Flat Burberry Sales Pull High-End Brands Down

After London-based Burberry Group PLC (LON: BRBY) reported flat comparable-store sales for its second quarter, market watchers are trying to digest cross signals in the luxury goods market, which was one of the first segments of the retail sector to claw its way out of the last recession in the latter half of 2009.

The performance of both luxury brands and the low-end discount retailers are closely watched because consumer spending by the wealthy is an indication they are more confident in the state of their finances, while an increase in performance for discounters suggests middle-class consumers are cutting back.

"The external environment is becoming more challenging," Burberry's CEO Angela Ahrendts said in the company's statement, explaining the slowdown.

Right now we see a climate where retailers like Wal-Mart Stores Inc. (NYSE: WMT) and Costco Wholesale Corporation (Nasdaq: COST) are doing well, while the performance of luxury brands is cooling. The news about Burberry sent shares of luxury retailers down, but not all market watchers say it's time to bail on the high-end brands.

Burberry's stock price plummeted on Tuesday toward its 52-week low, closing trades in London at $17.43, a 20.95 percent decline from Monday's close. Ralph Lauren Corp (NYSE: RL) was dragged down 3.18 percent to $155.21 as traders shed stock in luxury brands.

Burberry, which makes luxury clothes and accessories, reported flat sales growth for the quarter ended Sept. 8 for stores open for at least a year, a key indicator of a retailer's performance that excludes growth in newer stores that tend to outperform.

A slowdown in China has been cited as a major cause for the declining international sales performances for companies invested heavily there.

But not all retailers are hurting. Burberry's bad news come after Paris-based Hermes International SCA (EPA: RMS) reported on Aug. 30 a 28 percent rise in profits in the first half of its fiscal year compared to last year and raised its earnings estimate for the year.

So the question on many minds is which direction the luxury goods market is going as it enters the all-important year-end holiday shopping season.

"There's weakness in the luxury brand market, whether it's Tiffany, Coach or others," said Craig Johnson, president Customer Growth Partners in New Canaan, Conn., which provides research for Fortune 500 retail and other consumer services. "Euro luxuries are relatively weak, as are those that are dependent on China, which has taken a step down. Luxury is pulling back a bit from double-digit to middle-single-digit growth almost across the board."

New York-based Tiffany & Co. (NYSE: TIF), which was one of the first luxury brands to come out of the last recession with strong earnings in 2010, cut its fiscal year sales and earning guidance on Aug. 27, citing sluggish Chinese demand where it is more exposed to the country's economic climate than its competitors, such as Blue Nile Inc. (Nasdaq: NILE).

And despite a 12 percent increase in revenue in its fiscal year ended June 30, comparable-stores sales for New York-based Coach Inc. (NYSE: COH) was 1.7 percent, way below analysts' expectations of 6 percent. Coach makes handbags and other high-end fashion accessories.

But while established brands seem to be faltering, newcomers are doing much better.

"There are exceptions to the weakening luxury market," said Johnson. "Michael Kors and Kate Spade; they're newer brands and are seen as hotter brands."

Hong Kong-based Michael Kors Holdings Ltd (NYSE: KORS), designer, marketer and distributor of high-end apparel and accessories, is on a tear for 2012. So far its share value has nearly doubled, from $27.25 at the start of the year to over $50. After tripling its first-quarter earnings this summer and seeing comparable-stores sales rise 35 percent, the company expects to top Wall Street forecasts next year.