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The Ups and Downs of the Surging Euro

The surge in the value of the euro may be causing headaches for European luxe firms, but it’s a windfall for the other end of the fashion spectrum.

PARIS — The surge in the value of the euro to a record high Tuesday may be causing headaches for European luxury firms, but it’s a windfall for the other end of the fashion spectrum.

The Continent’s largest fast-fashion firms say the plunging value of the dollar is a boon that has driven down overseas production costs in regions where the euro has climbed in value some 25 percent over the last year. On Tuesday, it reached a record high of $1.1914 in Far Eastern trading before sliding back in Europe to close at $1.1884, up from $1.1857 on Monday. And currency prognosticators say the bulked-up euro could go even higher against the dollar — bringing tears or cheers to the fashion set.

“A strong euro is positive for our customers,” commented Leif Persson, chief financial officer at Sweden’s Hennes & Mauritz. “Production prices have dropped for us. Commensurately, prices in our stores will drop. We’ll pass those savings on to our clients.”

H&M purchases roughly half of its garments in dollars, with the rest purchased in euros and Hong Kong dollars, said Persson. “We’ve already seen lower prices coming in the stores,” he commented. “We believe that lower prices for garments in the stores will translate into higher volume.”

While European luxury firms from LVMH Moët Hennessy Louis Vuitton to Compagnie Financière Richemont SA depend on clients from Taipei to Honolulu, Europe’s cheap-chic chains are lightly exposed to business in Asia and the United States.

With 849 stores, H&M operates only 55 units in the U.S. Inditex, which operates the Zara chain, operates 1,648 doors globally, of which 1,340 are in Europe.

“Eighty percent of our volume is made in euros,” said an Inditex spokesman. “Europe is the main center of activity of our company, containing the majority of our stores, and where we intend to keep concentrating the majority of our stores, and where we intend to keep concentrating the majority of our openings in the following years. The impact of the dollar-euro [exchange drop] is very limited.”

Zara is unique in that it is a totally vertical operation, producing most of the products it sells in its stores. A large portion of its production is in Europe, which would be another factor limiting its exposure of its operations on the Continent to fluctuations in the value of the euro.

As for the United States, where the firm operates 10 stores, the spokesman added that prices haven’t changed. “Our price policy is determined by the market and by our competitors, and carried out in an independent manner in each of the markets where we are present. Variations in the exchange rates do not imply variations in our prices.”

Ditto for H&M, which has been cautious about keeping prices stable in the U.S.

“It becomes more of a challenge for the buyers [in the U.S.],” said Persson. “They have to be very sensitive to costs to make sure prices don’t inflate. Overall, though, the effects have been negligible in the U.S. We still plan to open 20 stores in the U.S. this year, of which 10 have already opened.”

Inditex has suffered some, though, in Latin and South America, where it operates 185 stores. “The currency depreciations [there] had an impact on 2002 sales and profits,” admitted the spokesman.

But if the euro’s newfound strength is a plus for fast-fashion, it’s a major headache for European luxury houses, which have already begun strategizing over how to take the weak dollar by the horns. Companies such as LVMH commonly hedge their currency exchange rate positions. Many are already negotiating currency positions for 2004.

That stance presses harder daily. Economists believe that the euro will continue to ascend this week against the dollar and the yen. Before hitting a new high against the U.S. currency on Tuesday, its previous peak was $1.1888, which it reached early in January 1999. Since the beginning of the year, the euro has climbed 14.5 percent against the dollar and 10.9 percent against the yen.

While hedging currency positions may limit some of the fallout, luxury houses are still expected to see continued profit erosion from a bullish euro.

Nathalie Schneider, equities analyst at HSBC in Paris, said current trading levels of the euro are already having a “significant” effect on the sector.

“Over the last two years, currency fluctuations have weighed on average 18 to 20 percent on EBITA,” she said. Schneider said some companies would be hit harder than others.

LVMH, for example, which has hedged its currency exchange rate positions, won’t be hurt so much this year. On the other hand, Gucci Group and Hermès, whose positions are more weakly hedged, should feel more of an impact, while Richemont, which is lightly hedged, will be the most severely affected, according to Schneider.

Many firms already are elevating their prices to counteract the weak dollar. Longchamp, the Paris accessories house, raised its prices in the U.S. by about 8 percent this January. As reported, Louis Vuitton, among others, increased its prices in the U.S. this February by about 5 percent, effective with its fall collections, although many other European luxury and designer companies said they would hold their prices for fall. The increases followed a 21 percent rise in the value of the euro against the dollar between January 2002 and January 2003.

“The euro had already appreciated a lot at the beginning of the year,” said Jean Cassegrain, Longchamp managing director. “But it continues to get stronger. We haven’t increased prices again yet, but if the situation continues we might have to consider it.”

Cassegrain added that the firm, which generates some 15 percent of its sales in the U.S., also has been battered by depreciations among Asian currencies.

“The drop in tourism has hurt, too,” he said. “Tourism to Paris is bad. Nothing about a strong euro is good for our business right now.”

A spokeswoman for Swiss watch conglomerate Swatch Group said the growing strength of the euro is just the latest of a string of tough blows for the sector, including the war in Iraq and SARS. “It is affecting the tourist business,” she said. “Every company selling consumer goods will feel the impact.”

Francoise Montenay, president of Chanel, added that the house already has seen a sharp reduction in tourist activity recently, especially among Americans.

Some firms, such as Swatch, have begun to cut costs to keep price increases at bay. But while many insist the weak dollar will not drive up prices, others recognize increases have become a necessary evil. At a shareholder’s meeting recently, LVMH chairman Bernard Arnault said that besides hedging, the company could modify prices to reflect the changes in currency trading rates.

“We believe our products are so special and unique that we can raise the price and consumers will still buy,” said Arnault. “Customers know it’s a temporary situation. When the currency rates level out, we modify prices down accordingly.”

But some analysts cast skepticism on that prospect. “Traditionally, the U.S. customer is very sensitive to price increases,” said Schneider. “Additionally, it’s probably not the time to increase prices for French brands, which are already under fire in the U.S. But in Japan, changing prices to cover currency fluctuations is more common.”

Higher prices mean lower volume for European firms. Vittorio Missoni, sales manager at Italy’s Missoni, said sales have already begun to suffer.

“We aren’t happy because our prices are in U.S. dollars,” he said. “The strong euro has meant a 7 to 8 percent drop in sales this season.” Nonetheless, Missoni said the house would eat the loss for the moment and not raise its prices.

Meanwhile, companies that set prices in euros are faring better.

Francesco Dalla Rovere, a board member of SINV Holding, which controls Sportswear International and Neo Res, licensees for Voyage Passion, See by Chloé and Krizia Jeans, among others, said since the company sells in euros, “our business is not suffering in that sense — we are not overexposed in the U.S., [either].”

Yet Dalla Rovere still worries that the strong euro could just add wood to the fire already fanned by a chain of global crises.

“Obviously, such a strong currency [will] affect business. We are in a wait-and-see mode, but we are now offering promotions and discounts in Southeast Asia to help our partners there afflicted by SARS repercussions.”