Upscale Retailers Expanding Into Downturn

Middle market retailers J.C. Penney and Coldwater Creek are scaling back new store plans, and Ann Taylor is clearly in trouble. But high-end department store Nordstrom, luxury leather-goods maker Coach, and iconic jeweler Tiffany are moving ahead with plans to expand despite the current economic outlook for success.

Never mind that their plans for expansion were made when times were better, or that investors see expanding now as a no-fail recipe for lowering both profits and stock prices after more than a year of decline.

According to a Bloomberg compilation, analysts estimate Nordstrom's earning will drop by 1.7 percent, the company's first decline in six years. Some of those surveyed would upgrade their recommendations if square-foot growth decelerated, yet the company plans to add more than a million square feet of retail space, opening eight new stores. That's more than double the number it opened last year.

"New stores are the most productive use of capital available to us," company head Blake Nordstrom says. "If we are doing our job right with our service and merchandise offering, we'll gain market share."

Nordstrom expects his firm's stores to grow to between 140 and 150 by 2015. The company plans capital expenditures of $540 million this year, more than last year's $501 million and almost double 2006 levels.

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The upscale retailer's last large expansion during the past 10 years was in 2000, when it grew square footage by 11 percent, after which its stock plunged 31 percent.

Expanding in the current economic climate could damage sales and lower returns on capital invested, Rochdale manager David Abella told Bloomberg. "The environment is worse than when they had these things on the blueprint," Abella says. "These expansions would be a negative to the stock prospects in the near term."

Still, the move may work. Luxury handbag maker Hermes raised second-half profit by 6.2 percent after expanding its store network and introducing a new perfume, growing net income to $249 million and beating Bloomberg estimates in the process.

"Luxury remains the most important purchase for rich Russians, Chinese and Brazilians," French securities strategist Jean-Paul Pierret notes. "Luxury is the only sector that's still working well."

Indeed, a study commissioned by Coach found 85 percent of women polled were spending more on handbags despite cutting back in other areas.

"We continue to see support for the long-term trend of more women entering the premium handbag space," Coach Vice President Andrea Shaw Resnick says. "They're using accessories to play a leading role to update their wardrobe."

Coach plans to open 40 new stores in fiscal 2009, with 30 of those open before November 1 to benefit from holiday sales. The firm forecasts earnings per share for the year of $2.06 on revenue of at least $3.15 billion, two cents per share higher than analysts polled by Thomson Financial foresee.

Meanwhile, luxury jeweler Tiffany is also expanding, but in a smaller way — by opening smaller stores, the first of which is slated to launch in October.

The average Tiffany's is about 7,000 square feet, but the newer models will average closer to 2,000 square feet, providing the company with the ability to expand the number of its stores more rapidly.

Store executives say the goal is to grow the company from 68 stores to 150 in the next 15 years, with only about 30 larger format stores opened in the next 10 years .

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