Luxury brands are having finding the going tough under the current economic conditions in the U.S., says Jennifer Yousfi in Money Morning. And the slowdown in Europe is putting further pressure on the sector. Here Jennifer recommends two luxury brands that are likely to weather the global downturn…

Luxury jeweler Tiffany & Co. (NYSE:TIF) yesterday followed in the footsteps of other high-end brands when it announced strong fiscal second quarter results.

Tiffany’s net income increased to $80.8 million, or 63 cents per share, in the second quarter, up from $40.5 million, or 29 cents, for the same period a year prior. It was enough to beat mean analyst expectations of 55 cents per share and sent Tiffany shares up 10%.

“Tiffany did a lot better than investors feared,” Schick, an analyst with Stifel Nicolaus & Co. (NYSE:SF), told Bloomberg News in a telephone interview. “Luxury isn’t getting a ton better, but it is hanging in there. People are going to remain concerned about what happens next, given the state of the global economy and the global equity markets.”

And there’s the rub. Luxury brands such as Tiffany, Hermes International SA (PINK: HESAF) and the Gucci Group NV (PINK: GUCG) have managed to grow sales despite a sharp slowdown in U.S. consumer spending. But growing economic troubles in Europe, traditionally the biggest market for luxury goods, are starting to weigh on the minds of high-end retailers.

And while luxury sales growth in emerging markets is on the rise, it may not be enough to offset the slowdown in the maturing markets of the United States, Europe, and Japan.

Some high-end retailers are struggling to come up with new ways of nabbing customers, while others are carefully implementing focused marketing campaigns that build on their core competencies.

Shares of luxury goods makers are no longer a sure thing, but there are still some profitable picks if you know what to look for, and just as importantly, what to avoid.

Selling Luxury

Many high-end retailers were convinced that sales of luxury goods would continue unabated despite slowing global economies. And at first, it seemed they were right. But as the fallout from the global credit crisis unfolds, the luxury market is starting to feel the pinch that its mid-level brethren are already familiar with.

The luxury industry has clocked in five straight years of strong growth that culminated with a 6.5% jump in 2007. At one time, luxury sales were expected to advance at an 8% – 10% clip over the next several years. But growth like that is no longer feasible in today’s tough markets.

Bain & Co. Inc. has ratcheted its forecast down to a 2% rate of growth for the $270 billion luxury market this year.

“I’ve done this for a long time, and this is one of the most volatile times I’ve ever experienced,” Angela Ahrendts, chief executive officer of British brand Burberry Ltd. (PINK: BBRYF), told Fortune.

“The good news is that the sector is still outperforming others over the next two years,” Ahrendts says. “It’s just a matter of getting through the storm by focusing on the right markets, the right suppliers, and the right categories. We’ve got to run a tighter, smarter business.”

Indeed, the future is bright for the luxury sector, particularly as demand picks up in emerging markets where rapid development has resulted in the materialization of a new client base.

Sales of luxury goods in Asia, excluding Japan, jumped 100% over the past ten years, increasing from $14.7 billion (10 billion euro) in 1997 to $29.4 billion (20 billion euro) in 2007.  But despite the rapid growth, that region only accounted for 12% of global luxury goods sales in 2007 – only slightly more than 11% in 1997.

For now, even with the impressive growth rates, emerging markets aren’t ready to pick up the slack for the wealthier West.

Stick With What Works

Luxury retailers are doing everything they can to boost flagging sales, but some just can’t get over the hurdle. A June survey by the Italian trade group Altagamma found that operating margins at many brands were flat or falling, Fortune reported. Slowing sales and shrinking margins have led some firms to try to reach out beyond their core customer base.

For many, it’s a costly error.

“The biggest mistake luxury brands make is in not sticking with their core value system and core customer,” Suzanne Hader, principal at 400twin, a New York-based consulting company that focuses on luxury goods, told Forbes.

American handbag maker, Coach Inc. (NYSE:COH) has carved out success for itself by selling $300 handbags. But a recent attempt to go higher-end with its Legacy line, with handbags that retail for $1,100 was not only unpopular, it alienated the company’s core customers.

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More on this topic (What's this?)

Diamonds in the Rough: Two Luxury Brands Ready to Shine (Money Morning, 8/29/08)

Diamonds in the Rough: Two Luxury Brands Ready to Shine (Jutia Group, 8/29/08)

Slump Starting to Hit Luxury Goods (naked capitalism, 7/19/08)

Read more on Luxury Consumption at Wikinvest

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