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Retail Surprise: Luxury Beats Discounters

Posted by: Ben Steverman on July 8, 2010

Many investors and analysts had expected discount retailers to do well last month. At a time when the U.S. economic recovery appears to be slowing, it makes sense that shoppers would be looking for bargains.

Apparently not. The most striking trend in June retail sales figures released today is by how much pricier department stores and luxury retailers beat expectations. Discounters, meanwhile, largely disappointed investors.

Bloomberg News reports:

Sales at Nordstrom [JWN], the U.S. department-store chain with more than 100 locations, jumped 14.1 percent at stores open at least a year, more than the 9.1 percent average estimate from Retail Metrics. Sales at J.C. Penney [JCP], the third-largest U.S. department store, climbed 4.5 percent, compared with a 3.7 percent projection. Macy’s [M], the No. 2 department store, rose 6.5 percent, also topping estimates.

Overall in June, same-store sales at department stores rose 5.9%, according to the International Council of Shopping Centers, and same-store sales rocketed 8.8% higher at luxury chains. Discount stores, meanwhile, saw sales rise 2%.

The Gap (GPS) demonstrates the trend, with different results at its chains aimed at high- and low-end consumers. Its pricier Banana Republic chain reported a 6% increase in same-store sales, just slightly below the 6.9% Wall Street was expecting, according to Retail Metrics. But discount chain Old Navy reported flat sales, even though analysts were expecting a 4.9% sales increase.

Compared to the rest of the retail universe, dollar stores continue to do pretty well serving the unemployed and others looking for deep discounts. Family Dollar Stores (FDO), which reported earnings on July 7, said same-store sales rose an estimated 5.5% in June. But, investors were clearly disappointed with the results and the chain’s outlook for the coming quarter. The stock fell 8.1% on July 7.

“The environment remains challenging for consumers,” Family Dollar chief financial officer Kenneth T. Smith told analysts. One problem for lower-end consumers cited by Family Dollar executives is uncertainty about the extension of benefits for the unemployed.

Another factor could be keeping a lid on lower-income spending: Rather than shopping, heavily indebted consumers are paying off credit cards and other debts. In data released July 8, credit to consumers fell $9.1 billion in May and $14.9 billion in April. Writes Ward McCarthy, chief financial economist at Jefferies Economics:

Consumers have been rebalancing balance sheets by paying down debt and increasing savings. As long as credit continues to contract at this pace, the prospects for a large increase in consumer spending are slim.

Many luxury consumers seem to be coming back to the malls without these constraints. As Bloomberg News notes, Tiffany & Co. (TIF) chief financial officer James Fernandez told an investment conference on June 30: “Our customers in the U.S. are feeling more confident than a year ago, tied to improved levels of net worth.”

While unemployment remains high, the economy is slowly improving. At a time like this, we may see an increasing split in attitudes between those who feel starved of cash (especially the unemployed and underemployed) and those who feel increasingly confident about their economic standing.

Reader Comments

Gigi Karmous-Edwards

July 9, 2010 9:40 AM

Excellent story on the luxury market. Looking forward to the comeback.


July 9, 2010 9:37 PM

Duh. The rich keep getting richer, everyone else is becoming poorer. This is mirrored in retail sales.


July 10, 2010 10:49 AM

Just wondering if there is data for id theft purchases made during this increase of sales in the 'luxury market'?

Steven Dennis

July 12, 2010 11:22 AM

From my experience at Neiman Marcus and now as a consultant I don't find it surprising at all that luxury is beating discounters. There are two primary reasons for this. First, the high end retailers are comparing against very soft numbers as they experienced precipitous declines in the year earlier. Second, a large portion of the high end is driven by very wealthy customers who never really lost the capacity to spend but did cut back for more social reasons. As they return (mostly) to their prior spending habits they are going to drive a large part of the rebound.

The issue for the high comp stores sales starting in November is they will longer be comparing to horrific declines and the highest end customer segment will not be sufficient to drive meaningful increases.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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