Lagging luxury signals global troubles

More weak reports could be the symptom of a bigger problem.

By InvestorPlace Sep 20, 2012 10:38AM

Ddiamond necklace, Image Source, CorbisBy Lawrence Meyers


IPLOGOLast month, I wrote about weakness in Tiffany & Co. (TIF), and my thesis was that luxury led us out of the financial crisis, so any slowdown there may foretell further recession. A certain deceleration is expected in this sector because of difficult year-over-year comparisons, but Tiffany’s organic revenue growth was only 2%. Ralph Lauren (RL) and Coach (COH) also came in weak.


And now Burberry Group (BURBY) has joined the list. Last week, the company warned that it would see only a 6% increase in revenue and that such a jump would be entirely due to new stores, while same-store sales would be flat. This contrasts with more than 60% revenue growth in the first quarter of 2011.


The company also said profits would come in at the lower end of expectations. So one by one, the luxury brands are starting to decelerate, and that worries me. It also worried the market, which sent Burberry shares down 21%.


This comes on top of not one but two warnings from FedEx (FDX). The more recent came as the company reported earnings and cut its 2013 forecast significantly -- to a range of $6.20 to $6.60 from $6.90 to $7.40. That’s a 10% cut on the bottom line, and reflects the company’s concerns about a global manufacturing slowdown.


Indeed, U.S. industrial production fell by the largest amount in three years. If the supply side contracts, that suggests consumers aren’t (and won’t be) spending as much as they have been, and that directly impacts consumer discretionary stocks. Add in high gas prices and double-digit real unemployment, and you start to see the problems in a even better light. Rival UPS (UPS) has expressed the same concerns about a global slowdown.


The real question with consumer spending, though, is whether the trend affects higher-income earners who purchase luxury goods. At first, it didn’t seem to as much. But a recent report showed that Americans lost 40% of their wealth as a result of the crisis, so even richer folk aren’t feeling as rich as they once did.


Now, the news isn’t all bad in the luxury sector. The French luxury company Hermes (HESAF) expects sales growth of 10% compared to last year’s increase of 18%. Sales in China were up 25% and 10% in Europe.And Salvatore Ferragamo saw Q2 profits up 23% on a 17% increase in sales. Even Ferrari set a sales record in both revenues and cars delivered in its first half and IPO-star Michael Kors (KORS) keeps plowing along.


Still, the lesson is that you want to be ahead of the curve regarding the global economy — certain stocks should be cut from your portfolio before that slowdown turns up in their earnings report. And right now, I’d be looking askance at the luxury sector and consider deploying that capital elsewhere.


As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.


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