High End Consumer Weakness? Say It Ain't So!

Given new reports, and what's expected in the coming weeks, a valuation reset is possible.

Blue Nile (NILE), Skechers (SKX), and HanesBrands (HBI) have been tossed in a bin of consumer-centric names that either missed on holiday earnings or guided down. The share prices of all three were obviously taken to the woodshed. Fundamentally, the common thread for these companies is the negative effect of using more competitive prices to move product out the door. In the case of Blue Nile, like Tiffany & Co. (TIF) before it, across-the-board demand in terms of product categories was not as robust as market expectations and an international tourist traffic slowdown seemed to be a factor.

Hmm. Why is nobody talking about this? The stock prices of Coach (COH), Saks (SKS), and even Nordstrom (JWN) have had a nice run dating back to Black Friday 2011, yet new information is suggesting greater investor caution is warranted. With these reports in hand, and more to come from consumer discretionary in the next two weeks, I would not rule out a valuation reset in the near-term. Theoretically that may open the door to buying opportunities when the actual reports hit the wires.

Underneath the Hyped Earnings Headlines
There are pockets of fundamental weakness throughout the earnings reports from the high end, outside of the clear warnings from the likes of Tiffany & Co. and Blue Nile. If all was on the up and up in high-end consumer land we would have gotten stronger comps from Tiffany & Co.'s domestic store base (branch store sales at the Americas division was up a meager 3% in the quarter, a sharp slowdown from the 13% increase in the third quarter), excluding flagships. Moreover, engagement-jewelry sales declined for Blue Nile, which is a bigger-ticket purchase. This will be an area worth zeroing in on when Tiffany reports.

Michael Kors (KORS): Mr. Market cheered the company's report, that's for sure. However, not known to many is that there was a little bit of slower comp growth from the company relative to when it first filed. The headline sales were very strong through a combination of comp growth and new-store openings, but the gross margin should have expanded more than it did. The fact that the handbag king's profit margin did not expand by a sizable amount on such an eye-opening sales gain underscores the effect of competitive pricing, most notably at department stores.

Abercrombie & Fitch (ANF): The company deserves to be lumped into any discussion on high-end consumption. It had an eye-popping 700-bps-plus contraction in its gross profit margin as it had to become more competitive for the holidays on items it tried to jack up by 15-20% in price.

Polo Ralph Lauren (RL): The company made it a point on the earnings call to note tourist spending was soft. I took that as tourist spending in international markets and at US flagships, in line to what was implied by Tiffany & Co.

Coach (COH): The company's comparable store sales growth has slowed on a quarter-to-quarter basis for two consecutive periods. Last year during this same time period, Coach's comp growth was north of 10%.

Saks (SKS): Missed consensus sales for the holiday quarter by about $25 million. Going back through the quarter, I think it had to get slightly promotional because, from November on, more categories didn't outperform. Only 25% of sales derived from the New York City flagship store, a fact that fits with the reports of reduced tourist spending coming from Tiffany & Co. and Blue Nile. I also wonder whether lower bonus expectations on Wall Street were a factor.

Takeaway: Even consumers of high-end retail want a deal, and that thriftiness has not been baked into valuations of the key sector plays.

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