By  on January 15, 2008

PARIS — It's not only American retailers who are battling chilly economic winds — their European counterparts are facing tougher times as well.

Coming off a less-than-stellar holiday season marred by worries about the economy, retailers across the Continent and the United Kingdom are bracing for continued difficult conditions as fears about consumer spending gather steam.

As in the U.S., no one in Europe wants to mutter the "R" — recession — word just yet. Most are watching the decline in retail at American stores with trepidation while hoping those troubles never cross the pond.

But analysts have begun taking note of the European slowdown. On Monday, analysts at HSBC slashed their target price for France's PPR, the retailer that owns Gucci Group, to 122 euros, or $180.32 at current exchange, from 144 euros, or $214.14, citing jitters about the economy.

PPR shares have declined by 17 percent since the beginning of the year and 36 percent since their Oct. 8 high of 141.50 euros, or $209.14. On Monday, the stock closed at 93.98 euros, or $138.90, in trading on the Paris Bourse.

"Short-term visibility is low on consumer spending," reasoned HSBC, which added PPR is hamstrung among investors by its Conforama furniture chain and Redcats catalogue business.

Retail is not alone in coming under scrutiny. Last week, analysts at Deutsche Bank and ABN-Amro downgraded their rating on L'Oréal to sell, sending the French beauty producer's stock down almost 9 percent in two days. ABN-Amro expressed concern that "the combination of an economic slowdown and further weakening of the dollar pose formidable headwinds" for the firm.

The euro has been on a seemingly inexorable ascent against the dollar — a particularly bitter pill for European luxury firms to swallow. The currency moved upward again Monday as it neared the all-time high against the greenback, trading at 1.49 euros to a dollar.

Many investors, in turn, have been abandoning luxury stocks in Europe. LVMH Moët Hennessy Louis Vuitton, the French conglomerate that runs brands from Louis Vuitton to Givenchy, has seen its shares fall from a high of 88.55 euros, or $130.88, on Oct. 29 to 73.17 euros, or $108.14, Friday.It remains to be seen whether the market is overreacting; LVMH will report full-year earnings in February.

But more than 12 months after retail spending began to improve in Europe following several tough years, merchants are starting to worry the downward cycle may be returning all too soon.

Warning signs are accumulating. Last week, Marks & Spencer chief executive officer Sir Stuart Rose admitted U.K. market conditions were deteriorating and that he expected business to "remain tough through 2008."

As Marks & Spencer is considered a bellwether for British retail sales, Rose's comments sent a shiver down the spines of nervous investors who had started to flee retail shares already tarnished by the subprime mortgage debacle and jittery consumers. Further darkening matters, U.K. consumer confidence dipped in December to its lowest level in 10 months as oil prices reached a record and the slowdown in the housing market deepened, Nationwide Building Society said.

French consumer confidence also headed south last month, hitting its lowest level since June, according to the national statistics office Insee.

And German retail sales unexpectedly fell in November before reports of severely disappointing holiday sales began to emerge in Europe's largest economy. Even Spain, which used to be one of Europe's fastest-expanding economies, is feeling the crunch as its housing sales declined after a decadelong boom, while Italy and other southern European economies are being pinched by the strong euro, which has impacted the all-important tourist trade.

Still, luxury has outperformed other sectors — especially at European department stores. Britain's House of Fraser, for example, which runs 59 stores, last week said its like-for-like sales over the five weeks to Jan. 3 rose 2.4 percent.

European department stores — many of which have been renovating recently by skewing upscale — generally have outpaced other retail formats. A spokeswoman for Galeries Lafayette in Paris said its holiday sales were "very strong," driven by robust luxury sales. She said sales to tourists — which account for 40 percent of sales at Galeries' Boulevard Haussmann store — remain robust despite disadvantageous currency trends. Galeries Lafayette and France's Printemps chain last week reported record sales at their Paris flagships on the first day of the annual winter sales here. Printemps said its flagship did close to 9 million euros, or $13.3 million, in sales, while Galeries said its first-day sales improved 10 percent.Italian entrepreneur Maurizio Borletti, who owns Italy's La Rinascente department stores as well as France's Printemps chain, remains cautious despite the encouraging numbers.

"It's difficult to say [how the year will shape up]," he said. "It hasn't been a great winter season. There are mixed signs. The high end hasn't performed so badly. In Italy, textile retailers have suffered a lot. France has seen a slowdown, but [sales] are still positive."

Added Borletti, "There's money around. People are just cautious spending it. For the moment it's psychological. It can change. I see a lot of volatility."

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