War and disease are coalescing to create an ever-darkening cloud over the luxury and retail industries.

Growing concern over the deadly pneumonia called Severe Acute Respiratory Syndrome, or SARS, has disrupted industry travel to the Far East, while the epidemic and the war in Iraq are hurting consumer confidence and travel flow in Asia, which fuels some 30 percent of luxury sales. The disruption caused luxury goods analysts on Wednesday to revise their already-downbeat forecasts for the sector, with some warning that, in a worst-case scenario, it could further reduce luxury groups’ profits by up to 15 percent.

This story first appeared in the April 3, 2003 issue of WWD. Subscribe Today.

Another sign of the disruption SARS is creating in the industry came on Wednesday when the Swiss government barred about 400 exhibitors from Hong Kong, China, Vietnam and Singapore from participating in the prestigious Basel World Watch and Jewelry show, which gets under way today. However, the measures do not apply to visitors who have arrived from countries reporting outbreaks of SARS, which has been spread around the globe by travelers.

The Hong Kong Trade Development Council, which represents 317 firms, said it was “disappointed and surprised” that the decree was issued after most Hong Kong exhibitors had arrived in Switzerland. It added that it had sought legal counsel on the restriction.

Several U.S. retailers already altered their travel plans to Basel because of SARS and the war. While executives from Neiman Marcus, Tourneau and London Jewelers are already there, such retailers as Saks Fifth Avenue, Mayor’s Jewelers and Mayfair Jewelers are staying away this season.

Lauren Kulchinsky, vice president and fine jewelry buyer at Mayfair Jewelers, noted: “We decided against going because we felt it wasn’t the wisest decision to go overseas right now. And with SARS…because there are so many different types of people that attend Basel, I didn’t want to be in danger of being quarantined coming home.”

SARS also is having other effects throughout the sector and at all levels. Ferragamo chief executive Ferruccio Ferragamo warned Wednesday that both the war and the epidemic will impact the industry for months ahead. “If we can get through 2003 and have sales in line with those of 2002, it will be a good thing,” he told WWD as the company announced that 2002 sales fell 8.7 percent to $638.29 million from $699.5 million a year earlier.

Ferragamo said he had just returned from a trip to Asia and felt the presence of the “scary” pneumonia virus sweeping the region. But he said that overall, he thinks the disease poses less of a threat to the industry than the ongoing conflict in Iraq.

“Certainly at the moment, the fears in Europe and the U.S. over the war are more of a concern than the virus in Asia,” he said.

But retailers and manufacturers are increasingly canceling trips to the region after the World Health Organization warned travelers to avoid affected countries in the Far East unless it was absolutely necessary to go there. The World Health Organization estimates there are now 2,223 cases of SARS in 18 countries, with at least 78 deaths from the disease.

At the mass market level, Wal-Mart acknowledged Wednesday that there has been some postponement of traveling, but no cancellations of trips, according to spokesman Tom Williams. “We are paying close attention to SARS and supplying all our associates with as much information as we receive it. If they have any question, they can contact our people at the home office. We have postponed some trips, but I wouldn’t say we canceled anything,” he said. Wal-Mart associates do much importing from the Far East, where the company also operates stores. The spokesman had no details on what trips were postponed.

Terry Lundgren, president and ceo of Federated Department Stores Inc., said, “We are not traveling to Asia. We stopped a week ago, due to the flu, and won’t resume until we all get a better handle on this.”

He added that personnel in Federated’s Hong Kong office have also been instructed not to travel, which primarily involves going to China.

Federated Merchandising staff does travel frequently to the Far East for importing for its private brand programs, though staff from Federated store divisions also do some traveling. As far as other parts of the world, “we’ve asked people to be very conscious of the fact of what’s going on around the world, and only take trips they believe are very important,” Lundgren said. “We’re leaving the decisions in their hands, but Federated is following the government’s lead,” which, he noted, is to be mindful of world events and to be prudent on travel decisions — although there have been no official government proclamations not to travel. Lundgren said that this time of year, there would be very little traveling for the divisions, though one exception would be Bloomingdale’s buyers going to Italy or France for some home furnishings.

For higher fashion stores, such as Saks Fifth Avenue and Bergdorf Goodman, it’s not really a travel period right now, and the next big round of trips to Europe will be in June for the men’s wear shows. Executives from these stores indicated traveling is currently more of an issue for suppliers. “It’s more of a story for manufacturers than for us,” said Ron Frasch, chairman and ceo of Bergdorf Goodman. He said Bergdorf’s, and its parent, Neiman Marcus Group, have for a while been tightening up on travel spending, anyway. “Everybody is trying to spend less money.”

As for luxury brands, several banks have reevaluated their outlook for the market. Goldman Sachs in London on Wednesday downgraded to cautious from neutral its stance on the European luxury sector, due to the likelihood of an extended war in Iraq and mounting concerns about SARS.

Goldman analyst Jacques-Franck Dossin also dropped LVMH Moët Hennessy Louis Vuitton from its “current investment list” of stocks expected to provide a return of at least 20 percent over the next year. Besides the impact of war and SARS, rising terrorism threats and the specter of a boycott of French products are worsening LVMH’s operating circumstances, Dossin believes. The investment firm maintains its outperform rating on LVMH and a positive medium-term view, but said the weaker environment prompted the removal.

Dossin noted that SARS concerns are hitting home with Japanese consumers, who are extremely risk-averse but vital to luxury firms, accounting for some 40 percent of sales — more than half of that amount purchased while traveling.

“Their travel patterns have historically been very dependent on safety perceptions,” Dossin writes, citing the Gulf War and the 1998 “chicken flu” as recent examples. “In the two months following Sept. 11, Japanese travel flow was down around 40 percent.”

Andrew Gowan, luxury analyst at Lehman Bros. in London, said he’s calculated that reduced travel spending is likely to have an impact of at least 1 to 2 percent on revenues and 3 to 5 percent on profits for luxury issues in 2003. This “best-case” scenario is based on how consumers responded during the Gulf War, which was less severe than the Asian Crisis or Sept. 11.

In the worst-case scenario, sales should be adjusted down 3 to 5 percent and profits down from 5 to 15 percent, he said. But the fact that many luxury stocks are down by 10 percent or more, since the first military strikes on Iraq suggests that the market is behaving more on “sentiment” than historical examples, Gowan said.

In her most recent weekly report on the luxury sector, Morgan Stanley analyst Claire Kent noted that SARS and war represent “significant setbacks” to Hong Kong’s inbound tourism that could cost $200 million in lost sales over the next two months.

“We believe that non-Japan Asia will continue to see a difficult 2003, due both to negative currency impact and lack of tourism,” she wrote.

In his LVMH note, Dossin characterized the firm as the “strongest self-help story” in the sector, given the extensive restructuring, especially at Sephora and DFS. He noted, however, that he expects a slowdown is the coming months due to subdued travel flows, trimming full-year DFS sales estimates from a 2 percent gain to a 1 percent loss.

He also noted that consumer boycotts against French products, in retaliation for the French government’s vocal opposition to the American-led war in Iraq, represent a “heightened” possibility. “This would presumably hit logo products harder,” Dossin wrote. “We estimate logo products represent over 60 percent of Louis Vuitton’s sales and profits.”

Sagra Maceira de Rosen, a J.P. Morgan analyst in London, wrote in a research note that luxury goods in general see about 13 percent of their revenues from Southeast Asia. So far, the analyst noted that sales levels in Hong Kong average 50 to 70 percent below plan. Of concern if the epidemic progresses is an expected decline of Japanese tourists to Hong Kong and other countries in the region. That timing would coincide with upcoming key national holidays: Golden Week, an annual Japanese holiday from April 29 to May 5, and the Labor Holiday week for the Chinese from May 1 to 9.

Canceled trips from Japanese visitors, who are likely to stay closer to home, will boost sales domestically, while other typical tourist draws could be affected.

According to Maceira de Rosen, other key shopping destinations for Golden Week are Hawaii and Korea. Hawaii, she noted, is also being impacted by the ongoing war in Iraq. Korea so far has not reported any cases of SARS.

As for Chinese mainland travelers, they account for about 20 percent of sales in Hong Kong. So far, sales in Hong Kong that are attributable to visitors from the mainland are down 10 percent. Maceira de Rosen concluded in her report that visitors from the mainland, where the epidemic originated, don’t appear to perceive any additional risk in visiting Hong Kong.

As for overall sales trends, she wrote, March was a difficult month for the luxury sector because of the Easter holiday shift to April 2003 from March 2002 and dampening sales in the U.S. market and in European capitals as a result of the start of and ongoing Iraqi war.

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