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Are Luxury Retail Stocks a Diamond in the Rough?

The luxury sector is usually resilient during economic downturns, but this one is so severe it’s taken luxe retailers — and their stocks — with it. So, does that mean it’s time to add a few baubles to your portfolio?

Tiffany Gift Box
Photo By: minxlj
Tiffany Gift Box

“I’ve been at this a long time and I’ve never seen anything like this,” said George Whalin, founder of Retail Management Consultants.

In the recession of the early '90s, “that didn’t really impact luxury goods at all because the stock market remained pretty strong,” Whalin explained. “Even during the late 70s and early 80s, interest rates went through the roof but the luxury-goods segment was less impacted,” he said. “This is across the board.”

And, it’s gotten worse in the past few months: Shares of iconic jeweler Tiffany fell more than 60 percent from $45 in early September to a low of $17 in mid-November. Leather-handbag maker Coachpeaked around $37 in May, before falling below $14 in November.

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It’s worse for upscale department stores like Nordstrom and Saks, which have seen their stocks steadily decline all year, leaving them down 80 percent for the year and trading in the single digits.

There are two types of shoppers in luxury and both have tightened the purse strings on their designer handbags. There’s the affluent shopper, who never used to be affected by downturns but is now cutting back because this one is affecting the stock market — and their net worth.

The other is what’s called the “aspirational shopper,” a woman who doesn’t fit the demographic but occasionally treats herself to a $600 handbag or $800 pair of shoes. She was the jewel-encrusted canary in the coal mine – the first indication that luxury was succumbing to this downturn.

The affluent shopper will eventually get back to indulgent spending, but analysts say they’re not sure about the aspirational shopper.

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“That customer is gone,” Whalin said. “I don’t know how long — if ever — that customer will come back.”

Retail insiders say 2009 is going to be another challenging year for the entire sector, luxury included, and that we won’t see a recovery until sometime in 2010.

Most importantly, they say, luxury retail stocks still have further to fall, despite the fact that we’ve seen a modest bounce since late November.

“There may be some bargains there, but I don’t think we’re at the bottom yet,” Whalin said of the luxury sector.

“I think that luxury stocks have been beaten down in recent months,” added Kimberly Picciola, senior retail analyst at Morningstar. However, “we do think that there might be more to come as job losses mount — particularly in the New York area (Wall Street) and as bonuses at the end of the year are no longer there. We certainly think the sector is going to feel pinched.”

Morningstar has a $30 stock target on Tiffany in a three-to-five year time frame, with a buy at $15. The stock is currently in the mid-20s.

“One thing about Tiffany in particular is that tourism and the weak dollar had helped them in the New York market,” Picciola said. “That has slowed down. And there’s more weakness to come.”

They have a target of $33 on Coach, with a buy at $16.50. That stock is around $20.

Still, both Tiffany and Coach have strong strategies, the analysts say, and are best poised to shine through.

Luxury department stores, however, haven’t fared as well. Saks, hasn’t managed the downturn well, miscalculating demand, which has resulted in bloated inventory. And in the case of Nordstrom, Picciola says, they have a credit-card business, which “adds an element of uncertainty to that stock, given the turmoil in the market.”

But, don’t go settling for a vinyl handbag stock just yet.

“I think luxury will come back,” Whalin said. “One thing we know about our economy is: It’s resilient,” he said, adding: “It’s just going to take a while.”

When the market does recover, Whalin says Neiman Marcus is the best positioned because the retailer has good management that has a strong consumer franchise, and it keeps a tight lid on inventory and the number of stores. But, alas, they’re not a publicly-traded company.

Tiffany also does a good job, and, importantly, has a strong presence overseas, he says. That puts them in a great spot to take advantage of the global recovery.

Two things to watch for when picking a luxe stock: A strong customer franchise and a global presence, Whalin says.

“Look for names that have strong brands,” Picciola added. “Names that have been through this before, with strong balance sheets. They’re in a much better position to weather the current storm.”

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Questions? Comments? retaildetail@cnbc.com

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