Tsunami Effect on U.S. Luxury Market

On March 11, 2011, Japan, the world’s third-largest economy, was traumatized by a 9.0 earthquake that hit the country resulting in a tsunami of disastrous proportion. The calamity has hit hard the mature global markets on a day-to-day basis.

Japan is considered to be the second largest consumer market in the world for luxury goods. Consequently, the devastation and the nuclear threat will adversely impact the luxury goods market worldwide. In an equation of high end luxury consumers flourishing while low end dollar store consumers increasing, the disastrous situation in Japan will surely destabilize the former part of the equation.

In a chain reaction, the U.S. economy reeled under the after shock of the Japan natural disaster. Just after a day when the earthquake and tsunami wreaked havoc in Japan, the U.S. market experienced heavy sell-off of shares, in particular the ones most heavily tied to the Japan consumer or luxury goods market.

Japan represents 11% of global luxury goods sales, almost at par with China, and behind the U.S. The list of stocks which suffered from a major sell-off included prominent U.S. luxury brands. Investors were duly worried about the adverse impact on the “mass luxury” market, post catastrophe, considering that Japan is a country where consumers are overly given to the consumption of luxury goods.

The luxury brands that faced the brunt of the disaster include names like Coach Inc. (COH), the designer and marketer of fine accessories and gifts. Coach generates approximately 18% of its revenues from Japan. Unfortunately, stores at Sendai, the region most harshly affected by the disaster, represents 10% of its Japanese business. As a result of the devastation, out of the 165 stores that the company runs in Japan, it shut operations at 20 stores with reduced staff level and hours at some of its other stores. Despite suffering a major setback in Japan, Coach remains undeterred in pursuing its businesses elsewhere in the world. The company is seen to be investing in Western Europe and China for ensuring growth.

Recently, Costco Wholesale Corporation (COST) had to stop the operation of one of its warehouses located at Tamasakai, which sustained significant damage. The Tamasakai location will have to be shuttered for more than a few months as the company needs to scrutinize and repair in order to ensure safety for employees and members alike.

Another of the luxury brands being affected by the Japan crisis is the world’s premier jeweler,Tiffany & Co. (TIF). The company booked as much as 20% of its FY10 revenue from Japan operations. Tiffany, a high-end jewelry designer, manufacturer and retailer, slashed its first-quarter 2011 earnings guidance, stemming from store closures and limited store hour operations in Japan. Tiffany now projects first quarter earnings of 57 cents a share, down from 62 cents forecast earlier. Management expects first quarter sales to increase 11%, incorporating a 15% drop in sales from Japan.

It has been eleven days now since the devastation has hit Japan and sent ripples of concern across the global financial world. It has yet to be assessed how and to what extent the catastrophe would affect the U.S. retailers and sellers of luxury goods, both in the near term as well as in the long haul. We cautiously wait to see the effect that the Japan catastrophe would have on U.S. consumer brands and retailers.

TIFFANY & CO (TIF): Free Stock Analysis Report

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