Q4 2009: Less bad is the new good! Unless you don’t happen to have a lot of money….

Last week, we put out a report on the lodging industry, and one of the themes that our analyst focused on was that things were getting “less bad”.  This has been a theme throughout our research lately across most of our sectors.  In fact, if I do a Google Desktop search across “less bad”, over half of the results show up in the last few months.

Less bad is an interesting concept.  For hundreds of years, there has been considerable philosophical debate on whether good and bad are relative or absolute concepts.  On the one side, you had the moral relativists such as Spinoza and Sartre, and on the other side, you had the ideas of absolutists, such as Kant.  Having once mistakenly thought that facing the consequences of returning home at 1am, smelling like cigars and wine after a night out with the boys without calling would excuse the relatively “less bad” transgression of coming home a couple of hours late from a tame business dinner, but again not calling, I can say that I now place myself firmly in the absolutist camp.  But what does this mean for investors and for the economy?

While there are a few companies that are actually benefitting from and performing quite well in this challenging environment, such as Priceline (PCLN) and Amazon (AMZN), most companies continue to struggle.  That said, the majority of these companies are doing “less bad” compared with a year ago.

Much of Majestic’s time has been spent identifying companies, and trends within companies, that are the best of the less bad (apologies to my wonderful high school English teacher and wordsmith, Ms. Sherman, for that last phrase).  More and more, we’ve been observing that the segments of companies we follow contributing most to the “less badness” (Ms. Sherman would now be sending me to the gallows) are the segments at the highest end; those that the wealthier Americans can afford.  Here are just a few examples:

From our lodging report, we can see that the luxury hotels, such as the Ritz Carlton, have seen the greatest improvement.  As illustrated below, the declines in Average Daily Room rates have improved the most in Q4 in the luxury segment:

ADR by Hotel Segment

With respect to online shopping across all categories, we’ve seen a tremendous shift in the percentage of overall consumption to higher income consumers.  Here is a chart of Hitwise representing this mix-shift in November ’09:

Online eCommerce Spending by Income

Recently reported November US new auto sales, which were flat in the aggregate year-over-year, showed a notable discrepancy in the performance of luxury brands vs. other brands:

• Mercedes  +19%
• Jaguar/Land Rover +20%
• Lexus +14%
• Porsche +18%
• Cadillac +10%
• BMW +3%
• Mini -32%
• GM down 2%
• Ford 0%
• Chrysler -25%
• Infiniti -26%
• Nissan +21%
• Hyundai +46%

Mirroring this trend in new vehicle sales, our proprietary CarMax (KMX) data shows luxury name plate volume in used vehicle sales up 18.5% in FQ3 ’10, while overall volume is up just 8%, despite luxury name plates selling at a 40% premium to the CarMax average sales price.

In the Homebuilding sector, the luxury builder, Toll Brothers (TOL), reported fiscal Q4 ’09 new contracts up 42% in units and a whopping 62% in dollars, while on average, the other builders (who sell considerably lower-priced homes) saw unit order growth down 1% over the same period.

Other evidence includes Tiffany & Co. (TIF), reporting better-than-expected third quarter results, along with Saks (SKS), which attributed much of the improved performance to its New York City flagship store, representing about 20% of the chain’s overall sales.

Here is a chart showing the dramatic recovery of luxury brands’ (Hermes, Chanel, LV, Prada, Dior and Gucci) transaction growth on eBay’s US platform:

Luxury Brand $ Transaction Growth on eBay

So, there is ample evidence that the highest-end has been doing considerably less bad of late.  Unfortunately, for the majority of Americans, things have not gotten less bad; they remain just plain bad, as is well presented in Nouriel Roubini’s piece in the Globe and Mail.

Unemployment continues to rise and evidence persists that it may remain high for a considerable period of time versus past recessions, due to outsourcing and other factors.

Indeed, when I think of my own skewed perspective, it strikes me that nearly all of my friends and colleagues who lost their jobs over the past 18 months (primarily in finance in New York City) have since found gainful employment, which for many, is at banks that have been bailed out and are now hiring again.  It’s worth noting that most of the unemployed, currently struggling to find jobs, contributed their tax dollars to rescue these banks, some of which are accruing record or near-record bonus payouts, which I would surmise contributed as much to Saks’ recent flagship improvement as tourists exploiting the strong Euro.  Moreover, to be fair, these same dollars have helped spur the recovery of many of the firms of Majestic’s clients and have helped us to enjoy a stronger year of performance than we had planned.

While I don’t consider myself wealthy, I do put myself in the category of those who are currently feeling more “less bad” than most other Americans right now.  And for those of us, like myself, who are going into the holiday season considerably less fearful and more willing to spend money than we were a year ago, we ought to remind ourselves of the words of the great philosopher and moral absolutist Immanuel Kant: Morality is not the doctrine of how we make ourselves happy, but how we may make ourselves worthy of happiness.

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