Luxury goods: Tremors from the global selloff

Coach, Tiffany and others have profited from our ravenous appetite for luxury goods. Now stock market tremors may derail that gravy train.

By Parija B. Kavilanz, staff writer

NEW YORK ( -- It's no secret that Americans love their Louis Vuitton bags, Tiffany bracelets and Gucci sunglasses. And how.

What's been less noticed is that sales of luxury goods, while still strong, are slowing. To be sure they're outpacing sales at chains catering to the masses like Gap (Charts) and Wal-Mart (Charts), which have been hurt by the housing slowdown, merchandising problems and other woes.

But then came last week's global stock selloff, which drove the Dow industrials down 416 points - the biggest point loss since right after Sept. 11.

Suddenly, even the most ardent proponents of the luxury sector's resilience are turning cautious.

"Marginal millionaires are looking at their net worth. Their realtors tell them they're seeing more 'For Sale' signs, home inventories are huge and home values are flat or down," said industry expert Milton Pedraza. "Then you get a 500-point drop in the stock portfolio and these consumers will feel it when they calculate their net worth."

"I'm not saying that affluent consumers will stop buying the $8,000 suit. They may opt for a $3,000 suit instead," he said.

What does that mean for the luxury market?

The Luxury Institute, a New York firm that researches the high-end market, last month conducted a survey of 820 "high net-worth" consumers nationwide asking them whether big drops in the stock market coupled with declining home values would affect how much they buy.

Pedraza, who heads the institute, said the results were significant. Forty percent of consumers earning $150,000 or more a year said a decrease in the value of their assets - either their homes or their stock holdings - would make them curb their purchases of luxury goods and services.

The survey showed that another third of extremely wealthy shoppers - worth more than $5 million - said they too would consider spending less.

"Bear in mind that these households represent the top 10 percent of upper-income Americans and between 50 to 60 percent of consumption of luxury brands," said Pedraza. "So this could be the difference between a good year and a great year for the luxury sector."

Analysts estimate that Americans snap up about 30 percent of the estimated $150 billion global market for things like Prada shoes, Cristal champagne and other high-end products. The figure excludes cars.

Jim Hurley, a luxury goods analyst with Telsey Advisory Group, is looking beyond stock market fluctuations to other potential risks for luxury sales.

"I think the biggest risk to the sector are the geopolitical tensions in the Middle East and elsewhere and what's happening with currencies," said Hurley. "You have to remember that the market for luxury goods is truly global marketplace.

To his point, consumer anxiety triggered by Sept. 11 badly hurt U.S. luxury sales. But the sector gradually recovered and two years later high-end sales peaked at a 20 percent year-over-year growth in 2003. Sales subsequently have moderated, growing about 10 percent last year.

Pedraza said sales growth was set to slow this year, to about 5 to 9 percent, even before last week's market meltdown. Nevertheless, that still outpaces the 3 to 5 percent sales growth expected for the retail industry overall.

Secondly, Hurley said the strength of the euro versus the dollar will put pressure on Americans' purchases of high-end European goods since it makes imports from Prada, Fendi and Dior, for example, more expensive.

But hasn't the weak dollar also made the U.S. luxury market cheaper and therefore more attractive to overseas tourists?

"It has but the discounts are only marginal," said Hurley, explaining that well-run companies like Coach and Tiffany tend to adjust their prices to currency fluctuations in a bid to maintain their profits.

So far, at least, purchases at luxury merchants are running higher. Their closely watched monthly sales numbers haven't shown any red flags that would point to a slowdown in American's pricey splurges.

Handbag maker Coach (Charts)'s sales at stores open at least a year, a measure known as same-store sales, have surged nearly 20 percent every quarter over the past two years.

Tiffany & Co (Charts).'s quarterly same-store sales have gained more than 5 percent on average while high-end department store chain Nordstrom (Charts) has logged an impressive 6.8 percent monthly sales gain over the same period.

Retailers are due to report February sales numbers on Thursday. According to First Call, analysts on average expect Nordstrom to report a 5.7 increase in its same-store sales last month while Saks is expected to post a same-store sales gain of 6.3 percent.

Michael Silverstein, analyst with the Boston Consulting Group and author of "Treasure Hunt: Inside the Mind of the New Consumer", said he's optimistic the luxury boom could have another four years of life if income and job growth hold steady.

"If unemployment rose among college-educated young professionals and income growth among the top 40 percent of households gradually declined, that could affect luxury spending," Silverstein said. "For now both are relatively stable."

-- Analysts interviewed for the story do not personally own shares of the companies mentioned.

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