Weak euro helps European luxury through crisis
PARIS (Reuters) - A slide in the euro against major currencies should help European luxury houses attract foreign shoppers as their home markets are rocked by a debt crisis that is seen dampening consumers' appetite for spending.
Italian jeweler Bulgari BULG.MI, fashion house Valentino and French handbag maker Longchamp are among those who said they would benefit from a weaker euro, which makes their sales abroad more lucrative and chips away at their cost base.
"The euro weakness is a great thing for luxury goods companies. In fact, their costs are typically in euros, and their revenues are split between U.S. dollars, yen and euros," said Luca Solca, an analyst at Bernstein.
Rising numbers of tourists, attracted to European shopping capitals such as Milan, Paris and London by more favorable exchange rates, will also help, analysts said.
"When an American comes to the Cote d'Azur, he will find that the watches are not so expensive anymore," Jean-Claude Biver, chief executive of LVMH's (LVMH.PA) Hublot watch brand, told the Reuters Global Luxury Summit in Paris.
Deutsche Bank estimates the weaker euro against the dollar and the yen would add 2-4 percent to its sales forecast for the global luxury goods industry.
However, it is the opposite for Swiss watchmakers, which are increasingly under pressure to raise prices to counter the strong Swiss franc.
The euro has fallen almost 5 percent against the franc, 14 percent against the dollar and 15 percent against the yen so far this year amid growing concern about the single currency block's future.
A Reuters poll of analysts indicated that the euro's stark depreciation against the dollar showed little sign of abating over the next 12 months with median predictions seeing the currency hitting $1.175 in a year's time.
Consumers' increasing wariness was also reflected in euro zone retail sales for April, which fell sharply and missed expectations for a small monthly rise, data showed on Thursday.
"Everybody is a bit more worried than two months ago," Valentino CEO Stefano Sassi told the Reuters Global Luxury Summit in Paris. "I am not negative, I am not optimistic, let's see how it evolves."
The euro weakness could boost its ability to be competitive outside Europe, which would prop up core profits, he added.
His comments were echoed by Longchamp CEO Jean Cassegrain, who also told the summit that it had been difficult for the handbag maker when the dollar was weaker against the euro.
"Now we are back in a territory where we can make interesting margins," Cassegrain said.
For Swiss-based Hublot along with its peers like Swatch Group (UHR.VX), Patek Philippe and Audemars Piguet, however, the weak euro is more of a headache.
"For the watch industry, a weak euro causes problems because the watchmakers are paid in Swiss francs. The stronger dollar is offsetting this for those watchmakers who export a lot into Asia and the United States," said Jon Cox, an analyst at Kepler Capital Markets.
Swatch Group, for example, generated almost half of its sales in Asia in 2009 and is less affected.
The dollar has risen about 11 percent against the franc since the beginning of the year.
Luxury goods group Richemont (CFR.VX), which reports in euros, should see a bigger translation boost to earnings than Swatch Group, which reports in Swiss francs, said Cox.
Some, like independent Swiss watchmaker Ulysse Nardin, have raised prices to protect their margins. Ulysse Nardin CEO Rolf Schnyder said the company hiked euro zone prices by 4 to 5 percent last week.
Philippe Merk, CEO of Audemars Piguet, told the Reuters Summit that the watchmaker recently raised prices by 4 percent. And there may be more to come.
"I think we will have to adjust much more. European retailers have an advantage. We may have to revisit the whole thing by the second half this year," Merk said.
For watchmaker Parmigiani Fleurier, the real issue is not currencies but the soaring price of gold, which CEO Jean-Marc Jacot said had tripled in five years.
"The price of gold is more important than the Swiss franc. Now we have to think about hedging gold. The gold price represents 20-25 percent of the total cost of a watch."
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