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With Britain very nearly in recession, banks in northern Europe buckling and lines of credit rapidly shriveling, few retailers are looking forward to a bumper holiday season.

This story first appeared in the October 9, 2008 issue of WWD.  Subscribe Today.

However, industry principals and observers in Britain and continental Europe believe the fittest companies will survive the current storm — provided they aren’t highly leveraged — and principals at both ends of the market are looking on the bright side.

On Wednesday, the Bank of England slashed interest rates by 0.5 percent to 4.5 percent, giving retailers and consumers alike a much-needed boost. That move followed the government’s 500 billion pound, or $865 billion at current exchange, bailout of some of Britain’s largest banks earlier in the day.

“I’m a retailer, not a clairvoyant, which means I don’t know what holiday sales are going to be like,” said Sir Philip Green, whose stable of companies includes Topshop, Miss Selfridge and British Home Stores, a mass market general merchandise chain. “We can end the world now, or try and stay upbeat about the future,” added Green, who’s positive despite BHS reporting a 27.9 percent slump in annual net profits earlier this week.

Asked about his Arcadia Group’s overall debt load, Green said the company was in good shape: “There is no specific leverage,” he said, adding he was in a position to finance a “sizable acquisition” with the company’s own resources should the right opportunity arise.

Mounir Moufarrige, president of Emanuel Ungaro, is also keeping his chin up. “I doubt that [this crisis] will last as long as people fear. In high fashion we’re likely to suffer less because at the end of the day we’re not selling to 300 million people, we are selling to a fraction of the population,” he said.

Lisa Montague, chief operating officer at Mulberry Group plc, said the company was cautiously optimistic. “We have to take a deep breath and be bold. Mulberry is small, there’s strong growth, we own our manufacturing facilities, and we’re not highly leveraged, so we’re well-placed to get through this,” she said. “We’re hoping that this crisis is once-in-a-lifetime stuff.”

George Wallace, chief executive of the London-based MHE Retail consultancy, said there is a lot of media frenzy in the U.K. that is feeding retailers’ and consumers’ fears alike. “There is this sense of Armageddon, which is real for some retailers — but less real for others,” he said.

Wallace said British retailers such as Topshop and New Look that cater to young consumers — who aren’t necessarily worried about mortgage payments or job losses — would be more insulated from the credit crisis, unless their balance sheet is highly leveraged.

The Icelandic group Baugur is particularly exposed because of its debts from fashion retail acquisitions, and the credit woes stemming from this week’s collapse of the major banks in Iceland. Although Baugur is a private company, it holds a number of stakes in listed companies, including French Connection Group plc, Moss Bros Group plc, Debenhams plc and Woolworths Group plc, as well as Saks Inc. “All of those companies’ share prices have bombed — they’ve lost more than 50 percent of their value since Baugur purchased them — so that will increase Baugur’s debts,” said Freddie George, a research analyst at Seymour Pierce in London.

Earlier this month, however, Baugur issued a statement saying it wasn’t overly concerned about the stock market crises: “We are focusing on large retail projects and will continue to operate based on that strategy as well as remain committed to working on our portfolio to continue to create value and growth. Our businesses continue to perform well in what are evidently tough market conditions. For Baugur, it is business as usual,” said Gunnar Sigurdsson, chief executive officer.

But on Monday, Britain’s largest corporate insolvency specialist Begbies Traynor predicted a rash of insolvencies among U.K. retailers in the new year. It said it had a short list of more than 300 companies that could go bust, although a spokeswoman declined to reveal any names.

Debt problems — and weak balance sheets — are not limited to British companies, though. Across Europe, firms are struggling with the economic downturn and the tighter credit markets.

IT Holding SpA, the Italian fashion group that owns the Gianfranco Ferré, Malo and Extè brands and operates under license the Just Cavalli, C’N’C Costume National and Galliano labels, has lost nearly half its value on the Milan Bourse in the last month. The firm is weighed down by almost 318 million euros, or $433.8 million, of debt, including an expensive 185 million euro, or $252.3 million bond, which expires in 2012.

That debt is nearly six times IT Holding’s market capitalization of 54.8 million euros, or $74.7 million. Last month, credit rating agencies Moody’s and Standard & Poor’s downgraded their outlook on the stock to “negative” on concerns that a decline in consumer spending is hurting earnings. Compounding matters, IT Holding’s parent company, PA Investments SA, is also saddled with around 140 million euros, or $191 million, in debt.

IT Holding chairman Tonino Perna, who controls 61 percent of IT Holding via PA (and a further 1 percent via GTP Holding SpA, a separate holding company for PA), confirmed last month he is in negotiations with a Hong Kong-based investor to sell a minority stake in PA, officially to open up the Asian market, but by doing so also reducing PA’s debt.

While some company principals are struggling with debt, others see this as a moment of opportunity — or downright success.

“Despite everything that’s going on, we’ve had an exceptionally strong September, with significant double-digit growth, and we’re still seeing that’s the case in the early days of October. The last six weeks have not shown signs of slowing,” said Sven Gaede, chief executive of Net-a-Porter.com.

“We’re not seeing a fundamental shift in our customers’ pattern of behavior or the composition of their buy. I think the customer is a luxury, designer goods customer, so they’re slightly more protected from the goings on, they’re more resilient to this type of turbulence,” he added.

In Germany, the Munich specialty store Ludwig Beck is experiencing similar success, having reported a 10.4 percent sales gain in the third quarter. Adjusted for store closures last year, sales rose 13.3 percent. “Given the weakening economy, this result indicates we’ve taken the right road with our trading up strategy,“ said chief financial officer Dieter Münch.

Paddy Byng, chief executive officer of Smythson, said “Year to date we are meeting our targets. We are 10 percent up on last year with positive like for likes. This positive performance in a very challenging economic environment makes me feel cautiously optimistic that our positioning as one of the leading luxury gift brands will stand us in good stead during the all important Christmas period.”

Jimmy Chan, the owner of Rue du Mail by Martine Sitbon who also runs a Y-3 shop in New York and Evisu boutiques in Hong Kong, is also relatively upbeat. “Obviously there is going to be an impact. But the reaction has been different from different buyers so far. Smaller boutiques catering to the niche are doing well and actually increasing their orders some,” he said.

Jean Touitou, the owner of APC, said his business was thriving. “Paradoxically, I’m happy because for the last three years I’ve been killed by the value of the dollar and the yen. With those currencies gaining value I’m making up for the money I lost,” he said.

“Our business is better than ever — even in New York. During the last big crisis in the Nineties, we did well, too. We tend to do even better in crisis periods. People are going for the most expensive and most exceptional pieces. People with cash won’t disappear,” he added.