Luxury Retail at Risk as Stock Market Drop Rattles Wealthy U.S. Consumers

The stock market’s 13 percent plunge since July 22 may mean lower sales for high-end retailers such as Tiffany & Co. (TIF) and Neiman Marcus Group Inc.

The shopping habits of Americans who make more than $100,000 a year are tied to the positive wealth effect of rising shares, so the decline in recent weeks likely will hurt high- income consumers and the U.S. expansion, according to Robert Dye, chief economist at Comerica Bank and formerly of PNC Bank.

Their spending “has been a driving force for the economy in this recovery and the recent sell-off of equities is a fundamental threat to that,” said Dye, who is based in Dallas.

The top 20 percent of households account for about 40 percent of consumer spending, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Federal Reserve economist. “Since consumer spending represents 70 percent of U.S. gross domestic product, any pull-back in consumption by upper-income households would present a challenge for overall GDP growth,” Feroli said.

Consumer spending unexpectedly contracted in June for the first time in almost two years, falling 0.2 percent after a 0.1 percent gain the prior month, according to the Commerce Department. That has contributed to a recovery that’s already “considerably slower” than expected, according to the Federal Reserve.

‘Flattened Out’

“Household spending has flattened out,” Fed policy makers said in a statement after their Aug. 9 meeting, predicting “a somewhat slower pace of recovery over coming quarters.” The Fed pledged to keep its benchmark interest rate near zero, a record low, at least through mid-2013 to encourage a rebound.

Shares of luxury retailers including Saks Inc. (SKS) and Nordstrom Inc. (JWN) have already begun to underperform the broader market and this may continue, potentially echoing the steep losses of three years ago, according to Peter Cook, chief investment officer at Performance Trust Investment Advisors in Chicago, which had more than $350 million assets under management as of July 31.

“We saw this in 2008, when high volatility and stock- market declines scared investors who are affluent,” Cook said. “They don’t spend as much money in that environment, which affects high-end retailers disproportionately.”

New York-based Saks and Seattle-based Nordstrom, the two companies that make up the Bloomberg Index of U.S. High-End Department Stores, have underperformed the Standard & Poor’s 500 Index by 12 percent since July 19. These stocks declined 83 percent from Dec. 31, 2007, through Nov. 21, 2008, while the S&P 500 fell 46 percent, Bloomberg data show.

Unexpected Decline

Other companies that appeal to high-income households could be susceptible to underperformance if their sales unexpectedly decline, according to David Strasser, a New York-based analyst at Janney Montgomery Scott LLC.

Affluent consumers already have cut back on discretionary spending, based on data from Unity Marketing Inc., which tracks luxury retailing. These Americans spent 18 percent less on expensive goods in the quarter ending June 30 compared with a year ago. The average was $25,833 across 22 categories, the lowest since the third quarter of 2009.

Confidence among high-income Americans fell to negative 21 for the week ended Aug. 7, according to the Bloomberg Consumer Comfort Index. This was their most pessimistic outlook about the economy, buying climate and personal finances since November 2009; in the prior week, their confidence declined the most of any income group.

‘Totally Discretionary’

“Luxury goods are totally discretionary and nobody needs any of it, so it’s the easiest thing to cut back on,” said Pam Danziger, president of Unity Marketing in Stevens, Pennsylvania.

The recent stock-market turmoil will have a “direct impact” on future spending patterns because these consumers are already in a tenuous place, she said. As the value of their homes and investment portfolios rose before the 18-month recession that began in December 2007, high-income consumers were spending their perceived wealth rather than their real income, according to Danziger.

Even amid the economic and political uncertainty of the past several months, high-end department retailers reported strong sales. Same-store comparable sales increased 15.5 percent for the three-month period through July 30 for Saks, the biggest increase in at least four years, the company said Aug. 4. Same- store sales at Neiman Marcus and Nordstrom rose 11 percent and 7.3 percent, respectively, in the same period.

Rising Sales

Retail sales in the U.S. rose 0.5 percent in July, the most in four months, according to data released by the Commerce Department in Washington today.

A rebound in the stock market would temper some of the scare of the past few weeks, supporting continued purchases by high-income consumers, Dye said. Even so, the volatility is likely to have “a lingering negative impact,” he said.

The recession that ended in June 2009 also remains fresh in many peoples’ minds, particularly given the sluggish economic recovery since then, according to Strasser. As a result, their propensity to spend on purely discretionary items may be hampered by the market’s turbulence.

“It’s hard to find a new demand driver for the high-end segment now that the stock market gains have diminished,” Strasser said.

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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