3 ‘Luxury’ Brands Designed to Beat Inflation

Key Points

• Companies that offer high-end products have wealthier customer bases that are relatively immune to higher prices.
• lululemon boasts an affluent customer base that doesn’t mind paying up for higher-quality gear.
• Williams-Sonoma managed to expand its operating profit and grow EPS by more than 20% in Q2.
• Canada Goose's customers tend to have extreme discretionary budgets.

Buy less. Switch to generic brands. Ask the boss for a raise.

These days, there aren’t many desirable ways to beat inflation. The same can be said of developing an inflation-proof investment strategy.

Defensive names like grocery stores offer value in a down market but are exposed to cost pressures of their own. Commodity-related companies also have merit but as we’ve seen in recent weeks, these can be volatile.

Perhaps the best way to form an anti-inflation defense—luxury brands. Why? Companies that offer high-end products have wealthier customer bases that are relatively immune to higher prices. In turn, their sales are usually little affected by an inflationary environment.

As the hot inflation readings continue to roll in, economists aren’t exactly expecting things to cool down in a hurry. A recent KPMG Economics Insights survey found that businesses expect inflation to be running around 6% by this time next year.

So with food, clothing and housing prices expected to stay elevated, corporate earnings are likely to suffer for the next few quarters. That is, unless you sell premium products.

What is lululemon Doing to Fight Inflation? 

Premium athletic apparel and footwear is exactly what lululemon athletica inc. (NASDAQ: LULU) does. From yoga enthusiasts to runners, the company boasts an affluent customer base that doesn’t mind paying up for higher quality gear. Last year this amounted to $6.25 billion in sales, a 57% jump from 2019 levels. No active apparel industry player gained more market share than lululemon during that span.

Even as the pandemic-led workout craze fades, the yoga-inspired retailer continues to outperform. As clothing peers struggled with demand, cost, and inventory hurdles, lululemon grew Q2 sales 29% led by 35% growth overseas. 

Make no mistake, inventory build-up is an issue at lululemon. But since it is able to sell more of its stuff at full price than the competition, slashing prices to move products isn’t mandatory. 

In addition to its pricing power edge, lululemon is finding new ways to grow even as the economy slows. This spring it rolled out its first-ever sneaker collection for women, including running shoes for $148 and slip-ons for $58 (don’t worry fellas, your footwear is coming in 2023).

To capitalize on inflation and sustainability trends, the company also launched a trade-in and resale program called ‘Like New’ to appeal to price-sensitive shoppers in search of a deal. 

With the lululemon Studio fitness platform its latest innovation, management seems to be pressing all the right buttons. A focus on men’s clothing, digital sales, and international expansion has the company targeting $12.5 billion in sales by 2026. Given the loyal, wealthy following and expanding product lineup, this doesn’t seem like a stretch.

How is Williams-Sonoma Able to Grow Profits?

Williams-Sonoma, Inc. (NYSE: WSM) is one of few retailers that had a strong Q2 showing. With double digit growth in both retail and e-commerce, comparable sales were up 11.3%. Better yet, the high-end home goods retailer managed to expand its operating profit and grow EPS by more than 20%. How did that happen?

For starters, consumer interest in Pottery Barn, West Elm, and Williams-Sonoma merchandise has been strong. Although it sells items in a range of price points, the products are perceived as premium—and as such, its customers tend to have higher household incomes. 

Speaking of pricing, management recently made a bold move that is paying off. It decided to eliminate site-wide promotions and allow its high-end, differentiated tables and chairs to stand on their own two (or four) feet. Consumers haven’t blinked.

Management followed-up its Q2 outperformance by reiterating full-year revenue growth in the ‘mid-to-high single digits.’ The goal is to hit $10 billion in revenue by fiscal 2024. 

Having an in-house design team and digital first strategy make Williams-Sonoma unique in the home goods market. To add to its brick-and-mortar and e-commerce presence, Williams-Sonoma will soon enter the virtual world through collaboration with Roblox. Even its digital furniture is likely to command a pretty penny.

What is Canada Goose’s Competitive Advantage?

One look at Canada Goose Holdings Inc.’s (NYSE: GOOS) website reveals that it sells luxury clothing. Coats, parkas, and jackets sell for well over $1,000 a pop. New product categories like fleece and footwear aren’t much cheaper. The company’s gear is built for extreme weather conditions—and its customers tend to have extreme discretionary budgets.

Like most clothiers, Canada Goose has been raising its prices. Unlike most, the impact on sales figures has been negligible. In Q2, revenue climbed 24% thanks to solid performances in both the wholesale and direct-to-consumer segments. It has also shown an ability to gain production efficiencies better than most.  The result: a staggering 660 basis point gross margin expansion, the likes of which few retailers achieved in Q2.

As Canada Goose shifts away from its core parka business, consumers are following the flock. High-priced sweaters, pajamas and more are generating social media buzz and providing important revenue diversification. Meanwhile, collaborations with the NBA and internationally known fashion designers are helping to keep luxury consumers cozy.

The only thing more insulated than a $1,250 Aurora Parka is Canada Goose’s profitability. Largely protected from inflation, it is leaving apparel industry competitors out in the cold.