The stars have aligned for the luxury industry since the global recovery began. But the earthquake in Japan is a reminder of how quickly tragedy can change the industry’s prospects.
Japanese investors dumped stocks Monday in response to Friday’s earthquake, with the Nikkei 225 tumbling 6%. While the U.S. stock market fell just a fraction of that amount, luxury highfliers came under fire. Tiffany, which trades at 18 times this year’s consensus earnings, fell 5%. Coach and Burberry Group of the U.K. fell by similar amounts.
Luxury investors have learned to pay less attention to Japan in recent years. Once vital, Japan accounted for 19% of Tiffany’s sales in 2009, compared with 28% in 2000. Over that time, Japan’s economy has barely grown and was eclipsed by a surge in wealth among its Asian neighbors. Recent monetary stimulus in the U.S. has also led to a rebound in domestic U.S. luxury spending, which accounts for about half of Tiffany’s total.
History suggests that major upheavals such as that being experienced by Japan can mean a sharp decline in consumer confidence. Take the Sept. 11, 2001 attacks on the U.S. In the early months of 2001, sales at Tiffany’s U.S. stores open at least a year fell by a mid-single-digit percentage. But in the quarter that included the terrorist attacks, they plunged 19%.
In addition to Tiffany, the likes of Coach and Hermes International also generate about a fifth of their sales in the country. After a huge share-price run over the past two years, the Japanese disaster is good reason for a reality check.
Tags: Brands, luxury, retail, stocks