Luxe swap: What's driving the high-end switch-up

Consider it a reversal of fortunes.

As high-end retailers are pressured by a pullback among luxury spenders, those that cater to a more moderate-income consumer — known as the "aspirational" shopper — are starting to gain steam. These consumers covet name-brand goods, but lack the bank account to purchase a $4,000 Louis Vuitton bag.

But while it can be tempting to assume one of these retail segments is growing at the expense of the other, that doesn't appear to be the case. Instead, the recent sales improvements at the more affordable luxury brands are more directly the result of them getting things right.

A Michael Kors retail store on Market Street in San Francisco.
Adam Jeffery | CNBC

During the holiday quarter, revenue trends improved at both the Michael Kors and Coach brands, while Kate Spade reported industry-leading comparable sales growth. Meanwhile, Pandora jewelry, the brand known for its sterling silver charm bracelets, outlined plans to boost its branded store count by 250 this year.

All four of these labels cater to shoppers who crave luxury on a budget, and are in various stages of tweaking their brand propositions. These tweaks have helped spur interest among shoppers of more moderate means, and are isolated from deteriorating trends at the high-end, said Hana Ben-Shabat, a partner in the retail practice of A.T. Kearney.

True luxury brands have been swimming against factors that include capitulating stock markets and a slowing global economy.

"The core luxury consumer is not trading down yet," Ben-Shabat said. "They are still buying [luxury goods], or if they're refraining from buying, they're refraining 100 percent."

At Coach, the quarter ended on Dec. 26 represented the company's first quarterly sales improvement in more than two years. Though much of that accomplishment was related to its acquisition of the Stuart Weitzman footwear label in May, it nonetheless represented the third straight quarter of domestic same-store sales improvement for the company.

Coach has undertaken several initiatives to restore its reputation as a fashionable brand, after losing much of its cachet to aggressive storewide discounting and a heavy penetration of outlet locations. Under the direction of a new designer and CEO, however, the brand has begun to recapture some of its "cool."

Part of Coach's recent success has stemmed from its new designs, which shy away from splashing logos all over its products. Meanwhile, the brand has been renovating its stores to give them a more modern feel. Comparable sales at these revamped locations have been outperforming the overall fleet.

"They're starting to get their product right," Ben-Shabat said.

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For Michael Kors, which topped Wall Street's expectations during the quarter, a reversal of its tapering same-store sales trends marked an inflection point for investors. It achieved these better-than expected results by playing into the popularity of crossbody bags, which helped it generate a double-digit gain in the number of units sold. Kors is also introducing new colors, materials and silhouettes, in an effort to keep consumers interested in the brand.

Along with designing more fashionable items, Kors is making operational improvements to maintain the power of its brand. The company is dialing back on the amount of merchandise it has available in department stores, which should help it to sell more products for full price.

"When a customer sees amazing design and understands that that is something that's different, we don't have any problem with selling the pricing of it," CEO John Idol told analysts on a conference call last month.

"What we're going to stay committed to is great design."

Having on-trend product helped a third affordable luxury brand, Kate Spade, blow the competition away during the holiday quarter. The brand's same-store sales accelerated an industry-leading 14 percent, even as it drew a line on discounts. By expanding its offering to include more low-cost items such as throw pillows, it also managed to avoid alienating the aspirational shopper.

"That continues to be a strong and successful strategy that we see continuing — this great balance between those access points to the brand at the opening price points, and, in fact, building more into the, what we call, splurge side of our pricing strategy," CEO Craig Leavitt told analysts.

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Momentum among affordable luxury players hasn't been limited to handbags. After opening nearly 400 branded stores and boosting revenue by 40 percent last year, Pandora jewelry will cut the ribbon on 250 additional branded locations this year. That includes roughly 50 in the Americas, 35 of which are in the U.S.

The company is also working to expand its customer base to include more 18- to 34-year-old women (it has traditionally appealed to women ages 34 and older). It's doing so by designing more products outside its traditional competency of charm bracelets, including rings. It's also pushing the message of quality merchandise at a price that won't break the bank.

"It really starts with the value proposition," Scott Burger, president of Pandora Americas, told CNBC.

The momentum at these four brands comes as retailers that cater to affluent shoppers reported weak holiday quarter results. That includes softness at Nordstrom, Neiman Marcus, Saks and Restoration Hardware. Separately, Citi analyst Paul Lejuez downgraded Tiffany shares from "buy" to "neutral" on Tuesday, saying he does not expect its near-term trends to improve. The luxury jewelry brand reports full fiscal fourth-quarter results on Friday.

Despite this flip-flop in trends, Ben-Shabat emphasized that investors shouldn't jump to conclusions about the coinciding strength in affordable luxury and weakness at the high end.

"I see a lot of people who are assuming that just because there is a softening of luxury people [are] automatically going [down] to the next level," she said. "It's not always true."