Luxury Retailers Put On Ice

Even ultra-rich consumers are avoiding stores like Saks and Neiman Marcus. Will they be back?

For months, aspirational shoppers spooked by job losses and a lack of credit have stayed away from luxury retailers like Saks and Neiman Marcus. But now the truly affluent, whose spending varies with asset values and business profitability, are cutting back too.

"Softness is no longer contained to weakness in aspirational consumer spending," says Fitch Ratings Director Monica Aggarwal, who tracks luxury retailers. She notes that same-store sales at Nordstrom (nyse: JWN - news - people ), which is more of an entry-level luxury chain than Neiman Marcus or Saks (nyse: SKS - news - people ), have been trending down for over a year. That the pain is now spreading up the chain is a sign that all shoppers are spending a lot of time on the sidelines.

Shares of top-line retailers were in free fall Thursday. This includes a 5.6% drop in Saks and a 9.7% drop in Nordstrom. The sell-off came after the chains announced same-store sales results for February that were far drearier than that of the broader retail sector. Comparable sales were off 26% at Saks, 15% at Nordstrom and 24% at Neiman Marcus.

Tiffany (nyse: TIF - news - people ), the upscale jeweler that reports sales quarterly, saw its shares drop more than 6%. Analysts don't expect the company to improve much on its 35% decline in same-store sales during the fourth quarter of 2008.

Why are upscale shoppers staying away, even those with big money? Chalk it up to the new psychology--conspicuous consumption is out, at least for the time being.

"If aspirational shoppers are victims of the economic forces, the affluent are being constrained by the sociological forces," says Richard Baker, CEO of Premium Knowledge Group, a market research firm that follows the luxury industry.

How long the phenomenon lasts is tough to say. Perhaps luxury shoppers will be back at the first sign of a turnaround. But Baker says his company's research suggests it will be a long time before the affluent consumer's appetite for luxury goods becomes as fierce as it was during the recent go-go years. Even the heavy discounting of recent months won't draw a shopper who isn't in the mood for a flashy handbag or watch.

 

The new mind-set could mean involvement with philanthropy and other causes that could (at least partially) replace material luxury as a status symbol. If Baker is right, it means a downsizing for the luxury retail sector, where fewer dollars will be spent.

Another factor: geographical concentration. Nordstrom gets 30% of its sales in California, Saks over 20% in New York and Neiman Marcus a combined 30% in California and Florida. All three areas have turned in some of the fastest growth of real estate-driven new money in recent years, and all are feeling the burst of the bubble now. All are feeling the cutbacks in tourist spending too.

Aggarwal expects free cash flow at Saks to be flat or negative this year, meaning the company will likely have to borrow against its $500 million credit facility to meet its obligations. Year-over-year comp sales declines in the low to mid-teens can be withstood for a while, but the company can't have too many more 26% drops without a liquidity crisis.

She figures the second half of 2009 will bring some improvement to the big luxury chains, but not to the point of comp sales breaking even or turning positive.

"Sales will improve, but only partially," she says. So expect negative same-store results in the low teens or high single digits right through the year.

The big question, though, is how many of those fleeing customers come back at all.