How quickly the pendulum swings.
This story first appeared in the May 11, 2010 issue of WWD. Subscribe Today.
Stock exchanges worldwide soared on Monday after news of the European Union and International Monetary Fund’s near-$1 trillion rescue plan for the European economy, pulling retail and luxury stocks up for the ride and causing industry executives to return to the optimistic attitude they professed before markets tanked late last week on Greece’s debt woes — even as they remain nervous another pothole could lie ahead.
Gains included a 5.7 percent lift for U.S. retail stocks and a 9.7 percent jump for the CAC 40 in Paris, even though questions persisted about the effects of the austerity measures facing Greece and other European nations. These include the U.K., where a hung parliament threatens to make fiscal governance more challenging. The uncertainty in the U.K. was underlined Monday by Prime Minister Gordon Brown’s decision to step down as leader of the Labour Party within the next few months, part of his bid to lure the Liberal Democrats into a governing coalition.
Still, those concerns weren’t enough to dampen the spirits of retailers, brands and consumers, including those in Europe, who feel the recession is no longer a major threat and better times lay ahead — although how far ahead, no one dares to guess.
“The initial panic on European stock exchanges, which has now been stemmed, could have had an impact on consumer confidence, but not now, with the rescue plan and stocks rising again,” said François-Marie Grau, general secretary of the French Women’s Ready-to-Wear Federation.
“I think it is a brief episode that will soon be forgotten and will have no impact on consumer morale,” he said.
And, so far, consumers in Europe appear to have shrugged off the uncertainty of recent weeks. “Business is up 10 percent in the first quarter, Japan has been hitting its budgets since January, and our Covent Garden store [in London] is rocking,” said Paul Smith. “In reality, the euro has only got slightly weaker here against the pound, and London is still bombarded with tourists from Europe during their long holiday weekends.”
Hugo Boss chief executive officer Claus-Dietrich Lahrs said the German apparel giant hasn’t seen any negative impact with regard to the Greek bailout. “We still believe in a recovery inside the Eurozone,” he said.
Lahrs added Hugo Boss doesn’t expect the falling euro to have any impact on its core market. As for the effect on consumers, he said: “I believe it was important that the decision-makers in the Eurozone have taken decisive steps against further speculation against the euro. If this helps to bring stability back, we don’t expect a further impact on end-consumer behavior.”
Bruno Pavlovsky, president of Chanel’s fashion division, said brands with a global reach will be better able to insulate themselves from any slowdown in Europe just as a strong Asia mitigated the steep slowdown in America.
Europe, he said, is “quite strong for us,” adding Russia is also doing well. Prolonged euro weakness, he added, will make goods less expensive in markets such as the U.S., balancing out any possible weaker demand on the Continent.
A Prada spokesman said the current crisis has not forced the company to change its plans. “Our strategies are based on a medium-to-long-term vision and making any drastic changes now seems premature.
“We confirm our strategy of gradual strengthening of the retail channel in Europe, especially since sales during the first quarter increased significantly, especially for Prada and Miu Miu. We will continue to follow the developments closely so as to be able to react efficiently in whatever scenario,” he added.
Richard James and Sean Dixon, founders and owners of Savile Row tailor Richard James, said they feel they’ve already come through a dark tunnel — and despite the uncertain future of the U.K. government and the prospect of higher taxes, business is looking up.
Dixon said while 2009 was a tough year, “we were prepared for it. We consolidated the business, and sales and profits were actually up.
“The weak pound is helping us,” he added, “and there are more Europeans in the shop — the Greek prime minister was actually here about two months ago buying an off-the-peg suit. The private sector has already made its cuts, so it’s the public sector’s turn now.”
Don Williams, head of retail at BDO LLP, which tracks monthly sales figures on the U.K. high street and online, said retailers who are paying for stock and services in dollars will most certainly see their costs rise. “And that price pressure will likely seep through to the high street in six to seven months’ time,” he said.
But he was hardly pessimistic in general: “The U.K. has an incredibly strong retail sector, like-for-like sales were better than a year ago and online sales continue to grow. The day of the multichannel offering is here,” he said. In April, U.K. sales rose 1.7 percent, while sales via nonstore channels and online rose 46 percent.
Grau, of the French Women’s Ready-to-Wear Federation, said he was not concerned about the price pressure from the weakened euro.
“Regarding rising costs for those who are manufacturing in the dollar zone, the effect is the opposite. We don’t think it will have a big impact because it concerns unit costs that are relatively low, and because markets are very sensitive to price. We don’t think economic players will feed through to consumers any price increases linked to the strengthening dollar,” he said.
The euro, trading above $1.50 against the dollar last Dec. 1, closed Monday at $1.276.
Not that the ongoing recovery at retail means all will be smooth sailing. “It’s an awkward time for members of the European Union, but the bailout last week should resolve the crisis in Greece,” said Iain Begg, professorial research fellow at the European Institute of the London School of Economics. “It is much more difficult to judge whether the new stabilization fund will prove to be sufficiently large…but I think the market reaction today suggests that it has worked.”
Even with Britain facing a hung parliament, looming public sector cuts and the threat of higher taxes, “the U.K. recovery will not go into reverse, and fears of a double-dip recession look exaggerated. There is a negligible risk of Britain losing its ‘AAA’ credit rating,” Begg added, citing the nation’s low public debt and considerable stakes in the Royal Bank of Scotland and Lloyds Banking Group.
Michael Schroeder, head of the department of international finance at the ZEW, the Centre for European Economic Research, in Mannheim, said the bailout of Greece and the rescue fund will have “serious — but not drastic — effects” on Germany’s economic upswing.
He added, though, that the weakened euro is good for exports, which in turn is good for the export-driven German economy and means more jobs. “But I can understand when people get panicky. It’s reassuring that the European ministers reacted relatively quickly, but it meant that it was a bigger crisis than we thought. The situation is not so transparent,” said Schroeder.
And growth in Europe is on track: In its spring forecast for 2010 and 2011, published last week, the European Commission foresees “gradual economic recovery” for the EU’s 27 member states, including Britain. The commission forecast 1 percent growth in gross domestic product for the EU in 2010, compared with the previous year, followed by 1.7 percent growth in 2011.
“The improved outlook for economic growth this year is good news for Europe,” said Olli Rehn, EU commissioner for economic and monetary affairs. “We must now ensure that growth will not be derailed by risks related to financial stability. Sustainable growth calls for determined fiscal consolidation efforts and reforms that enhance productivity and employment.”
Ross Walker, U.K. economist at Royal Bank of Scotland, said Europe has clearly bought precious time with the rescue fund. “What the countries need to do now is use the time to enact fiscal reform,” he said, adding financially savvy countries will also be able to make a profit from their loans to Greece. “And in the end, that will help taxpayers.”
Goldman Sachs is even more bullish about growth in Europe: In a research note issued last week, the bank forecast 1.8 percent growth in GDP for the 27 EU member states in 2010, followed by a 2.5 percent rise in 2011.
“Significant trade linkages among European countries, stronger global growth and the increase in trade activity, particularly with Asia, have added a self-reinforcing element to the upswing. At the same time, we remain aware of the many structural challenges in the region, including the ongoing fiscal concern,” said the report.
The stock rebound on Monday was unable to dispel all sense of concern any more than the run-up in stocks in the preceding six months instilled absolute confidence in an unstoppable economic recovery.
Coming back from declines averaging about 7 percent last week alone, Paris’ CAC 40 added 9.7 percent on Monday to close at 3,720.29, London’s FTSE 100 picked up 5.2 percent to close at 5,387.42 and Frankfurt’s DAX increased 5.3 percent to end Monday’s session at 6,017.91.
In the U.S., the S&P Retail Index took its biggest stride forward since June, advancing 25.4 points to 468.69.
The sector remains off its recent high of 499.91, set April 26, but is still outperforming the broader market. Retail shares are up 14 percent for the year so far and appear to be living up to their reputation as early-cycle stocks, which lead the market out of a recession. Until the European debt crisis reached its boiling point last week, retail shares were enjoying the tailwinds of better consumer spending and stronger financial profiles after two years of cutbacks.
Joining in the rally Monday were Guess Inc., up 10.9 percent to $41.72; Urban Outfitters Inc., 10.5 percent to $38.55; Macy’s Inc., 9.3 percent to $23.97; Saks Inc., 8.8 percent to $9.30, and Abercrombie & Fitch Co., 8.3 percent to $42.38.
The Dow Jones Industrial Average advanced 3.9 percent, or 404.71 points, to 10,785.14, the largest jump for blue chip stocks since March 2009.
Asian markets, less affected by the turmoil in Europe but hit by losses that were only slightly smaller, picked as much as the Hang Seng Index’s 2.5 percent boost in Hong Kong and as little as the 0.4 percent gain experienced by Shanghai’s SSE Composite Index.
“What is clear is that the whole ‘recovery’ is fragile and demand is still very cautious. ‘Value innovation’ will continue to be a winning competitive factor,” said Umberto Angeloni, co-owner of Caruso, which manufactures formalwear for such brands as Dior Homme, Lanvin, and Ralph Lauren as well as its in-house Caruso and Uman labels. He was speaking of the European economy, but his comments could sum up the consumer mood worldwide.
“The bailout package seems substantial enough to stem the immediate pressure, but it means more debt and severe fiscal discipline in the years to come, thus still a depressing factor on demand,” he added.
Nick Hood, partner at Begbies Traynor Group, the London-based business consultancy and insolvency practitioners, stated, “The reality on the street is that everyone is fearful and uncertain. Consumers are hanging onto their money, and there are an awful lot of fragile retail businesses out there in the smaller, independent end of the market,” he said.
Then there is Greece, a country whose pride is wounded nearly as badly as its finances. Given the new austerity measures, the outlook for consumer spending there isn’t good.
According to IHS Global Insight chief European and U.K. economist Howard Archer, the perception in the markets is that the “European authorities have been behind the curve in their efforts to combat the crisis.…Although the package will buy time for the perceived vulnerable Eurozone countries, they still have to take the necessary austerity measures needed to rein in their public finances and tackle the fundamental structural problems facing their economies.”
Initial market reaction to the measures has been “very favorable [and temporarily at least] alleviates market concerns over the ability of Greece, Portugal, Spain and Ireland to meet their funding requirements over the next three years,” Archer said.
Although market reaction suggests the Eurozone measures have done their job, at least for now, CreditSights analysts David Watts and Louise Purtle pointed out the bigger test will concern the program’s actual implementation and its economic impact. They wrote in a research note that, in Europe, “there is little popular support for cross-border bailouts.”
The analysts described the measures as “breathing space, not a silver bullet.” They caution the issue of debt restructurings becomes a concern if the governments fail to meet their austerity targets, in which case their access to the Eurozone fund might be curtailed. “In that scenario, a default or forced restructuring becomes almost inevitable,” they concluded.
The Greek austerity measures and “the high uncertainty during the first half of the year are expected to be a significant drag on consumer spending [in Greece], with disposable income declining at a double-digit pace,” said Nick Magginas, senior economist at the National Bank of Greece. “Consumer spending on capital goods and consumer durables will continue shrinking at a high pace in the following months as increasing VAT rates and higher excise takes are likely to further depress consumer sentiment.”
A weaker euro, Magginas said, will do little to help matters: “While exports could benefit from the depreciation of the euro, the fact that the Greek economy is service-oriented, and dependent on raw materials, intermediate goods and energy from abroad, will also lead to increasing costs for a number of Greek companies.”
Evi Klaoudatou, marketing director of Attica, a leading Greek department store, said lower sales have had more to do with unstable conditions in the heart of Athens, as opposed to negative consumer sentiment, although demonstrators managed to shut down the downtown store on Panepistimiou Street for an entire day.
“We have to wait and see how consumers will react given lower incomes,” she said. “If the private sector is spared in terms of income loss, for instance. We shall see come December. We’re not making any predictions, but we remain cautious and proactive in terms of cost cutting.”
Lakis Gavalas, who introduced major apparel brands to the Greek market in the early Eighties, and who is the exclusive distributor of Burberry in Greece and Cyprus, said, “I witnessed the arrival of the crisis in other countries three years ago, so I was prepared. I started preparing my wholesale clients, by suggesting that they shouldn’t be spending 50,000 euros on orders, but go down to 25,000 euros. It worked, and it’s these people who are coping with the crisis right now.”