC (PINK: BURBY) and Hermes International SCA (PINK: HESAF) will lift revenue at least 9%, according to estimates compiled by Bloomberg.

Sales at Burberry, a maker of luxury clothing and accessories, rose 27% to $747 million (480 million pounds) in the third quarter ended Dec. 31. Burberry now forecasts full-year adjusted pretax profit of  $400 million (250 million pounds) to $464 million (290 million pounds), and predicts that the figure will be near the top end of the estimate. The previous prediction was for profit of $384 million (240 million pounds) to $432 million (270 million pounds).

 Sales at Burberry may expand 11% in the fiscal year ending March 2012.

China has been an especially strong market for the company, as third-quarter sales were up 30% in that country. Burberry has been steadily expanding in China, adding 50 stores in July 2010 at a cost of  $112 million.

Burberry offers one of the best top-line and margin expansion outlooks in the industry, according to Antoine Belge, an analyst at HSBC Holdings PLC (NYSE ADR: HBC), in a Jan. 6 report.

Burberry stock rose 88% in 2010 amid rising sales and takeover speculation.

Compagnie Finciere Richemont (PINK: CFRUY) – the world's largest jewelry maker and the second-largest luxury goods group behind LVMH – reported a 33% increase in revenue, which climbed to $2.8 billion (1.59 billion euros) during the quarter ended Dec. 31. Sales in the Asia-Pacific region rose 57% from the same period last year.

Richemont warned its fiscal fourth quarter and 2011 results might not be as strong as those of its third quarter because comparisons to 2009 sales won't be as favorable. However, the company should continue to expand so long as the nouveau riche of China keep buying – and most analysts believe they will.

"The rate of growth in Chinese demand for luxury goods should remain unabated," said Belge. "Welcome to the new ‘new normal'."

Luxury demand will probably increase 11% in 2011, Belge said.

Furthermore, wealthy U.S. and European customers continue to be a force.

"High-end consumers in the U.S. and Europe are willing to spend, even in a subdued economic environment," said Belge.

U.S. retail sales rose for a sixth straight month in December. Purchases for the month increased 0.6% after rising 0.8% in November, the Commerce Department said. Sales advanced 6.7% for all of 2010 – the biggest jump since 1999's 8.2% increase.

However, analysts say it's the country's wealthier consumers that are driving sales as lower and middle-class Americans live paycheck-to-paycheck. 

"The heavy lifting is being done by the upper-income households," Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase & Co. (NYSE: JPM) told Bloomberg. "They're the ones benefiting the most from the stock market rally, and they're spending."

The Dow Jones Industrial Average has surged more than 10% in the past year, while the Standard & Poor's 500 Index is up 11.5%.

Wealthy Americans also are benefiting from the extension of the Bush tax cuts. U.S. President Barack Obama on Dec. 17 signed into law an $858 billion bill extending the tax cuts for two years for all income groups, instead of letting them expire for family earnings that exceed $250,000 a year – the cutoff the administration uses for the middle class.

With more disposable income, high-end U.S. consumers have flocked back to the likes of Tiffany & Co. (NYSE: TIF) and Coach Inc.  (NYSE: COH).

Tiffany reported a stronger-than-expected holiday season, with net sales for the two months ended Dec. 31 climbing 11% from a year earlier. As with Burberry and Richemont, the company's sharpest growth was in the Asia Pacific region, which saw sales jump 23%, followed by Europe, which was up 13%.

Tiffany last week lifted its per-share forecast for the year ending Jan. 31 by 11 cents, to a range of $2.83 to $2.88. It expects sales approaching $3.1 billion, which would be a 14% year-over-year increase. The company had forecast a 12% sales increase in November.

Tiffany stock has earned 11 "buy" ratings and five "holds," according to Zacks Investment Research.

High-tech retailers also are turning in strong performances. Apple Inc. (Nasdaq: AAPL) on Tuesday reported its best ever financial performance. The company reported revenue of $26.74 billion and profits of $6 billion, or $6.43 per share. Revenue was up 71% from a year ago, and earnings were up 78%. Analysts were expecting revenue of $24.38 billion and earnings per share of $5.38.

Apple sold 7.33 million iPad tablet computers, which range in cost from $500 to $829, in the first holiday season for the device.

On the opposite end of the spectrum, low-cost retailer Family Dollar, which performed exceptionally well in 2008 and 2009, has witnessed a slowdown in traffic. Same-store sales growth slowed to a lower-than-expected 4% in December, below the 6.9% increase seen during the fiscal first quarter, which ended Nov. 27. And the company on Jan. 5 posted a lower-than-expected quarterly profit and gave a forecast for the current quarter below analysts' expectations.

While Family Dollar stock surged nearly 80% last year, it still has a lower Price/Earnings ratio than its high-end counterparts. The stock has a P/E of 16, compared with 21.3 for Coach, 22.9 for Tiffany & Co, and 26 for LVMH.

Still, luxury stocks may get a boost from mergers and acquisitions, as well as improved results.

Analysts speculate that China and Korea will want to tap the rising demand for expensive jewelry and leather bags.

Small and medium-sized brands in Italy will be the most likely targets Jean-Marc Bellaiche, a senior partner at the Boston Consulting Group in Paris and head of the consultant's luxury topic area, told Bloomberg. And investors in Hermes International shouldn't sell their shares, according to HSBC's Belge. It's possible that LVMH, which already has a 20.2% stake in the Birkin bag maker, will move to acquire more of the company.

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