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Weaker Pound, Euro Could Boost Luxury

Stronger dollar seen as a boon to companies.

LONDON — Europe’s luxury goods companies could be the big winners — and fast-fashion retailers the big losers — as the pound and the euro slide in value against the dollar.

Because most companies have already locked in exchange rates and prices for the spring season, the impact of this week’s dramatic currency fluctuations won’t be evident until the middle of next year at the earliest. However, looking ahead to the third quarter of 2009, industry observers and financial analysts foresee two very different scenarios for the fashion business overall.

For luxury companies that sell to Japan and America and source and manufacture in Britain and the euro-zone, the outlook is bright. “The euro weakening so quickly gives oxygen to luxury firms in terms of turnover,” said one analyst for a leading European investment bank.

The analyst, who requested anonymity, said luxury firms generate a good chunk of their earnings in currencies other than the euro, with typically 20 percent of turnover tied to the yen and 40 percent tied to the dollar.

The analyst said, however, it will take time to see the impact of the recent exchange rate fluctuations on luxury goods companies’ books. On Thursday, the pound hit a five-year low against the dollar, trading at $1.62. It was the pound’s biggest fall since 1992.

Earlier this week, the euro hit a two-year low against the dollar, reaching $1.27, its lowest rate since November 2006. On Thursday, the euro surged back to $1.29.

“Any erosion in the value of the euro is a good thing, because its strength has been eroding profit margins for so long,” said Guy Salter, deputy chairman of Walpole, the association of British luxury goods firms.

Salter said the slide of the euro, coupled with the growing value of the yen, would also mean increased spending power for one very powerful consumer group — Japanese tourists — who had been suffering from a strong euro and pound.

Despite forecasting the sector will contract one percent in the fourth quarter and between 3 and 7 percent in real terms in 2009, Claudia D’Arpizio, a Milan-based partner at consultancy Bain & Co., said the euro’s weakening against the dollar and yen would soften the blow.

“For the first time, currency fluctuations [in 2009] may have a positive impact on luxury goods market growth,” D’Arpizio said.

But for companies that source and manufacture in the Far East — and do their business in dollars — the outlook is not as rosy.

“For these companies, costs will be higher at a time when consumers have less money to spend,” said George Wallace, chief executive of MHE Retail, a Europewide retail consultancy, referring to retail chains such as Marks & Spencer Group plc, French Connection, Fat Face and Jigsaw.

Freddie George, a research analyst at Seymour Pierce in London, said the impact of the newly weak pound will not be evident for another six months. “The weak pound is going to affect everyone in apparel who is sourcing in dollars,” he said.

Paul Alger, executive director of U.K. Fashion Exports, the independent trade association that helps British exporters, said that despite the increase in sourcing and manufacturing costs, the falling pound, and strengthening dollar, there are opportunities on offer in the U.S.

“We tell British companies that now is the time to take the U.S. seriously. It is usually the first country to go into a recession, and the first to get out,” he said.