A shirtmaker's recession tale

David and Kelly Hamilton, co-owners of Houston-based Hamilton Shirts.

Job cuts on Wall Street is denting demand for $300-$500 custom-made shirts.

NEW YORK (CNNMoney.com) -- As scary recession headlines gain momentum, a $300 to $500 custom-made shirt can quickly lose its appeal, even to the wealthiest consumer.

That's especially problematic if your entire business is built on sales of pricey, hand-crafted men's shirts.

Houston-based Hamilton Shirts, one of the nation's few custom shirtmakers, is exactly in that predicament - and not for the first time.

The 125-year old family-run business, currently run by the brother-sister team of David and Kelly Hamilton, survived the Great Depression, and the recessions of the early 1990s and 2001-2002.

So while David Hamilton, the 29-year old former Lehman Brothers investment banker, is drawing comfort from the company's past ability to ride out economic downturns, he's worried that every downcycle still poses its own unique set of challenges.

While the company's sales jumped an impressive 20% to $10 million in 2007, he said the sales growth so far this year has noticeably slowed.

That trend corresponds with the Luxury Institute's forecast, which calls for sales of luxury items to be flat to down 10% in 2008. The firm is an independent rating and research organization focused on the high-end retail market.

Hamilton pointed out a few reasons, including "trading down" among some of the company's well-paid clientele and the weakening dollar, for the sales deceleration.

First, although CEOs and independently wealthy millionaires - whose spending habits aren't tied to the state of the economy - account for 80% of its 20,000 clients, he said the remaining 20% are customers who "aspire" to high-end living.

"When this 20% [of customers] get a bonus, they feel good and they buy a custom-made shirt," he said. "That's a lot of our business."

But as Wall Street steadily trims its work force in the investment banking and mortgage-related businesses, and with bonuses in jeopardy, Hamilton Shirts has been losing these customers. Hamilton anticipates they will now "trade down in their spending rather than trading up."

Milton Pedraza, CEO of the Luxury Institute, agreed.

"Luxury spenders are a split segment," he said. "There are 10 million empty nesters who have lots of money and they aren't scaling down in their spending."

In the single-digit millions are millionaires with kids "who are paring down somewhat," said Pedraza.

Lastly, the deep-pocketed spenders are comprised of single professionals who earn between $150,000 to $300,000 a year, but "with no net worth."

"This segment has been spending robustly over the last two years," Pedraza said. "They're cutting back now because of the situation on Wall Street."

A second reason for a sales decline is the weakening dollar, which has raised import costs of fabric that the company gets from mills in Switzerland and elsewhere in Europe.

Third, Hamilton said the business was also taking a hit from general economic malaise that has depressed retail sales across sectors since the past holiday shopping season.

"When times are tough, bankers and lawyers tend to wear mostly plain white buttoned-up shirts," said Hamilton. "Like they say, you don't wear a bright shirt to a funeral."

Still, he's optimistic that Hamilton Shirts will once again ride out this latest economic storm.

"Look, the most important thing is we don't have any debt," Hamilton said. "That's why we've been around for 125 years. We're operating on cash flow."

"We're a small company. When we get the bill, we pay the bill," he added.

While Hamilton doesn't want to sound cavalier, he sees a silver lining in this difficult retail environment.

"There's great opportunity for some people in tough times. You get thinning of the ranks," he said. "You can grow your business by taking someone else's. I think we will gain some market share when [the recession] is over."

His three tips to other family-owned businesses: "Focus on your existing customers, focus on your margins and focus on your overhead costs."

"If you can still make money, you will be OK."