Retail, Luxe Sectors Battle Shock Waves From War and Sars

Goldman Sachs in London downgraded its stance on the European luxury sector due to concerns over an extended war in Iraq and the deadly SARS virus.

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.
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