Luxury may have been a buzzword for much of the Nineties, but in 2002, there was more fizzle than buzz in the sector.

Plunging profits, decelerating sales, stock downgrades, spiraling debts and cost-cutting efforts dominated headlines as the year progressed and big luxury groups and small players alike hunkered down to weather a worsening economic climate.

Industry titans were still putting on a brave face, expecting luxury’s strong and long run to resume once it gets through this period of weak spending and global tension. But for the foreseeable future, single-digit increases and organic growth seem to be the reality for even the strongest of the luxury field.

In November, Morgan Stanley cut its earnings estimates on six European luxury goods stocks as it forecasted a weak Christmas season and expressed fear about the consequences of a war in Iraq. The bank slashed earnings and sales targets for Bulgari, Gucci, Hermès, LVMH Moët Hennessy Louis Vuitton, Richemont and Swatch, saying 2003 sales growth for the six firms should come between 2 percent, for Bulgari, and 5 percent, for Swatch.

"Indications on the Christmas season do not look good. Data from high-end Japanese department stores show that October sales disappointed," wrote analysts Claire Kent and Mandy Deex. "The U.S. is hardly showing the expected rebound."

Another sign of luxury slowing is the dearth of mergers and acquisitions. According to Michael Zaoui, managing director and head of mergers and acquisitions for Morgan Stanley, the total value of such transactions in Europe was about $800 million in 2002, a far cry from the $10 billion in deals in 1999.

Zaoui said unlimited growth once seemed possible for the luxury sector, with average expansion running at about 20 percent for the last decade. "We have now woken up," he said, estimating that the luxury sector has shed some $60 billion in equity in the last two years alone.

Speaking at an International Herald Tribune conference last week, Zaoui outlined dismal short-term prospects for luxury’s biggest players, as their fixed costs have spiraled with new store construction and heavy advertising investments. He noted that the 10 biggest luxury brands opened about 1,400 new stores since 1999 at a cost of about $4.5 billion, while advertising expenditures have risen to 8 percent of sales, as opposed to about 6 percent in 1995.Given a "significant" slowdown in sales since 2000, and "basically no growth" anticipated for 2002 — profits also dissolved across the board — margins are being compromised. To wit: Average earnings per share are down, and so is the return on capital investments. Company valuations have come down, too, with price-earnings multiples sitting at 23 today, versus 40 in 2000.

Smaller upscale designer businesses are also hurting. In May, Eric Bergere shuttered his Paris-based fashion house. "I don’t know how an independent can make it today," said the designer, citing tough going in Japan and elsewhere.

Other prominent designers who closed or suspended their houses this year include Daryl Kerrigan, Olivier Theyskens and Josephus Thimister. Some have resurfaced: Theyskens signed as creative director at Paris house Rochas and Kerrigan bought back her name.

The plunge in global tourism — travelers are estimated to buy 40 percent of luxury goods — and less robust spending won’t make the rebound easier. European retailers have cited mild improvements in tourist traffic, but nothing like pre-Sept. 11 levels. The situation has forced innovative moves to drive local customers into their stores, like creating limited-edition items, and opening units in tertiary markets.

All the signs aren’t negative, though. Many retailers and analysts still believe there’s growth ahead for luxury firms.

"I definitely do not think luxury is dead," said Judy Collinson, Barneys New York vice president. "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."

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