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|  | JANUARY 28, 2005
Starring Roles for Luxury -- and Discount Those market segments set the pace over the holiday shopping season, says S&P analyst Marie Driscoll, who likes Coach and Chico's There was good news and bad news in the world of fashion and apparel during the holiday shopping season. The good news came at either end of the price spectrum -- luxury goods and the discounters did well. For most middle-of-the-road retailers such as the old-line department stores, the news wasn't so swell. That's the report from Standard & Poor's analyst Marie Driscoll, who covers apparel makers and sellers. She quotes the National Retail Federation as reporting a 5.7% gain for holiday buying over the previous year. But some of the gains were dramatically higher for some purveyors of luxury items -- Driscoll cites a 30% upturn for Coach (COH ) at both department stores and its own retail outlets. Driscoll has a buy recommendation on Coach. And Pacific Sunwear (PSUN ) draws a strong buy from her -- she likes the way "its unique merchandise mix offers teen customers national and private-label brands." These were a few of the points Driscoll made in an investing chat presented Jan. 25 by BusinessWeek Online and Standard & Poor's on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff. Edited excerpts follow. AOL subscribers can find a complete transcript at keyword: BW Talk. Note: Marie Driscoll, a Standard & Poor's Equity Research analyst, has no ownership interest in or affiliation with any of the companies under discussion in this chat. All of the views expressed in this chat reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this chat. For required disclosure information and price charts for all S&P STARS-ranked companies, go to spsecurities.com and click on "Investment Research" and then on "Required Disclosures & Standard & Poor's STARS vs. Closing Prices Charts." Q: Marie, we're in the last week of January -- looking back, how was the holiday shopping season? A: Holiday shopping came in better than we had anticipated. S&P equity analysts had looked for 3% to 3.5% gains in overall holiday sales. When the last cash register was rung up in 2004, according to the National Retail Federation, holiday sales had risen 5.7%. That was despite the fact that by midpoint in the holiday season -- two weeks before Christmas -- shoppers had done less shopping than the prior year. So what we saw was a lot of postponing, a lot of gift-card purchases (which postponed holiday sales until after Christmas and into 2005, so will probably be looked at in 2005), and we saw strength in a variety of categories. Among those categories, consumer electronics were very strong, luxury accessories (jewelry, fur, etc.) were very strong. We saw the apparel market split in two -- it has been doing this for a while. Those apparel brands and those retailers targeting the luxury end of the business did very well. Those retailers and brands targeting the discount shopper did well, too, while the middle-of-the-road retailer, for the most part, was disappointed. Q: What companies did best? A: Coach (COH ) did very well...sales at department stores were up 30%. Sales in their own retail outlets increased about 30% as well. And on a same-store basis, sales were up 16.5%. So Coach has positioned its merchandise as affordable luxury, and it has a certain aspirational quality to it. That is what we think the American shopper is looking for. We could say the same thing for Abercrombie & Fitch (ANF ). ANF is pursing a casual-luxury strategy. Both companies have limited their distribution to protect the value of their brand, and...[are] among the most profitable companies we cover. Other companies that did very well at the holidays included Urban Outfitters (URBN ), with its very eclectic and differentiated merchandise. I think this speaks to a trend we see of consumers' willingness to pay a price for merchandise they regard as unique, new, exciting, and fashionable. Q: What's the S&P ranking on COH, ANF, and URBN? A: Our recommendation would be buy Coach and Abercrombie. Both have a $60 12-month target price. We have a hold recommendation on URBN, with a $45 target price. Q: What are your thoughts on Talbots (TLB ) at this time? A: I have a hold on Talbots. It's one of those companies that I regard as mature. In terms of total number of stores, I don't belive there's much opportunity for geographic expansion. The brand is mature, so I think it's vulnerable to price displacement. The consumer may just be a little bit bored with the whole brand and lifestyle. This consumer may have moved on to Chico's FAS (CHS ).
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