Luxury’s Rebound Expected to Withstand Japan Crisis

Investors in the U.S. and Europe remained jittery Wednesday.

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Investors around the world remained on a knife’s edge Wednesday, pushing stock markets down in the U.S., Europe and Asia even as the growing consensus was that the disaster in Japan would have no long-term impact on the luxury market’s rebound.

This story first appeared in the March 17, 2011 issue of WWD.  Subscribe Today.

Still, stores in Japan, some of which have cut back staffing and are coping with rolling blackouts, are expected to suffer as tourists cancel trips to the island nation. It is also unclear how Japanese shoppers — a somewhat weaker though still potent force in the luxury market — will adjust over time.

As some foreigners and families with small children left Tokyo rather than risk contamination from the failing nuclear generators 160 miles away, there was at least some good news from the country’s financial markets. The Nikkei 225 index bounced back 5.7 percent to 9,093.72 Wednesday, though the proxy for shares on the Tokyo Stock Exchange remains down 11.3 percent this week. Onward Holdings Co. Ltd. grew 13.7 percent, while Shiseido rose 6.9 percent and Fast Retailing Co. Ltd. gained 5.3 percent.

The rebound failed to spark a broader rally and European and U.S. markets fell after Europe’s energy chief warned lawmakers in Brussels that the situation in Japan could worsen quickly.

The CAC 40 slipped 2.2 percent in Paris while the DAX fell 2 percent in Frankfurt and the FTSE 100 declined 1.7 percent in London. On Wall Street, the S&P Retail Index fell 1.2 percent, or 5.80 points, to 494.83, as the Dow Jones Industrial Average decreased 2 percent, or 242.12 points, to 11,613.30.

So far this week, luxury stocks with a presence in the Japanese market have weathered some of the biggest declines, with Tiffany & Co. shares down 11 percent for the week, to $56.27, following their 2.4 percent decline on Wednesday. Coach Inc. is off 9.6 percent for the week, to $50.67, following Wednesday’s 2.6 percent drop; LVMH Moët Hennessy Louis Vuitton has dropped 8.4 percent for the week, to 100.80 euros or $140.59, after its 3.3 percent dip on Wednesday, and Burberry Group is down 6.8 percent, to 10.94 pounds, or $17.60, following a 1.4 percent decline Wednesday. Polo Ralph Lauren Corp. shares were down 1.6 percent Wednesday to $121.18, leaving them off 4.8 percent since last Friday.

Among retailers serving the luxe market, both Saks Inc. and Nordstrom Inc. are down 6.7 percent for the week following Wednesday declines of 2.6 percent and 3.2 percent to $11.83 and $41.50, respectively.

All eyes are now on the Fukushima Daiichi nuclear power plant, which was swamped by the tsunami and has released radiation after a series of fires and explosions.

“The gravity of the impact will be determined more so by the developing nuclear situation rather than by the effects of the earthquake and tsunami,” said Armando Branchini, executive director of Italy’s luxury goods association, Altagamma. “Intense crises such as these tend to have very short-term effects on acquisitions, especially when it comes to luxury goods.”

Japan, though, is not the luxury powerhouse it once was.

“As a marketplace, it is certainly less significant than even five years ago: Japan represents around 10 percent of global luxury goods sales currently, down from closer to 18 percent in 2001,” said James Lawson, a director at Ledbury Research in London.

But even as brands have turned their attention to faster-growing economies in China, Brazil and elsewhere, the Japanese luxury consumer is still important. And Lawson said about 40 percent of Japanese luxury spending is done abroad.

“It’s too early to say what the long-term impact will be on the Japanese luxury appetite, but it seems that the market has overreacted,” Lawson said.

“Any brand that has exposure to the Japanese market is likely to be concerned, but that’s different from saying the disaster will have a long-term effect,” said Guy Salter, luxury investor and the deputy chairman of Walpole, the association of British luxury goods.

“The Japanese are by their nature the most discerning luxury consumers in the world,” Salter said. “While this disaster is so appalling on a human level, it’s not going to affect their aesthetic or desire for quality. I’m absolutely convinced of that.”

For now, Japan is still reeling from the disaster, which, according to estimates, could have claimed more than 10,000 lives.

Some train lines into Tokyo were still disrupted Wednesday and there were fewer people than normal on the streets. More families with young children appeared to be leaving the city — although this is also a time when Japanese schools traditionally break between terms. Some foreigners and Tokyoites are relocating to Osaka, Kyoto and the regions surrounding those cities. Hotel rooms in those areas are becoming increasingly hard to find.

“We’ve seen a big increase in Japanese tourists coming from Tokyo over the past two or three days,” said Makiko Oku, who works at the Osaka Visitors’ Information Center inside the station where the bullet train arrives. “The number of foreign tourists has also been on the high end of normal.”

A spokesman for Central Japan Railway Company confirmed that trains from Tokyo heading west to destinations such as Nagoya, Kyoto and Osaka have been more crowded than usual in the past couple of days.

Meanwhile, travel to Japan has been disrupted considerably. Lufthansa has rerouted all of its Narita Airport flights to Osaka and Nagoya (via Seoul) until at least the weekend. EVA Airways, based in Taiwan, has canceled flights to and from Sendai, where the earthquake and tsunami caused most damage, until the end of June.

In the past few years, retailers in Japan have been cashing in on Chinese tourists visiting the country and this demographic was helping brands at least partially offset declining demand from locals. That looks set to change — at least for the short term. Chinese travel companies that organize trips to Japan for Mainland tourists said there have been widespread cancellations.

Paul Xia, who works for the Beijing-based Lukintl tour company, said the firm has called off three groups of around 30 travelers each. “After the earthquake all of the groups have canceled immediately,” he said. “No one wanted to go to Japan.”

Coach and Tiffany, two prominent U.S. companies with stores in the country, seem to be faring relatively well, despite pressure on their stock prices.

Coach said: “A very few of our stores — representing well under 10 percent of our Japanese business, which in turn represented 18 percent of sales through our first fiscal half — are in the most affected Sendai region…our Tokyo office facilities are open and we have had no interruption to our systems, while our central inventory and logistics are functioning at capacity.”

Tiffany’s Sendai Mitsukoshi store was “damaged,” but Mark Aaron, vice president of investor relations, said all of the company’s 700-plus employees living in Japan have been accounted for and were doing fine. Some of Tiffany’s 55 stores in Japan were closed or operating on reduced hours.

“Coach is stealing share rapidly, and maybe has a little more cushion,” said Laura Champine, analyst at Cowen & Co.

How well Tiffany weathers the disaster is linked, in part, to how the stock market fares, she said. Overall traffic trends at the upscale jeweler tend to be impacted by the market.

The industry continued to ramp up relief efforts for the country.

• Tod’s Group pledged more than 100 million yen, or $1.3 million at current exchange, to aid Japanese relief efforts.

• Noting the $60 billion in jewelry imported by the Japanese from the U.S., the 47th Street Business Improvement District established a fund to collect $1 per sale from the 2,600 businesses in New York’s Diamond District.

• H&M has donated nearly 100,000 garments to the Red Cross to help victims of the quake.

• Hublot, the watchmaker owned by LVMH, said it was raising money for the Japanese Red Cross, matching donations made through its own Web site.


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