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New Report Sees Luxury Struggling

HSBC report sees flat or limited growth for luxury in 2010, with brighter view on soft luxury items such as leather goods.

MILAN — Although the worst might be over for the fashion and luxury goods industry, top executives at most listed companies in the sector feel far from out of the woods, according to a new HSBC report.

And HSBC analysts see a long and difficult road ahead.

“We draw the conclusion that the current downturn may differ from the previous crises, which did not last long and were followed by steep recoveries,” wrote HSBC analysts Antoine Belge, Erwan Rambourg and Sophie Dargnies after meeting the leaders of most luxury firms in their coverage.

The analysts offer a more sober outlook for the sector than many of their peers. European luxury stocks have gained 22 percent so far this year compared with a 3 percent gain for the Eurotop 300 and consensus expectations in the market are for a v-shaped recovery from the fourth quarter, according to the report.

“We are less optimistic,” they wrote. “We argue that the luxury industry may face a period of flat or limited growth in 2010 [and even maybe 2011] as several of the drivers of the hyper-growth of 2005-2008 are likely to have disappeared for a while.”

Belge, Rambourg and Dargnies said the Asian crisis in 1998, the Sept. 11, 2001, attacks and the SARS epidemic in 2003, had a short negative impact on luxury goods demand, mostly because fewer people were traveling.

“We believe the current environment differs from these external shocks as we feel there is a need for a ‘structural re-set’ of certain segments of the luxury industry,” they wrote, citing watches in particular, which were mostly driven by mix-price enhancement rather than volume growth.

For this reason they argued hard luxury like watches and jewelry remained the most at risk, adding that consumers would be far less likely to respond to huge average price increases going forward. Less vulnerable was soft luxury and in particular leather goods, where a sizeable portion of products are at more accessible price points, they wrote.

Despite management anticipating a gradual improvement through 2009 as the psychological barriers to luxury consumption, such as fear and guilt, wane and the effects of destocking on wholesale-led businesses soften, the analysts added: “What strikes us is that luxury companies still do not seem to have a clear picture of how their consumers’ behavior has changed. Very little in-depth consumer analysis appears to have been conducted…which leads us to believe that management’s visibility remains pretty low.”

The analysts upgraded Luxottica Group SpA to “overweight” from “neutral” and Tod’s SpA to “neutral” from “underweight,” and downgraded Christian Dior SA to “neutral” from “overweight” and Hermès International to “underweight” from “neutral.”