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NEW YORK — Enjoy the good times while you can.
With luxury retailers and vendors seeing their best growth in years, investors have celebrated the sector, driving up share prices to new highs. But will Wall Street — and the consumers gobbling up the pricy goods — sober up?
This story first appeared in the March 8, 2004 issue of WWD. Subscribe Today.
Eventually, experts say. For now, though, the industry can expect to see robust spending at the high end through 2004, which should be good news for luxury shares.
“I’m optimistic for 2004,” Francesco Trapani, chief executive of Bulgari, said in January. “If nothing else happens, such as a widespread epidemic, a large terrorist attack or a war, meaning that things stay as they are now, then I think the top-line growth of 8 to 10 percent that the financial community is expecting is reasonable.”
The dark cloud hovering on the horizon is probably at least a year off. Some industry leaders — such as Bernard Arnault of LVMH Moët Hennessy Louis Vuitton — feel the luxury sector could be susceptible next year to another U.S.-led invasion or a SARS-like outbreak.
“For this year, I am very optimistic the economy is going to grow at a high pace, pushed by the strength of the U.S. economy and also pushed by the strength of the Far East, but the question is what will happen next year,” Arnault told WWD early last month. “The main problem for luxury companies, most of which are based in Europe, is the strength of the euro. The strongest ones, like Vuitton or Hermès, may adjust prices to cope with the weakness of the dollar, but the rest of them are really having a problem.”
The dollar is scaring everyone. “Currency exchange rates are an important variable in 2004,” said Dana Telsey, equity analyst at Bear Stearns, in a just-released report on the luxury goods sector.
Telsey said last year the industry experienced a strong euro that negatively impacted top-line growth for European-based companies, despite price hedging. “Although currency exposure is often hedged at the operating profit level, we believe the protection achieved in 2003 could be harder to cycle in 2004,” Telsey said.
Telsey went on to say that Bear Stearns currency strategists “expect the dollar to continue to fall in a relatively slow and steady fashion, or collapse.” She said they are not ruling “out the possibility that 2004 turns out to be a crisis year for the dollar.”
The dollar has recently strengthened slightly against the euro. On Friday, the dollar lost 1.6 percent against the euro ending at $1.24, compared with the previous day’s $1.22. Since the beginning of January, the dollar has gained against the euro by about 3 percent.
The weakness of the dollar has meant luxury goods companies have boosted some prices in recent months. Telsey estimates that prices by European brands were raised 8 to 12 percent in 2003.
Regardless of the price increases, though, the luxury segment continues to have a lot of momentum, Telsey said. Gil Harrison, chairman of Financo, agreed. “Just look at the same-store sales over the past two months,” Harrison said. “And the fact that retailers such as Neiman Marcus and Saks have made tremendous improvement in the months of January and February.”
Neiman’s same-store sales, reported Thursday, rose 24.4 percent in February over February 2003 and were up 12.8 percent in January. Saks Fifth Avenue has seen similar growth, with same-store sales up last month by 25.2 percent and by 10.9 percent in January.
Harrison, like other industry deal-makers and investment bankers, continues to hear that there is high demand for high-end goods. However, Harrison said there’s no question the price of luxury goods from France is being impacted — by at least 30 percent — from a stronger euro.
“What we are finding is that the price sensitivity is there and is expandable,” he quickly added. “Some of the companies have hedged their bets. The price differential is not evident for the time being. When that starts to change, though, is anyone’s guess.”
Harrison also noted a curious trend that is just beginning to develop in the segment. “Some of the luxury brands are trying to [have retailers] place their orders in units instead of dollars,” he said. “They’re trying to convince the open-to-buys to place orders based on units, and what they think unit increases will be. It’s a good omen for manufacturers.”
Meanwhile, Wall Street is basking under the sector’s bright light. Luxury retailers, vendors and fashion houses such as Nordstrom Inc., Coach Inc., LVMH, Saks Inc., Neiman Marcus, Tiffany & Co., Bulgari and Burberry Group have seen a significant uptick in their share prices in recent months and, for the near-term, the picture is radiant.
“Our luxury index has outperformed most world markets during the last two years,” Telsey said in her report. “In 2003, out-performance was fueled by 129 percent appreciation at Coach, growth at Tiffany & Co., and 63 percent expansion at both Bulgari and Burberry.”
And here is the sweet part: “If the early performance of equity markets is any indication, the global economy and earnings growth could prove quite strong throughout 2004,” Telsey added.
Indeed, comparing the first day of trading of 2004 to the market close on March 4, most of the stocks in the sector have experienced sharp increases in share prices: Nordstrom is up 20.3 percent; Saks is up 19.4 percent; Coach is up 17.2 percent; Neiman Marcus is up 12.9 percent, and LVMH is up 6.7 percent. Moreover, shares of Coach, Nordstrom, Saks, Neiman Marcus and LVMH have been trading at or near their 52-week highs. And as of Friday’s close, the percent change off of the 50-day moving average for the top luxury stocks showed increases of 3 percent to 15 percent.
Telsey told WWD that investors have been feeling good about luxury companies’ product exclusivities as well as the higher margins garnered by Prada bags and Chloé suits, for example. She also said it was important to take note of the improving travel and tourism industry, improving stock market and the fact that there have been no major wars or SARS outbreaks, all of which are “helping to make consumers feel good about spending this year.”
James Hurley, associate director of equity research at Bear Stearns, explained that the biggest luxury brands such as Gucci and LVMH are draws for investors because they generate a tremendous amount of cash flow. They also have high operating margins, which investors like to see.
Telsey said Coach, for example, is appealing to investors as its same-store sales continue to show solid increases against tough comparisons over last year. The company is also experiencing better-than-expected success in Japan, a newer market for Coach. In addition, she said Coach has extended its products to other categories such as footwear, and consumer acceptance has been strong.
Hurley explained that LVMH is benefiting from a rebound in tourism, which bolsters its duty-free business. LVMH is also buoyed by consumers’ propensity to buy leather goods instead of apparel when they travel, while its DFS duty-free operation — which moved back into profit last year — should benefit further from the improving travel picture.
Analysts also noted that improving the results of Tiffany and Coach is a strong Japanese yen relative to the dollar, which gives greater buying power to Japanese tourists when they buy goods in the U.S. On the other hand, the yen has fallen against the euro, raising the prospect of further price increases by European luxury brands in the key Japanese market. As a result, retailers like Takashimya are ordering up to 10 percent less from European design houses for fall.
Eric Beder, a retail analyst with Northeast Securities, said investors “love growth and right now this is the highest growing category by far.” Saks Inc., Neiman Marcus and Coach are nailing solid double-digit, top-line expansion along with margin growth, which equals even higher earnings growth. “That is the ideal investment for the investor,” he said.
With Neiman Marcus, Beder said the Dallas-based luxury retailer offers a premium way for investors to play for growth in the luxury-goods sector at the retail level. “People see a company that is focused on the high-end and that utilized the down times to significantly improve its shopping experience,” he said. “Neiman Marcus is now reaping the rewards of that through double-digit same-store sales, beating Wall Street estimates by significant levels and, going forward, opening new stores, including San Antonio, Boston and Boca Raton.”
Beder said the “luxury sector is in the third inning of this high-end baseball game. Last fall was really the catalyst, and I am seeing the growth continue this spring.”
John Lonski, economist at Moody’s Investors Service, noted that stock-market gains along with the robust housing market are benefiting key retailers. “Those consumers that were already doing fairly well did even better,” he said. “Those with high-paying jobs were able to spend. The benefit flow to specialty high-end retailers reflected the increased wealth of [some] American consumers.”
Lonski cautioned that the good times may not last much longer. He pointed to a lack of job creation, which affected February’s consumer confidence report. The Labor Department reported Friday that U.S. companies added a mere 21,000 jobs in the overall economy in February, which fell far short of some economists’ projections, while the unemployment rate remained unchanged in February at 5.6 percent.
“The miracle of achieving robust consumer spending amid a stagnant labor market owed in part to tax cuts that began in 2001 perhaps may come to an end in the first half of this year,” Lonski said. “Unless job growth returns in force, consumer spending is vulnerable to a slowdown to the U.S. and the world economy at large.”
— With contributions from Jennifer Weitzman and Vicki M. Young