Luxury After Lehman Brothers
NEW YORK (
) -- Luxury, since the collapse of
Lehman Brothers
, hasn't looked pretty.
In fact, the fall of the sector has been unprecedented. Not once during the major downturns of the past three generations -- not in 1974, 1989, 1992 or 2001 -- have wealthy consumers responded to an economic downturn by so radically smothering their spending habits. But today, the psyche of these consumers has undeniably changed.
"Frugality is the new black," Stifel Nicolaus analyst Richard Jaffe says. And this trend could last a decade. Because while Federal Reserve Chairman Ben Bernanke declared earlier this week that the recession is "likely" over, that's hardly the case for the luxury sector.
According to a recent survey conducted by The Luxury Institute, 77% of wealthy shoppers believe luxury is less important in today's economy, and only 40% say it's a good investment.
What's Next for Luxury
For this reason, Milton Pedraza, CEO of New York-based research firm The Luxury Institute, predicts the sector will not recover in the next 12 to 24 months. "The stock market has only made back half of what it lost, we need to do better than that before we see a true recovery," he says.
And even once a full recovery is realized, Pedraza expects spending levels to be nowhere near what they were several years ago for at least the next five to 10 years.
"Unless there is a new economic boom ... I do not see a true return to the luxury spending we saw several years ago," Pedraza says. "Luxury is cyclical; it doesn't grow any faster than the economy -- and there is nothing on the horizon to convince people to spend above their means."
Indeed, the hedge fund manager who once had $100 million in assets most likely now has $60 million, while the dentist who made $100,000 quite possibly makes $75,000 -- and his 401(k) has been slashed, Jaffe says. There is no reason to cry for either; they can both still afford a $200 pair of jeans. But it seems they are choosing not to.
"Their homes aren't growing in value, nor are their stocks," Pedraza says. "In the past, they weren't afraid to spend because they had those assets to mortgage their future. Those expectations of having those assets are no longer there."
Consider the survey by The Luxury Institute, which found that 58% of wealthy shoppers said they are spending more on essentials rather than on what they really want, and are spending the least on are jewelry, home furnishings and watches.
"Need to have and want to have are now two different things," says analyst Dana Telsey, of the advisory firm bearing her name. "The need is not as strong as it has been and price has gained in importance where it was never even a factor in the past."
Indeed, Pedraza believes that some sectors, like luxury housing, haven't even scraped bottom yet -- a bracing notion for luxury home builders like
Toll Brothers
(TOL) - Get Report
.
Worth noting, of course, is that sales comparisons in the luxury realm stand to get significantly easier in the second half of the year; it's hard
not
to achieve a strong report card when you're being graded on a curve against historically dreadful quarters. But even that might not be enough for some of the most damaged stocks in the sector.
Consider
Tiffany
(TIF) - Get Report
, which upped its full-year guidance after reporting a
30% drop in its second-quarter earnings
. CEO Michael Kowolski said even though economic and retail conditions remain challenged, stores are achieving small to modest sales growth year-over-year compared with the previous two quarters.
Of course, the company is achieving these "increases" only when stacked up against last year's dismal results. But this hardly means luxury shoppers are any better off than they were last year.
Price, indeed, has been such an important consideration for high-end shoppers that retailers have resorted to drastic markdowns, something rarely seen in the luxury sector prior to the recession. Most notable: the blaring 70% off signs at
Saks
(SKS)
last holiday season.
This focus on price has helped bolster the market share of such discount retailers as
TJX
(TJX) - Get Report
and
Ross Stores
(ROST) - Get Report
. Those off-pricers, on the whole, have been able to stock better merchandise as retail consolidation perpetuates.
As a result, both companies are outperforming the sector. In August, TJX saw same-store sales grow 5%, while Ross was up 6%. Meanwhile, on average, total same-store sales declined 5.7% during the month.
Losing the retail game to a bunch of discounters is probably just the wake-up call that high-end retailers sorely needed -- and several luxury sellers are visibly upping their games.
Coach
(COH)
, for one, is using its excess cash to invest in new product, like its
. The company is also making its first foray into apparel with the Reed Krakoff division.
Likewise, Tiffany has launched its "Keys" collection to drive traffic ahead of the holiday season. The line ranges between $150 for sterling silver to $15,000 in platinum and diamonds. The jeweler has been struggling with sales of items over $50,000.
Nordstrom
(JWN) - Get Report
, meanwhile, has held up better than its competitors by emphasizing its famed customer service and its tier-pricing strategy. Same-store sales at Nordstrom declined "only" 7.6% in August, while competitor Saks plunged 19.6%.
And these days in the luxury sector, losing by less than your competition is as close as you can get to winning.
-- Reported by Jeanine Poggi in New York
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