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The bubble of luxury has plenty of fizz in it yet.

While there are signs the explosive growth seen in the sector so far this year is beginning to slow amid uncertainty over the impact of high interest rates, the presidential election and the war in Iraq, most observers believe luxury’s good times will just keep on rolling, at least through 2005. Such players as Louis Vuitton, Gucci, Bulgari, Tod’s, Coach and Cartier are expected to have double-digit growth through next year.

By geographic segment, business in Europe has stabilized and the U.S. has shown buoyancy after a slight bump, while Asia is quickly becoming a hotbed for luxury boutique retailing.

Designers from Milan, Paris and New York remain optimistic about business. And they should be, as consumers vigorously buy their clothing, leather bags, shoes and accessories.

The optimism is fueling another spurt in store openings worldwide. Ralph Lauren earlier this month opened Polo’s first store in Milan, a 16,000-square-foot palazzo that is believed to be the designer’s most expensive store to date; Fendi is said to be planning to open 15 stores a year for the next three to four years; Tod’s has opened 38 units during the past 18 months, and Louis Vuitton last week inaugurated a 9,700-square-foot store in Shanghai as the latest arrival in that booming market. These openings are on top of the string of other new stores arriving almost weekly in developed markets such as the U.S. and developing countries such as Russia and China.

In reporting a 49 percent leap in first-half net profits at LVMH Moët Hennessy Louis Vuitton, chairman Bernard Arnault said the “second half is looking very good for the group as a whole. The world is being driven by economic growth, even if we are not feeling it so much in Europe.”

Speaking earlier this month about Gucci Group’s first-half performance, chief executive officer Robert Polet was also upbeat. He cited a “mini boom” in luxury spending in the U.S., thriving sales in Asia Pacific and strong tourist spending by Japanese in South Korea and Hawaii.

“We think overall, companies have bounced back from the Iraq and SARS crises,” said Rupert Trotter, an equities analyst at Isis Asset Management in London. “Russia, India and China — and the Chinese travelers — especially are becoming major contributors to growth in the luxury goods sector, adding 3 percent to demand year-on-year, each year.”

This story first appeared in the September 28, 2004 issue of WWD. Subscribe Today.

Trotter sees the luxury business in Europe as stable, and feels the U.S. customer is “more resilient than a lot of people expect.”

Still, there are some bearish takes on the segment as several analysts and a few vendors offer a more cautious view — especially when looking out to 2005.

Claire Kent, chief luxury analyst at Morgan Stanley in London, expects slower growth in 2005 and a flattening of the yield curve. In a report released Friday on Swedish fashion giant Hennes & Mauritz, Kent highlighted the likelihood of sustainable growth for the next decade.

“[This] sets it apart from luxury companies where growth rates are likely to fall over the next 10 years, primarily because, by its very nature, luxury distribution requires exclusivity,” she wrote.

Antoine Colonna, analyst at Merrill Lynch in Paris, just released a hefty report on the luxury sector suggesting much lower sales growth down the road. “We believe most luxury brands will find it increasingly difficult to grow their sales in the coming years if they do not find ways to offset the increasing maturity of their store networks,” the Merrill Lynch report noted.

According to the analysis, the brands most likely to continue growing sales without opening new stores are Louis Vuitton, Cartier, Coach, Gucci and Hermès.

Regarding Hermès, management offered their take on the prospects for the luxury segment. “The trend remains very good, but the whole year 2004 will not be as good as the first half,” Patrick Thomas, co-chief executive of Hermès International, said recently, referring to more difficult comps ahead for the French luxury firm. “We’re still growing, but not booming. We are dealing now with a single-digit growth pattern.”

That is not a bad place to be in the market, especially during a presidential election year in the U.S., a time that could stir the anxiety level of luxury spenders.

Pam Danziger, president of Unity Marketing and author of the book “Why People Buy the Things They Don’t Need,” stressed in an interview that the uncertainty about the economy and the outcome of the presidential election are two key aspects that have led to a slight deceleration of luxury spending. “The affluent people of the luxury market are very in-tune to the stock market, and they are very educated, so they can understand what all the pundits are saying on TV,” she said. “Uncertainty is very, very bad for projecting the economy. When people are uncertain, they hold back.”

A strong win by either President Bush or Sen. John Kerry would be a positive for luxury spending. That’s because for the near term, a major uncertainty would be resolved and that would help rebuild consumer confidence. In contrast, if the election is extremely close, it would stall luxury spending, according to Danziger, since people would remain confused.

But for now, business is booming. Bulgari ceo Francesco Trapani said his sales data from the summer months are reassuring, and the company does not predict a slowdown at the moment. He said the U.S. market is going very well and local customers in Europe are partially making up for slower tourist flows. As for Japan, he acknowledged that market conditions are more challenging than they were in the past.

“Looking toward the end of this year and on to 2005, if the current economic and geopolitical environment stays the same and doesn’t worsen, I think Bulgari will make progress,” Trapani said.

Sergio Loro Piana, co-ceo of Loro Piana, expressed similar optimism, citing an 18 percent jump in sales of finished products for the first six months of the year and even higher growth rates in July and August. He said this growth was particularly impressive given that Loro Piana has minimal exposure in Asia so the company didn’t benefit from easy first-half comps on the SARS epidemic. At the same time, he stressed that Loro Piana’s situation is different from that of larger groups and brands and is seeing large growth rates because it is still an emerging brand far from its saturation point.

“The bigger the piece you are of the cake, the more you have to care about the dimension of this cake,” he said. “Am I worried about the world? Like all people, I’m worried about the world and the economic and geopolitical situation, but I have to go back to my desk and work.”

An Armani spokesman acknowledged that sales in the U.S. in June were slower, but they rebounded shortly afterward. “Certainly the month of June was not as strong as March, April and May; however, in August and in the first days of September we have seen encouraging signs that the positive trend is continuing,” he said.

Giacomo Santucci, president and ceo of Gucci Group’s Gucci division, said it’s important not to “overreact to market difficulties,” whether it’s a strong euro or “economic growth in certain regions of the world.” He said Gucci is still planning to open in new locations like Berlin, Shanghai, Guam and Osaka.

“We continue to invest in the Gucci brand by maintaining adequate advertising budgets and expanding the retail network,” Santucci said.

Kim Winser, chief executive of Pringle, who has been spearheading the company’s relaunch, said she thinks the segment will experience a case of “survival of the fittest.”

“There will be a number of luxury brands that will continue to struggle, and others that are going to do well,” said Winser, who is expecting sales growth of 30 to 40 percent in the 2004/2005 fiscal year. The privately owned Pringle does not release sales or profit figures.

“The strong brands are the ones that are innovative with their products, and exciting and creative with their marketing,” she explained. “With regard to marketing, I think it has a lot to do with talking to — and seducing — the individual.” Winser named Vuitton and Marc Jacobs among the brands that will continue to thrive in the coming year.

With regard to Pringle, she said Russia, South Korea and Italy are doing particularly well. She said the U.S., where Pringle has been selling for the past 18 months, still offers enormous potential and she’s upbeat about growth prospects there.

For some firms, taking a cautious outlook is the best way to approach the complexities of global luxury sales.

Johann Rupert, chairman of Compagnie Financiere Richemont SA, said in a trading update earlier this month that the market is “undeniably stronger than at this time last year.”

“The sustainability of the economic recovery in the U.S. is still unclear and, although we are seeing growth, Europe is still a very sluggish market,” Rupert said. “Fortunately, we continue to see strong growth in the Asia-Pacific region and a gradual improvement in Japan.”

With regard to Richemont, he said the uplift in sales the first five months of the fiscal year, which began in April, will result in “significantly improved” profitability for the group in the first half.

Regarding Japan, Rupert believes that domestic consumption there is not yet benefiting fully from the improving economic situation in the country.

Sales in Japan, which accounts for at least 30 percent of all the luxury goods sales, may have slowed in the first half because luxury clients, who stayed home last year because of SARS and the Iraq war, are traveling more. Simultaneously, there’s been a push by the high-end brands into China.

Tiffany & Co. said Monday that it plans to open its second location in China on Wednesday, a 1,300-square-foot boutique in Shanghai. The store will be in the City Plaza shopping center on the ground floor of the Jiu Guang department store. It will carry an array of jewelry designs, including a new engagement ring from the Tiffany Legacy Collection, as well as the Tiffany Mark T-57 watch that retails for between $1,950 and $3,250 in the U.S., according to the company’s Web site.

“As a center of taste and style, Shanghai is an ideal location for Tiffany and is consistent with our long-term strategy of expanding into key markets around the world,” James E. Quinn, president of New York-based Tiffany, in a statement.

Although Tiffany has experienced weaker sales in Japan of late, international retail sales made up 39 percent of the company’s total 2003 revenue of $2 billion. The company’s other store in China, which opened in December 2001, is at The Peninsula Palace Hotel in Beijing.

This sort of growth in Asia bolsters many bullish outlooks — something LVMH stressed last week by hosting a field trip in China for luxury analysts.

Vuitton, which boasts 40 percent market share in China, told analysts it tripled sales there over the last three years — and trends are accelerating in 2004.

“Five years from now, European luxury brands will have a much more balanced customer base and thus will be less dependent on Japanese clients,” Antoine Belge, analyst at HSBC in Paris, wrote in a research note about the LVMH field trip.

Earlier this month at its press conference about first-half results, Vuitton president Yves Carcelle trumpeted enormous potential in China, noting that the massive nation boasts 320 million people between 20 and 34 years of age: the ideal target for fashion and luxury goods. This compares with only 27 million Japanese of that age segment.

Furthermore, Vuitton predicts 20.2 million Chinese will travel abroad this year, with the numbers catapulting to 49 million by 2008 and 100 million by 2015.

Besides the spectacular growth in Asia, HSBC’s Belge also highlights strong long-term growth prospects in the U.S. for European luxury brands. [See separate story, page 10.]

But for every optimist, there’s always one from the half-empty camp. “There is today a question mark hanging over the cyclical growth leg for the [luxury] sector as most cyclical drivers have stabilized or worsened in the U.S.,” wrote J.P. Morgan Chase & Co. analyst Melanie Flouquet in a recent research note.

Milton Pedraza, ceo of the New York-based Luxury Institute, predicted luxury spending will decelerate from 2003-2004 highs to more historical levels in 2005. “The consensus and what we’ve seen in our research is that there is throttling back gently on spending,” he said, cautioning, “it’s not this fall-off-the-cliff kind of effect.” Rather, he calls it a deceleration of growth. “You’re still going to see growth…of 10 to 15 percent for the balance of the year and through 2005,” he said.

This could be a signal that consumers are returning to more historical levels of luxury spending, but potentially to the guarded levels of 2003, as fears of terrorism remain on their radar screens and the unrest in Iraq continues. “We’re in a time of significant uncertainty: the Iraq war, slow job growth, the flat stock market, the election year. The tightness of the presidential election is an element of uncertainty that does affect the wealthy spending,” said Pedraza in a recent telephone interview. “A lot of these macro factors don’t seem to be getting better.”

Currently, however, concerns over reduced spending in the luxury market stem from weaknesses already seen in U.S. retail sales, which added 0.8 percent in July but dropped 0.3 percent in August, according to the Census Bureau. “The high-end segment does not seem to have participated in this [retail sales] slowdown and to have fared better, but luxury is a late cycle so [it] could see a slowdown at a later stage — closer to the all important fourth quarter,” Flouquet wrote.

Still, a bearish analysis fails to explain the strength of retailers such as Neiman Marcus. After the company reported in early September fourth-quarter earnings of 42 cents a share, which blew away estimates for 36 cents, Eric Beder, an analyst at J.B. Hanauer & Co., lifted his full-year 2005 earnings estimate on the company to $4.52 from $4.32. Beder is very bullish on Neiman’s and the luxury market in general, calling it “on track for even higher heights.”

As Beder wrote: “By any measure, fiscal year 2004 was an incredible year where all the pieces came together in a spectacular way for Neiman Marcus; that said, we believe the drivers remain in place, such as exciting fashion statements, highly focused management, continued margin opportunities, for the high-end party to have at least a few more soirees.”