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The End of the Mac & Cheese Trade

Consumers have spent the past two years looking for bargains, but the retail trade-down phenomenon is drawing to a close.

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) -- This week is a big one for retail companies, with the bulk of the earnings reports coming from big-box retailers. A smattering of specialty retailers will be reporting this week as well. In a compressed period of time, we'll be inundated with all sorts of financial data, separating the winners from the losers and inevitably resulting in dramatic responses from traders and investors.

As the bulk of the investment community focuses in on individual companies, I'm busy spotting trends in consumerism. Trends begin with subtle signs, but if you can recognize certain patterns and take appropriate action, you'll be rewarded.

First, I feel obligated as The Finance Professor to review some theory.

Economists classify products into two categories: normal goods and inferior goods. Rather than being classified by product quality, normal goods are products for which an increase in income causes an increase in demand. Inferior goods are those that increase in demand as incomes fall.

Investors have created a third product class: luxury goods. Luxury goods are normal goods for which an increase in income causes an even greater increase in demand. To put it in context: An inferior good is the equivalent of macaroni and cheese, a normal good is chicken, and a luxury good is steak.

When economies shrink, luxury goods demand shifts to normal goods, and normal goods demand shifts to inferior goods. As incomes stabilize and the recession abates, demand for inferior goods peaks. As incomes then begin to rise, demand shifts back from inferior goods to normal goods and from normal goods to luxury goods. Keep in mind that this does not happen overnight but rather over a period of time.

Let's dig into some of the recent retail earnings reports and extract evidence of the end of the trade-down effect.

Inferior/Low End:




reported fourth-quarter 2010 EPS

of $1.17 vs. analyst estimates of $1.12. The company benefited from strong international sales but missed out on revenue expectations due to disappointing sales in the U.S., where same-store comps fell 1.6%.

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At the same time, Wal-Mart warned that it was expecting soft sales for the first-quarter and fiscal-year 2011, evident in its guidance for fiscal-year EPS of $3.90 to $4 vs. analysts' expectations of $3.97. This would imply earnings growth of 7% to 9% in the coming year.



, another low-end retailer, echoed Wal-Mart's results with a

better fourth quarter

while also tempering expectations for the first quarter and coming year.

Normal/Middle Market: Nationwide department store



reported fourth-quarter 2009 EPS of $1.40 vs. analysts' estimates of $1.32. For its fiscal-year 2010, Macy's expects to earn $1.55 to $1.60 per share, which straddles analysts' estimates of $1.57 per share. The midpoint of the guidance implies year-over-year earnings growth of 12%. Management expects same-store comps to increase 1% to 2% after declining 5.3% for 2009.

Luxury/High End: Investors key in on two prominent high-end retailers:





. This week,

Nordstrom reported

a very strong quarter. The media's observation that Nordstrom missed earnings estimates by 2 cents might be correct, but it's misleading. After reporting strong sales for the month of January, management informed investors to expect the company to handily exceed its previous earnings outlook. Since its last reporting earnings, analysts moved up its earnings expectations for Nordstrom by 14 cents. Clearly, they were too aggressive. Earnings are expected to rise by 24% for Nordstrom in 2010.

Tiffany will report its earnings on March 22.

Here is what I see: The retail trade-down phenomenon is drawing to a close. For the past two years, consumers have stretched their dollars, tightened their pocketbooks and looked for bargains. Slowly, we are reversing course. The shift from inferior goods to normal goods is starting to take hold.

In confirmation of the upswing in demand for luxury goods and my above observations, yesterday former

Federal Reserve

Chairman Alan Greenspan characterized the economic recovery as "extremely unbalanced," with high-income earners benefiting first and foremost from the recovering stock markets and corporate earnings.

-- Written by Scott Rothbort in Millburn, N.J.


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At the time of publication, Rothbort had no positions in stocks mentioned, although positions can change at any time.

Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of

LakeView Asset Management

, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of

, an educational social networking site; and, publisher of

The LakeView Restaurant & Food Chain Report

. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.

Mr. Rothbort is a regular contributor to's RealMoney Silver

website and has frequently appeared as a professional guest on

Bloomberg Radio


Bloomberg Television


Fox Business Network


CNBC Television

, TV

and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.

Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.

Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.