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High-End Retailers Knock it Out of the Park

Riddle me this: If positive employment trends, lower taxes, and flourishing paychecks are boosting consumer confidence, why aren’t all retailers enjoying the spoils?

Over the past two weeks, there’s been a dramatic divergence in the behavior of retail stocks. Tiffany (NYSE: TIF), Movado (NYSE: MOV) and Ralph Lauren (NYSE: RL) enjoyed 20%-30% jumps based on robust earnings.

But Big Lots (NYSE: BIG), Dollar Tree (NSDQ: DLTR) and Dollar General (NYSE: DG) experienced the mirror image of those successes. Sloppy earnings and weak guidance sent this trio down 12%-16%.

Here, I explain why luxury retailers are racking up a high batting average while the discounters are striking out.

All three of the high-end retail winners beat revenue and earnings handily. Tiffany attributed much of the expanding sales to its new Paper Flower collection, which sports diamond and platinum necklaces as high as $75,000 but also includes what management describes as “lower-priced” pieces like a $3,200 pendant. It’s all relative, I guess.

Movado accredited its strength to its Olivia Burton acquisition which offers exposure to women’s jewelry in addition to mid-priced watches. International sales also added to the boost.

Ralph Lauren’s profits grew due to improved pricing and strength in Asia. The company saw little resistance by customers to its higher price points and less aggressive markdowns.

The three discount chains, however, witnessed the opposite of these trends. Revenue and earnings were below expectations for all three and guidance was muted. They placed some blame on a cold spring which dampened sales of higher margin seasonal products like sunscreen and beach toys.

A Tale of Two Consumers

However, I think the answer to this odd divergence lies in the employment data released last week. Despite 223,000 new jobs added to national payrolls and a drop in the unemployment rate to 3.8%, wages failed to gain much traction.

The government’s data point for capturing wages, average hourly earnings, crept up only 0.3% to arrive at a 2.7% year-over-year increase. This rise is a hair more than the average 2.5% increase in inflation over the same period.

Combining the wage data with information about the demographics of workers highlights another trend. This trend is the disparity of wage growth for new workers versus more experienced ones. A number released by the government called the labor-force participation rate shows the number of workers seeking jobs. This number is declining.

As the considerable bulk of baby boomers reach retirement age, many will likely leave the labor force. Employers are usually able to replace those experienced workers with capable but less experienced and less expensive workers.

The split between high-income earners and low-income earners might be growing wider. That’s good news for the likes of Tiffany’s, Movado and Ralph Lauren. Consumers with rising wages and job security are more likely to splurge on a luxury like a fancy watch or piece of jewelry.

At the low end of the spectrum, it’s a different story. While the weather might be part of the problem, lower-income consumers are feeling less ebullient about the economy. Their job status is less stable, and their wages are not growing as quickly as the cost of necessities like housing and health care.

As these consumers feel pinched, they are less likely to purchase the “extras.” That beach towel or sand toy is the first thing to go when economic confidence falters. The additional bad news for stores like Big Lots, Dollar Tree and Dollar General is that these products generate the highest profits for their chains.

Just last week subscribers of my Profit Catalyst Alert newsletter cashed in on 40%-100% gains on bearish options I had suggested on the dollar stores.

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That’s right; once a week. It’s like getting an extra paycheck. In fact, the gain is so reliable that you can schedule it on your calendar. How does Jim do it? Click here for his presentation.

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