Is the Humble Station Wagon Making a Comeback?

This week in Geneva, European carmakers showed off their newest creations. Among the many exotic cars and trucks that command six-figure sums, there appeared a vehicle many had thought to be extinct—the station wagon. Porsche, Volvo, and Mercedes showed off their compelling new the station wagon offerings.

Yes, the sober station wagon, one of the smallest, quirkiest niches of the global auto market, is poised for a remarkable renaissance. To anyone who has been on U.S. roads lately, this may be surprising news. Last year, some 55% of vehicles sold in the U.S. were either pickup trucks or SUVs, according to IHS Markit. Indeed, the wagon has been on a long, slow skid to obscurity since the 1980s. These cars were not very sexy to begin with. When the SUV came along with the same cargo space in a tougher, taller package, auto buyers made the switch. Lately, the skid has accelerated. Over the past five years, as the U.S. auto market surged, domestic wagon sales fell by 16% to just 77,200 in 2016. Ford Motor Co. sells that many pickups in a month.

So why the sudden glut of new rigs with seats in the way, way back? It turns out that the wagon data is a bit deceiving. Much of it can be attributed to a dearth of product, since the number of station wagon models available to U.S. buyers dropped from 17 to just seven over the past five years. Acura scrapped its wagon, as did Cadillac, and Saab finally ground to a full stop. Meanwhile, Audi and BMW decided to keep their high-end wagons in Europe, as U.S. orders dwindled to the point where it didn’t make sense to load a ship. “There’s a fundamental demand level that doesn’t fluctuate much,” said IHS Automotive Senior Analyst Stephanie Brinley. “It’s enough for the players who are left to see some healthy take.” Here is the other thing that was not missed in the C-suites of Stuttgart: The small crew of drivers who are still keen for a wagon are the best customers in the car business. They are more educated, more affluent, and perhaps most important, more loyal than other buyers. In a consultant’s quadrant of customers charting effort vs. profit, these are the folks in the box at the top right: the keepers. “It’s a great customer for us,” said Dana Headrick, product manager at Mercedes-Benz USA. “I almost liken them to the millionaire-next-door type of person.”

Volkswagen’s new SportWagen and Alltrack are proving particularly popular with cyclists and kayakers, according to Hendrik Muth, head of product planning at Volkswagen of America. Their roof racks are easier to access than those on an SUV, with plenty of space in back for gear. “The buyer is slightly more male and more sports-oriented,” Muth said, dispelling the station wagon-soccer mom cliché of a few decades back. Bryce Beerman, who owns a New England company that stages trade shows for woodworkers, recently handed the keys back on a 2013 Audi Allroad after a three-year lease. “I don’t typically get excited about these things, and I was excited to get that car,” he said. “I’m a wagon guy, and it was the best-looking one out there.”

The cargo space will be clutch for his family’s two dogs and the gear the family hauls back and forth to a 25-foot fishing boat north of Boston. A truck, he realizes, would probably make more sense. But Beerman, 38, hates trucks. “They’re not cheap, and they’re not economical,” he said. “Plus, I grew up being able to drive a sports car now and again, so I’ve always been partial to these designs.”

Volvo has so much confidence in potential buyers such as Beerman that it is not even bothering to stock its new wagons at U.S. dealerships. Customers who want one will place an order and then wait a few weeks while the machine is hammered together and shipped from Torslanda, Sweden. Such inelastic demand is manifest in pricing. Though they are usually skittish about losing customers to rivals, when it comes to wagons, auto executives have the swagger of Texas pickup dealers. Sure there are not that many customers, but there are not that many wagons anymore, either, at least not in the U.S. Consider the Mercedes E-class wagon. In North America, window stickers on the bare-bones version start at $62,300, almost 20% more than the starter E-class sedan. Part of the spread is because the base model wagon comes more fully stocked with such goodies as four-wheel drive. But the cars are essentially the same, which is another reason why wagons are getting the green light from product planners.

A station wagon is a marvel of financial engineering, as much as mechanical. With higher prices and virtually zero added cost, its unit economics are usually better than those of conventional cars. “It’s basically the same as a sedan,” said Brinley at IHS. “Compared to developing a whole new model, it’s not that hard to make a wagon.” IHS forecasts a little bit of growth in the station wagon segment as new models come out and Chinese drivers discover hatchback life. “We don’t chase volume,” Porsche Chairman Oliver Blume told the crowd in Geneva this week. “We simply build great cars that people desire.” It helps that today’s station wagons are incredible. Long gone are the days when these machines approximated rolling condominiums, with faux wood siding and sofa-like seating for the entire family. Driving dynamics are one place where wagons still beat out their taller siblings. And with the utility box checked off by SUVs, the segment is getting sportier. Oddly, the only thing that might make the exotic station wagon extinct in the U.S. is a trade war. Subaru aside, almost every version on the market today is assembled in Europe and shipped across the ocean. Of course, that will change if Cadillac gets back in the wagon game.

Citations

1. http://bloom.bg/2nlN4o7 Bloomberg
2. http://bit.ly/2nowyDR – AutoByTel

Urban Outfitters Struggles to Strengthen its Appeal

Urban Outfitters Inc., like other retailers, is changing its business to get a grip on the migration toward e-commerce, but it recognizes it has another issue—shoppers simply do not like what it is selling. At Anthropologie, the company’s Terrain line of home and garden items and the bridal-focused BHLDN lines “delivered strong double-digit comps and both continued to benefit from inclusion into the Anthropologie group, where they can leverage the Anthropologie customer base,” said Chief Executive Richard Hayne on the company’s most recent earnings call.

However, same-store sales at the Anthropologie chain were down 2.9% for the fourth quarter. “The customer is also telling us in no uncertain terms that the apparel and accessory offerings are currently off-pitch,” he said. The leadership roster has changed at Anthropologie, including a new merchandise manager, and three new classification design directors on the women’s-apparel team, according to Hayne.

According to Hayne, at Urban Outfitters stores, men’s apparel and accessories showed “strong improvement,” and intimates and beauty continued strong showings. But women’s accessories suffered from sluggish sales of cold-weather gear, and product sales for the home were hurt by a decline in demand for electronics, vinyl records, and books.

While the company’s Anthropolgie unit struggled, same-store sales at the Urban Outfitters brand increased 2%, and same-store sales at the Free People brand were up 1.2%. Urban Outfitters reported sales of $1.03 billion for the quarter, up slightly from $1.01 billion last year, in line with expectations. And earnings per share were 55 cents, down from 61 cents last year.

“Though management cited stronger trends in home and beauty, we question how long consumers will give the brand to fix its core apparel assortment,” according to comments from retail analyst firm Wunderlich. “Fashion at Anthropologie can’t get on track” was the title of the Wunderlich research note. “We believe management may be underestimating how degradative the effect of continued apparel misses on Anthropologie’s brand equity may be,” the note said.

“Urban Outfitters’ average unit retail continues to be under pressure given product missteps in the higher average unit retail dresses category,” said UBS in a note. “Given our negative industry outlook, Urban’s disappointing January, and negative read-throughs across the industry, we see elevated risk of negative earnings revisions for calendar year 2017, which we expect could cause near-term stock pressure.”

Urban Outfitters has about 200 namesake and Anthropologie locations in the U.S., as well as 130 Free People shops. The retailer plans to open 15 new stores in North America this year, barely half the pace of the last two years. In his comments, Hayne likened the retail industry to the housing industry, which “saw too much square footage capacity added in the 1990s and early 2000s,” he said. He noted that the number of retail square feet per capita in the U.S. is more than six times that of Europe and Japan. “Thousands of new doors opened, and rents soared,” said Hayne. “This created a bubble, and like housing, that bubble has now burst.” As a result, hundreds of stores are being shuttered nationwide by retailers including Macy’s and J.C. Penney Co.

Citations

1. http://on.mktw.net/2mmqga7 – MarketWatch
2. http://for.tn/2maexs8 – Fortune

The Good News Is . . .

• Nonfarm payrolls increased by 235,000 in February and the unemployment rate was 4.7% the Bureau of Labor Statistics reported. Average hourly earnings increased by 2.8% on an annualized basis. Construction led the way, growing by 58,000, the most in almost a decade, while manufacturing also posted strong gains with 28,000 new jobs. That contrasts with the upwardly revised January numbers of 238,000 new positions and an unemployment rate of 4.8%.
• John Wiley & Sons Inc., a global research and learning company, reported earnings of $0.92 per share, an increase of 37.3% over year-earlier earnings of $0.67 per share. The firm’s earnings topped the consensus estimate of analysts by $0.14. The company reported revenues of $436 million, an increase of 3.0%. Management attributed the results to strong performance in its journal subscriptions business and double digit growth in its author-funded access program.
• Standard Life and Aberdeen Asset Management, two of Britain’s largest asset management firms, are joining forces in a $4.7 billion deal that reflects the rising pressure on money managers who actively manage investor funds. Firms like Aberdeen and Standard Life are facing increased competition from behemoths like the Vanguard Group and BlackRock that specialize in low fee index funds. The two companies will merge in an all-share transaction to create Britain’s largest asset manager, worth $13.5 billion. Under the terms of the deal, Aberdeen investors would exchange their holdings for shares in Standard Life, based on a valuation for Aberdeen of $4.7 billion. Standard Life shareholders would own two-thirds of the combined company.

Citations

1. http://bit.ly/2iYbHWM – Bureau of Labor Statistics
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2mc6yLV – John Wiley & Sons Inc.
4. http://nyti.ms/2mL0bCt – NY Times Deal

Planning Tips

Guide to Often Overlooked Tax Breaks

You are probably familiar with the most popular itemized deductions, including the one you take for home mortgage interest or for charitable contributions. You also can take advantage of other expenses, including sales taxes and certain investment-related costs. Be warned. It is also easy to make mistakes with these lesser-known deductions, so be sure to work closely with your tax advisor before claiming any of these tax breaks.

Exclusions for forgiven debt – In general, if a lender cancels all or part of a debt, you will have to consider that amount as income. However, you may be able to exclude some of the canceled debt under certain circumstances. The IRS allows this for some homeowners who had their mortgages canceled in 2016. For instance, you may qualify for an exclusion if your lender lowered your mortgage balance through a loan modification.

Energy efficiency updates – You can save money on taxes for making your home more energy efficient. The IRS offers a pair of tax credits for energy-efficient improvements. The nonbusiness energy property credit covers the cost of energy-saving items, including adding insulation and efficient windows and doors —but not the cost of installing them. The credit is subject to a maximum lifetime limit of $500, of which $200 can go toward your windows. The residential energy efficient property credit, meanwhile, is equal to 30% of the cost of alternative energy equipment installed in your dwelling. This includes solar hot water heaters, wind turbines, and solar electric equipment.

Deduct your RV or boat – You can deduct interest on mortgages for up to two dwellings: Your primary residence and a second home. But what if your second home is on wheels or in the water? You may be able to deduct interest on this mortgage, too. Note that boats and recreational vehicles must have sleeping, cooking, and toilet facilities in order to qualify.

Sales taxes – Instead of deducting state income tax, individuals can deduct their sales taxes. The IRS acknowledges the difficulty of recordkeeping for all of your purchases, so there is a standard amount that you can take based on your income and where you live. Be aware that while the IRS gives you a choice of claiming your state and local income taxes or your state and local sales taxes, you cannot deduct both.

Tax prep and investment fees – The IRS has a number of miscellaneous itemized deductions you can take. You can deduct certain expenses to the extent they exceed more than 2% of your adjusted gross income. This can be helpful for individuals with complex finances: You can deduct tax prep fees, the cost of tax advice, and legal fees that are related to either producing or collecting taxable income or getting tax advice. Investment fees and expenses are also deductible, subject to the 2% of adjusted gross income threshold. It is easy for filers to claim deductions for which they are not entitled. Fees in your 401(k) plan and IRA, for instance, are not eligible. Retirement accounts are funded with pretax dollars, so fees deducted from there are not eligible as a deduction.

Citations

1. http://intuit.me/14Xyz0Z – Intuit.com
2. http://bit.ly/1tvAhT0 – Bankrate.com
3. http://cnb.cx/2lZ5IB8 – CNBC
4. http://bit.ly/2gZLHf8 – Kiplinger
5. http://bit.ly/2mKXzUS – MoneyCrashers.com