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High-End Retailers Face Stock Slump on Reports of Emerging Market Constriction

Luxury retailers such as Coach, Burberry and Tiffany and Co. have faced a stock slowdown over the past two months on news that developing markets in Asia will not be able to continue their blistering growth rate.

Reduced spending from Chinese consumers has already created a difficult Q2 for many luxury imprints. A drop in business at Tiffany and Co.’s flagship New York store led a month of slowdowns for the jewelry retailer, which wound up curtailing its profit projections for 2012. Shares in Tiffany and Co. dropped 6.8%, to $57.59, on the news.

High-end retailers Burberry and LVMH reported news, and both stocks have posted month-on-month declines with LVMH trading at 114.10-euro per share and Burberry trading at 1,330.00-pounds per share, as of June 25.

Though retailers have cited slow spending by financial sector employees and the need for heavy discounting as possible causes, the slowdown is being blamed primarily on sluggish spending by Chinese consumers, who have proven reluctant to spend both domestically and internationally.

Despite recent cooling in their stock prices, many luxury brands have actually shown impressive performance in the past two years, regularly exceeding projections.

Handbag and accessories retailer Coach posted a year-on-year growth of 15.3% in 2011 while Tiffany and Co. fared even better, showing an 18.1% year-on-year growth, with net sales of well over USD3.5 billion. Even luxury department store Neiman Marcus, still down 4.5% for the three-year period beginning in 2008, posted a 2011 year-on-year growth rate of 8.1%.

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If market watchers have soured on luxury retail’s prospects, the reason might be found in the perception that China holds the key to luxury retailers’ futures. Chinese consumers are expected to form the world’s largest market for luxury goods by 2015. Despite an economic growth rate of 8.2% in 2011, far lower than in recent years, Chinese consumers purchased $2.4 billion worth of luxury goods, a 100% year-on-year expansion from 2010. In 2012, socially mobile Chinese consumers are expected to spend more than $3.2 billion on luxury goods.

Despite this, Chinese consumers do not yet contribute the lion’s share of profit to such brands as Burberry, Coach, LVMH or Richemont, with most brands having roughly 10% exposure in China.

American and European stores form the majority of their business, making these retailers far more susceptible to a slowdown in European or American consumer behavior than to a similar decline amongst Chinese consumers. As pointed out by CNBC, a hypothetical 5% decline in Burberry’s European sales would have to be offset by a 20% jump in the retailer’s Chinese operations.