A disappointing profit outlook from British luxury goods purveyor Burberry Group PLC has heightened concerns that slowing growth in China threatens to spook consumers and pinch booming upscale fashion businesses just as they head into the crucial holiday season.
On Tuesday, Burberry said its full-year pretax profit will be at the lower end of market expectations following a flat retail performance in the past 10 weeks.
The news sent Burberry's shares tumbling 21 per cent and dragged down rivals such as LVMH Moët Hennessy Louis Vuitton SA, the world's largest purveyor of luxury goods.
Burberry's results signalled that luxury goods consumers, who have fuelled healthy financial gains for upscale fashion players in the past couple of years, may be showing signs of fatigue.
Concern is particularly focused on China, which until recently had been a key driver of the surge in sales of designer labels, including Burberry, whose signature raincoats are lined with a distinctive red, black and camel checked pattern.
"It's uncertain – very uncertain," Jean-Marc Bellaiche, a senior partner at consultancy Boston Consulting Group in New York, said of the luxury sector's short-term prospects.
Luxury fashion companies have reported mixed results in the past quarter, with some, such as jewellery retail specialist Tiffany & Co., posting weaker-than-expected results.
The companies have bet that growth in China and other emerging markets will help to offset weaker trends in the United States and Europe – but that wager may not be a sure thing.
Now the profit warning at Burberry raises the stakes for high-end retailers, who count on consumer confidence in the all-important holiday period for a good portion of their annual profits.
"Given this background, we are tightly managing discretionary costs and taking appropriate actions to protect short-term profitability," Burberry chief executive officer Angela Ahrendts said.
A slowdown in luxury spending was inevitable following pent-up, post-recession demand and heavy sales in the past two years, said Mr. Bellaiche of Boston Consulting.
In June, it forecast that 2012 global sales of personal luxury goods would climb 7 per cent compared with 10 per cent in 2011.
Mr. Bellaiche said this year's sales growth may be a tad lower: between 6 per cent and 7 per cent.
"We've been spoiled because many companies have announced double-digit growth for the past couple of years," he said. "We need to get back to reality."
Reality, however, hasn't been easy on some high-end retailers. "We are maintaining a cautious view of the global retail environment for the balance of the year," Roger Farah, president of fashion purveyor Ralph Lauren Corp., told analysts last month.
"We continue to operate in highly uncertain market conditions around the globe – around the world.
"Global, financial, economic and political conditions are not only having an impact on the underlying demand trends, but are also resulting in more unfavourable currency dynamics than we initially planned for."
Said Pat McGuiness, chief financial officer at Tiffany, which lowered its full-year outlook last month: "While Tiffany's sales growth in the second quarter was restrained due to both macroeconomic reasons and difficult year-over-year comparisons, we were pleased that operating results met our expectations."
Even so, some analysts have raised red flags. Randal Konik, an analyst at Jefferies & Co., said Tiffany faces economic weakness in many regions globally and tough prior-year comparisons.
"The weakness in global consumer spending, elevated competitive environment, higher product costs and difficult [year-over-year comparisons] paint a tough picture for [Tiffany] in the next few quarters," he said in a note late last month.
Pam Danziger, who runs consultancy Unity Marketing in Stevens, Pa., said double-digit luxury sales surges in China were unsustainable.
"The slowdown in China and the weakness in Europe is a perfect storm for these luxury brands," she said.
"I call it, really, suspended consumption. Luxury consumers are just not feeling confident."