Over the last few years, companies that traditionally targeted the 1% have branched out. It makes a lot of sense, since the 1% is, by definition, a small group. Companies like Michael Kors Holdings Ltd (NYSE:KORS) and Tiffany & Co. (NYSE:TIF) have added smaller, less expensive — but never “cheaper” — products to their lineups. That small shift has resulted in a new luxury boomtown, with Tiffany & Co. (NYSE:TIF) stock up 43% over the last 12 months, while Michael Kors Holdings Ltd (NYSE:KORS) has risen 62%.
With the rapid rise, some analysts have started looking for a drop, arguing that the growth has to slow as China pulls back on its own growth. There’s no denying that the connection between Asian growth and luxury growth is close, but even domestic companies are seeing great growth. So should investors be worried, or is it time to double down on the high-end?
International growth and American hope
The growth of the Chinese middle class has resulted in a boom for Western companies. On most earnings calls these days, there’s a heavy focus on expansion in China, Japan, and Korea. Last quarter, Tiffany & Co. (NYSE:TIF) opened another new location in China, and it now operates 66 stores in the region. Four more locations are coming this year, with Tiffany & Co. (NYSE:TIF) hoping that it can continue at the quick growth pace that it’s already set in the region. Last quarter, comparable sales rose 9% in its Asia-Pacific region.
The focus on China was well explained in an article by The New Yorker‘s Evan Osnos earlier this year. In summary, the growth of the Chinese middle class is not just economically driven — it’s ideological. Official documents have called the middle class, “the force necessary to eliminate privilege and curb poverty.”
At home, the growth of luxury goods has similar roots. The American middle class is slowly escaping the financial crisis — or simply tiring of its household austerity — and that’s driving more aspirational purchasing. Michael Kors Holdings Ltd (NYSE:KORS) has seen growth in its small leather goods product line, which is a lower entry point into the brand. The expansion of middle-class spending with the ever-increasing reach of the American upper class is combining to drive up profits at domestic retailers, as well.
The 1% has seen phenomenal income growth recently, and that’s spurred growth at companies like Saks Inc (NYSE:SKS) and Nordstrom, Inc. (NYSE:JWN), both of which managed 5% increases in revenue in the last quarter.