Amid unresolved tension in the Middle East, the SARS epidemic and weak retail sales in the U.S. and Europe, this is hardly a time to bank on booming sales to cover amounts due. But the money needed to open flagships in high-rent districts or invest in new brands has to come from somewhere.
And that means even more debt.
Overall, the high-margin luxury goods business appears better placed than some other sectors, such as telecommunications and car manufacturing, when it comes to debt loads. But there have been casualties — the most recent example being Cerruti parent Fin.part. Its mounting losses and crippling levels of debt amassed from a buying spree prompted auditing firm KPMG to reject the company’s accounts last month.
Will there be other victims? The experts say it is too early to panic, but it’s important that luxury goods firms watch their balance sheets and trim as much fat from operating expenses as they can to compensate for the continuing drop in demand. As for selling assets or brands, companies hoping for a quick buck may have difficulty getting favorable valuations, even if they can find interested buyers.
“This doesn’t seem like the right moment to be opening stores,” said Andrea Paladini, an analyst with Centrosim in Milan. “Having an overabundant number of stores than the market requires just for a matter of image doesn’t make sense.”
Still, at least some luxury goods companies continue to spend even as they sell assets they now deem nonessential. LVMH Moët Hennessy Louis Vuitton went through a several-year-long buying spree of brands and accumulated losses at some of its units, like duty-free store chain DFS and the U.S. arm of its cosmetics retail business, Sephora. Yet its net debt of $6.69 billion at the end of 2002 remains dwarfed by its current market capitalization of $23.91 billion. (Dollar figures have been converted from the euro at current exchange rates.)