PRESSURE ON LUXE SECTOR INCREASING
Byline: Miles Socha
LONDON — Ready-to-wear and leather goods are likely to bear heavy pressure as troubles mount in the luxury sector, while diversified cosmetics firms may benefit as consumers trade down to less expensive products.
Those were among the conclusions reached at a Goldman Sachs conference here Monday as executives and analysts sought to gauge the impact terrorist fears and growing economic uncertainty will have on high-end consumers in the coming months.
“We’re still cautious on luxury goods, as we have been since November of last year, but we upgraded the cosmetics sector shortly after the Sept. 11 attacks,” Jacques-Franck Dossin, luxury goods analyst at Goldman Sachs and host of the conference, told about 120 investors gathered at the Four Seasons Hotel.
Dossin compared the performance of luxury and cosmetics firms during the Gulf War and Asian crisis. He noted that, during the Gulf War, earnings per share for luxury firms dropped 13 percent, while stock prices were off 38 percent. By contrast, the Asian crisis saw earnings fall 21 percent, with stocks plummeting 48 percent.
Among cosmetics firms, the Gulf War pulled EPS down 3 percent and stock prices down 19 percent, while the Asian crisis eroded EPS 5 percent and stocks 31 percent.
Dossin said the market has so far demonstrated a willingness to overlook the worrisome headlines in the short term — with luxury giants LVMH Moet Hennessy Louis Vuitton, Compagnie Financier Richemont and Gucci Group all issuing profit warnings — to an eventual rebound starting in the fourth quarter. But the luxury sector faces threats from:
A shift in consumer sentiment away from the “conspicuous consumption” of the easy money days of the Eighties and Nineties.
A sharp drop in travel shopping, which accounts for 40 percent of all luxury goods sales.
Dossin said Japanese outbound travel is projected to plummet as much as 60 percent in the fourth quarter, with transatlantic and European travel estimated to be off 30 and 50 percent, respectively, in the same period. Japanese consumers, who account for 46 percent of all luxury sales, are being impacted by yen weakness and terrorism fears.
“Safety risks may be more important than the size of their wallets and the currency situation,” said Dossin.
Indeed, discussion was dominated by predictions of how consumers will behave in the face of the global crisis. Executives were asked to identify the most resilient parts of their businesses and give their theories on whether shoppers will play it safe, seek cheerful products or stay out of the stores completely.
Most sessions and panel discussions were closed to the media, but some companies offered commentary.
Michael Kowalski, president and chief executive officer of Tiffany & Co., said silver and classic jewelry have been its strongest categories since Sept. 11, with “more elaborate products” selling less successfully. Kowalski also said high-end products priced at more than $50,000 have been hurt, even if they represent a minority of sales.
Macadou Fall, president of Italian firm Furla in the U.K. and France, said the “lowest price categories,” especially jewelry, have been least affected in the wake of the terrorist attacks in America.
“We think accessible luxury will be a key success factor in the next year,” added Giovanni Burani, ceo of Mariella Burani Fashion Group, whose flagship rtw label, Mariella Burani, is priced about 30 percent less than collections like Prada and Gucci.
Dossin took a stab at projecting which luxury brands might fare best in the current climate, suggesting that more exclusive, but less conspicuous, brands like Hermes, Cartier and Bulgari may suffer less than aspirational, fashion-driven labels like Gucci, Prada and Louis Vuitton.
In beauty, he said European companies like L’Oreal, Wella and Beiersdorf may reap the benefits of consumers seeking lower-priced products, while more “aspirational” products may face a greater risk.