She’s got a closet full of luxury handbags, a jewelry box overflowing with gemstones and dresser drawers stuffed to the gills with designer togs. But even luxury consumers can fall prey to fears of recession and the roiling financial markets.

The first signs that luxury shoppers were beginning to tighten the reins on their spending emerged late last summer. By the end of the year, there was no denying that affluent consumers — the top 25 percent of U.S. households — were pulling back, and their confidence was slipping, too. Unable to escape the barrage of economic bad news, roller coaster stock market fluctuations and declining home values, this once avid-spending consumer put the brakes on free spending.

And retailers that cater to these well-to-do shoppers got whiplash. At Coach, domestic same-store sales slipped 1.1 percent during its second fiscal quarter. Tiffany reported a 2 percent decline in U.S. same-store sales during the eight-week holiday selling season, and Nordstrom said that December comp-store sales fell 4 percent. Saks Fifth Avenue squeezed out a 0.8 percent sales lift at stores open for a year or more, and Neiman Marcus posted a 2.9 percent sales increase, but those figures were a long way from the steady gains they’d posted in previous months.

Even brands that cater to the super rich were not insulated from economic pressures. Both PPR, which owns Yves Saint Laurent, Stella McCartney and Balenciaga, and Compagnie Financiere Richemont, the Swiss parent of Cartier and Baume & Mercier, reports that the pace of growth has slowed.

Pam Danziger, president of Stevens, Pa.-based Unity Marketing, saw the writing on the wall in early fall. Unity’s Luxury Consumption Index slipped 8.8 points between June and September; in December, it dropped 23.8 points to 63.6 — the greatest decline recorded since the marketing and consulting firm began its quarterly tracking study in January 2004.

The survey, based on the responses of 1,281 luxury consumers (average income $155,700 and age 46.6) suggests that affluent consumers are feeling the pain of the financial crisis, according to Danziger.

“There are a number of factors that have dragged down luxury consumer confidence, but foremost is a lack of confidence in the country’s executive and legislative branches — and particularly in their ability to lead the nation out of its economic malaise,” Danziger says. Other factors include the mortgage banking crisis, increases in the price of oil and the decline of the dollar’s value against nearly all major currencies.

Luxury consumers’ spending declined 21 percent between the second and third quarters of 2007 and remained flat in the fourth quarter, and near-term expectations aren’t any rosier, Danziger says. Thirty-nine percent of the respondents surveyed by Unity Marketing plan to spend less on luxury in 2008; only 16 percent expect to spend more.

Those figures mesh with monthly consumer data compiled by BIGresearch. Dianne Collins, market analyst for the Worthington, Ohio-based company, reports consumer spending intentions are tracking downward for every major product category and consumer confidence is now at a five year low, with only 26 percent of adults 18 and older indicating they’re confident or very confident in the economy.

“Generally speaking, consumers are delaying purchases,” Collins says. “They may want to buy a car but they’re anxious about signing on the dotted line. In the back of their heads is a nagging voice wondering, ‘what if I need the money a few months from now.’”

End game
The question on luxury retailers’ minds is: “How long will this last?” Economists and industry watchers don’t expect the current climate to change much until after the elections in November. Most say that regardless of who ends up in the White House in 2009, the prospect of change will likely boost affluent shoppers’ spirits, and thus their appetite for spending.

“We’re going to stay in this current environment for another nine months to a year,” says Michael Niemira, chief economist at the International Council of Shopping Centers. “By and large, I think the luxury retailer is in a better position to weather economic weakness, but they’re certainly not immune.

Caution reigns
Luxury retailers remain cautiously optimistic about the upcoming spring season and the remainder of 2008. It’s clear, however, that the double-digit sales growth to which many had become accustomed is likely out of reach. Still, if they can keep inventories in check, resist the urge to append promotions and ride the wave of foreign shoppers flocking to stateside stores, they’re betting same-store sales will grow — even if by smaller margins.
 

A silver lining will be international business. Several retailers will open new stores outside the United States, and they are hopeful that global sales will give corporate balance sheets a much needed shot in the arm.

Last month, Tiffany outlined plans for a high single-digit increase in U.S. retail sales for 2008, and a mid-teens gain in international retail sales for the same period. “Generally speaking, we are planning our U.S. businesses cautiously for the first half of 2008,” says CEO Michael Kowalski, “while planning for continued healthy international sales growth throughout the year.”

Coach CEO Lew Frankfort acknowledges that some of the brand’s customers traded down to lower-priced items during the final weeks of 2007, noting that the company was “not immune to a slowing consumer environment.” Still, a bright spot for Coach was a 13 percent increase in sales of their $400-plus handbags.

“It’s the middle class that is being hit,” Frankfort said during a call with investors. “The truly upper-income consumer does not seem to be affected.” He told investors that in light of “continued uncertainty,” Coach would not provide comparable-store sales guidance for the balance of the fiscal year. Still, he underscored the brand’s commitment to innovation.

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