NEW YORK — Whatever is in store with the global political situation, plenty of Americans still want their luxuries.
The long run of automatic double-digit sales increases has long since drawn to a close, but retailers and analysts believe there’s still growth to come for luxury apparel and accessories firms in the U.S.
Luxury remains a bright spot for many stores, albeit a less radiant one, as consumers grapple with diminished stock portfolios and the possibility of another Middle East war and most retailers off to a tougher start in the third quarter than they’d projected. Even with the important travel component of the luxe trade remaining weak, retailers who aren’t solely dependent on tourism for their gains are continuing to see at least single-digit increases, even though bottom-line improvement remains difficult in the current environment.
"I definitely do not think luxury retailing is dead," said Judy Collinson, vice president and divisional merchandise manager of women’s at Barneys New York. "It isn’t even ailing. Yes, the dot-com bubble burst, spending is more controlled and growth will be at more normal rates than it was in 2000, but the luxury business is strong.
"The customer seems to be trading up in a certain way," Collinson continued. "She is looking for what has great intrinsic value. She is looking for what has strong emotional appeal. She is buying the finest and the freshest and the most creative and beautiful that we have."
As reported, Barneys finished its second quarter, ended Aug. 3, with a net loss of $439,000, compared to losses of $3.9 million, in the year-ago quarter as sales dipped 4.2 percent to $81.6 million. However, it did manage a first-half net profit of $39,000.
According to Bear, Stearns retail analyst Dana Telsey, luxury sales on average rose 23 percent in 1999 and 35 percent in 2000, but slowed in 2001, rising only 9 percent. In 2002, Telsey said luxury goods companies have seen sales growth slow even more — to about 6 percent in the first half — so essentially quarterly sales are decelerating. However, she noted, retailers could still make up lost ground as 56 percent of luxury goods sales and 60 percent of earnings take place in the third and fourth quarters.In addition, Telsey said the rich continue to get richer as wealth among high net-worth individuals is still expected to grow, at least in the mid-single digit range over five years. At the end of 2001 — before the most recent months of equity evaporation — there were 7.1 million people worldwide with more than $1 million in financial assets, up 3 percent from 2000.
Still, economic and geopolitical circumstances haven’t bred widespread optimism. In London, Claire Kent, luxury analyst at Morgan Stanley in London, said there is no sign that the luxury goods industry is experiencing a rebound in the second half."Japanese and U.S. tourism is still weak and consumer confidence is low," she said. "We cut our forecasts for all our luxury stocks on Aug. 1, but we are currently having to make further cuts to some of our forecasts following first-half results publications.
"We have always believed that 1999 and 2000 were boom years, not to be repeated in the near future," Kent pointed out. "That’s why we downgraded the luxury sector in July 2000. Things have turned out even worse than we expected, partly because of the tragedy of Sept. 11. We anticipate a slow, sluggish growth environment in 2003."
Burton M. Tansky, Neiman Marcus Group’s president and chief executive, said on a conference call last month to discuss yearend results, "While the customer may shop judiciously in the months ahead, we know our success depends on continuing to stock our store with the fashion trends and the quality and unique merchandise our customers demand and expect."
However, Tansky tied NMG’s fourth-quarter turnaround — $5.3 million in net income versus a $20.6 million year-ago loss — to its aggressive management of its inventories, its willingness to take markdowns on slow-moving styles and even the elimination of unprofitable classifications and vendors. In addition, Tansky said NMG made substantial reduction in its future receipts and supported those businesses that showed strong sales trends with adequate open to buy.
"Though these times require conservatism, we will not allow ourselves to become paralyzed and no longer take chances on strong sales trends," the ceo said. "Without the burden of too much inventory for the spring season, we were in a very favorable position to improve our profitability."For the fall, Tansky said he anticipates continued strength in the classifications that were successful at the end of its fiscal year, such as contemporary women’s sportswear, denim and fine apparel, as well as more full-price selling.
Like others, NMG has adjusted to the end of the nation’s economic boom — dating from 1995 into early 2001 — which had helped make many Americans, however temporarily, cash- and investment-rich. Even with more people experiencing diminishment of wealth, rather than its arrival, there are still large amounts of luxury-bound wealth to be mined.
Gregory Furman, executive director of The Luxury Council, said compared to the mass retailers, most purveyors of luxury goods are doing well. "The smart ones are focused on getting a greater share (of customers) and surprising and delighting their ‘best customer,’" which he defined as those 7 million Americans with a liquid portfolio of $1 million or more.
To better understand exactly what their customers want, Furman suggested luxury retailers exchange data and share the cost of innovative promotions that give the "best customer" a reason to shop. "The old taboos about sharing data about this customer are breaking down in a sensible way as people realize they share the same customer," Furman said, adding that roughly 60 percent of these customers shop at the same stores.
To drive sales during the all-important holiday selling period, the luxury market is focusing on strategies more in tune with the new economic atmosphere, including the introduction of more moderate price points and intensified marketing efforts.
Saying she is expecting sales increases this holiday over last year’s depressed levels, Collinson said Barney’s is maximizing business within the context of not-so-stable conditions by relying on its merchandising instincts — buying emotionally, but making very edited choices. "We have always been about real luxury and individual taste and the sense of humor that makes it all make sense," she said. "The things that are happening [in fashion] are basically what our business is about."
Even in the tough economic climate, people still need to spend, retailers and analysts agree, and are willing to spend more on a luxury product that is recognized as offering distinction and value.R. Brad Martin, chairman and ceo of Saks Inc., said he expects to see sales improvements in this year’s second half compared to the last two years, despite having less people in the stores: "The brands that do have a great perceived value are selling even if they are a very expensive product."
As reported, Saks cut its losses in the second quarter as its department stores generated higher profits and Saks Fifth Avenue reduced losses on an operational basis. So far this year, Martin said, luxury traffic is down roughly 5 percent, but average transaction size has risen in a range of 3 to 5 percent.
To counter slower traffic, Martin said Saks Fifth Avenue hopes to stimulate more traffic through a new marketing campaign called "Make It Your Own," designed to communicate the idea that, if you want a personal luxury shopping experience, Saks has it. "We need people to understand our store is the store for them," Martin said. "We organized our marketing, product offering, customer service and reconfigured the store in a matter designed to attract more new customers who may want to shop in a luxury environment but might not have done so previously."
Higher-end retailers also are finding they can do more with less expensive merchandise. Stefani Greenfield, owner of the New York-based Scoop boutique, scoffed at the notion of a business slowdown. "Our business is trending 25 to 30 percent above 2001 and 10 percent above 2000 levels," Greenfield said. "Our inventory is much leaner, 30 percent less, while sales are up 10 percent."
Asked about differences in her customers’ shopping attitudes, Greenfield said she believes people are more cautious about what they are purchasing, but they have not lost their desire to buy. "They are not buying head-to-toe luxury, but mixing luxury purchases to combine with a basic."
To be sure, purveyors of luxury accessories like Tiffany and Co. are hoping their storied histories as purveyors of high quality, special products will help them add up to a strong value concept, one removed from the vicissitudes of short-term fads, that will continue to attract a full- or part-time luxury consumer."It’s pretty clear most companies in the jewelry and luxury goods sectors — whether of European or U.S. origin — are experiencing varying degrees of sales weakness," said Mark Aaron, vice president of investor relations at Tiffany. "However, we are not in the fashion business and are not subject to such related risks. Instead, we believe that, in these times, perhaps more than ever, consumers turn to trusted retailers with quality offerings which represent enduring value. Tiffany is about things that last."
Aaron said the post-Nineties mentality could prove valuable to the New York-based luxury jewelry and accessories wholesaler-retailer. Noting that even consumers spending less still want the very best, he noted, "There is an increased move to better quality products. If we have the opportunity to get in front of customers and explain why this product is exceptional, there is a good chance they will find it an attractive story and want to buy the piece. Yes, people are spending more cautiously and less per transaction, yet they still come to Tiffany. When the economy and stock market improve, people will be spending more.
"We do not have to reinvent ourselves," Aaron said. "We need to say this is always what we are about and we simply need to get that message out and demystify Tiffany."
For the second half, Tiffany’s chief financial officer James Fernandez, said on a recent conference call that he is forecasting a midteen comparable-store sales increase in the U.S. in the third quarter, because of easy comparisons, and a low double-digit comp increase in the fourth quarter, because of an expected economic improvement and revived consumer spending.
"You can be assured we intend to overcome any obstacles and enjoy Tiffany’s substantial earnings power when the economic conditions become more favorable," he said.
But even going against weak year-ago numbers in the wake of the Sept. 11 attacks, retail observers have scaled back their expectations for the second half and are proceeding with caution.
Still, Adrianne Shapira, a retail analyst at Goldman Sachs, said she believes the high-end customer is not trading down. "They are using a laser-like focus to narrow in on the hot trends of the season and no longer making a purchase in multiple colors when they fall in love with something," she noted. "That is obviously not good for business."On the other hand, Shapira said, luxury retailers like SFA, NMG and Tiffany aren’t backing away from their core products or trading down. "I am hoping this cycle, too, will pass and these companies can rebound even more dramatically," she said.
Even with many retailers recently bringing down projections for the remainder of the year, Dana Cohen, retail analyst at Banc of America Securities, expects business to get somewhat better.
Still, with bad economic news, falling stock prices and war talk in the air, she asked rhetorically, "But how much better? Six months ago, I would have said the numbers would be very robust. Now I say I hope it is better, which is a big comedown."
Retail executives and analysts agree that, like the economy in general, consumers go through periods of self-indulgence when they simply have to have the hot new blouse, skirt, jacket or bag. There is a lot less of that "got to have" psychology since Sept. 11 but undoubtedly, they say, there will be another boom period. Figuring out when it will arrive and what will drive it, they concede, is no easier than predicting the next fashion trend.
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