MILAN — Morgan Stanley cut its earnings estimates on six European luxury goods stocks as it forecast a weak Christmas season and expressed fear about the consequences of a potential war in Iraq.

The bank slashed earnings and sales targets for Bulgari, Gucci, Hermès, LVMH Moët Hennessy Louis Vuitton, Richemont and Swatch. High-flying Burberry was a notable exception for which the investment firm raised expectations.

In a research note, Morgan Stanley analysts Claire Kent and Mandy Deex said consensus estimates for luxury companies currently hinge on sales growth of 6 to 10 percent in 2003: "This is totally unrealistic, in our view. Apart from a few exceptions, where there is a lot of brand momentum [e.g. Burberry], we would expect low single-digit sales growth."

Morgan Stanley said 2003 sales growth for the six firms should come between 2 percent, for Bulgari, and 5 percent, for Swatch.

On the earnings front, Morgan Stanley said it expects these firms to post 2003 growth of earnings before interest and taxes (EBIT) between 3.1 percent, for Swatch, and 18.9 percent, for Gucci, compared to market consensus growth forecasts of between 8.9 percent and 31.4 percent.

"The prospects for the industry look considerably worse since the Bali tragedy, not better," Kent and Deex wrote. "Indications on the Christmas season do not look good — data from high-end Japanese department stores shows that October sales disappointed; the US is hardly showing the expected rebound."

But Morgan Stanley warned that a possible war could depress earnings and sales even more.

"Neither our own revised 2003 nor the consensus forecasts incorporate the impact of a possible war with Iraq," the analysts said, which, "if prolonged, could further hurt consumer confidence and tourism, both of which are vital for a healthy luxury market. We would almost certainly have to cut our 2003 forecasts again if there were a prolonged war with Iraq."

Morgan Stanley was particularly pessimistic on prospects for Bulgari and Hermès, downgrading its rating on both stocks. The bank cut Bulgari to equalweight from overweight and Hermès to underweight from equalweight.

"We are taking the view that Bulgari will have a disappointing Christmas, as we believe it is more exposed to the sort of customers who are suffering in this downturn (more so than Richemont-owned Cartier)," Kent and Deex said.The analysts also cut their 2002 forecasts for Bulgari. They said the jeweler’s EBIT should slide by 22 percent compared with a previous forecast for flat growth.

"As we have stated for some time, Hermès is fundamentally overvalued, in our view. This is because investors have been willing to ‘overpay’ for the brand’s relative defensiveness," the analysts wrote.

"While we do not think Hermès will disappoint on numbers in the same way as Bulgari, we do not believe it offers value compared to some of the other luxury names," they said.

They expressed optimism about the "very strong brand momentum of Burberry," and raised its sales growth forecast for the fiscal year ending in March to 14.9 from 13.1 percent.

"Burberry is the only luxury company in our universe which is likely to surprise on the upside with its first-half earnings release next week," they said.

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