The wealthy are thriving, but the stocks of the luxury stores that cater to them aren’t. And while lower-income shoppers feel the pinch, the stocks of the big box stores they shop at are booming.
The dichotomy is one of the curve balls in the post-pandemic economy. Behind this divergence is shifting investor confidence, as middle-class shoppers cut back on occasional luxury splurges and look for deals, casting doubt on luxury brands’ growth.
Stocks for big box stores are having a stellar year, led by Wamart’s gain of more than 50% in 2024 and Costco’s climb of 41%. Seeing reverse fortunes are luxury goods, with Roundhill S&P Global Luxury ETF, which tracks luxury goods on the S&P 500, down 6% in the same period.
Noticing this trend, analysts say price has become one of the most important factors for consumers and successful retailers.
“They want value and low pricing is becoming more important than ever, we’re just hearing that across the consumer space,” said Peter Keith, senior research analyst at Piper Sandler. “It is really about price.”
Even as the pandemic shut down the economy, it didn’t hit the pocketbooks of the upper-middle class and those wealthier. Most kept their jobs, worked remotely, and tucked their stimulus checks into a rainy day fund. Their spending power was partially credited with greasing the economic wheels of the recovery that followed.
As the wealthy thrived, so did stocks for luxury goods, which outperformed the S&P 500 from January 2021 through March 2022.
But that surge in stocks hasn’t continued. Some of the biggest luxury goods brands have struggled in 2024, including watch and jewelry seller Movado Group, with stocks down 35% since January. Fashion company Capri Holdings Group, which includes Versace and Jimmy Choo, is down 24% over the same time.
The problem is the aspirational shopper – the middle-class shopper who occasionally buys luxury goods.
Aspirational shoppers made up 64% of luxury goods shoppers in 2023, according to Boston Consulting Group. That’s down 10 percentage points from 2013 and is taking a bite out of profits this year, scaring off investors.
“That customer that might buy an entry-level Louis Vuitton bag or the entry-level item at Gucci has fallen off,” said Joe Feldman, Senior Research Analyst at Telsey Advisory Group. “People have traded down to T.J. Maxx, Ross, and Burlington.”
Luxury stores are also facing a drop in demand from China, where middle-class consumers are facing “luxury shame” and a reluctance to flaunt wealth, according to Bain and Company.
As shoppers turn away from luxury splurges, they want to pay less. That’s where the big box stores come in – and investors have noticed.
“People are looking for a bargain,” said Ron Sander, a retail investor in Bergen County who bought shares in Costco about six months ago. He says he kept an eye on the economic cycle when deciding to invest.
The key factors here are pricing and groceries, which all the big box stores sell. They strive to be the lowest price in the market.
“Every pricing I’ve ever done about groceries, Wamart’s always the lowest price out there,” Feldman said.
As customers are drawn to the low prices, especially on food, they also pick up discretionary items. The need for food, particularly as Americans eat at home to save money, keeps customers coming back.
Target has struggled more than other big-box stores in the last two years. It saw four straight quarters of revenue declines as customers cut back on nonessentials, which have typically outperformed essentials among Target shoppers. This was punctuated by a social-media-fueled backlash over items stocked for Pride Month in 2023.
Some investors saw that dip as a chance to get in on the stock.
“They were offloading inventory,” said David Fox, 44, of Owatonna, Minn., who picked up Target shares in 2022 when the company’s stock tanked and it had a glut of unwanted electronics and apparel. “I felt like, for a long-term play, there was a good chance of bounceback.”
His move paid off. Target stocks have begun to climb again after it slashed prices and posted a second-quarter revenue gain of 2.7% over the previous year.
Institutional investors have also noticed the value in big box shares during the economic softening.
“Our clients hold many shares in large-scale retailers, like Costco – in line with its role in the economy and proportion in the stock market,” said Zach Teutsch, managing partner of Values Added Financial, a passive investment firm in Washington, D.C.
Yet uncertainty about the economy – from interest rates to employment levels to the effect of the election on taxes and tariffs – will impact whether these shopping trends continue.
Investors are watching the threat of tariffs in particular: Big box stores import many of their goods from China and may have to raise prices or absorb some of the tariffs, eating into their profits.
“It’s not clear the magnitude, or how people will handle it,” Keith said. “But it can create noise, and even prices going up can cause the consumer to pause.”