Why Luxury Brands Can’t Ignore the Recession Threat Forever


A recession this autumn isn’t a certainty — in the US anyway — but some retailers appear to be battening down the hatches.

This week, PVH Corp., the American parent company of Tommy Hilfiger and Calvin Klein, announced plans to lay off 10 percent of its global workforce as it cut its full-year outlook. The company cited inflation, which it said was one of many challenges putting pressure on discretionary spending.

PVH is among the first large, traditional apparel companies to cut jobs in response to the gloomy economic outlook (though many tech firms and direct-to-consumer fashion brands have done so). But it probably won’t be the last. In recent weeks, a slew of retailers have issued similar warnings about what’s coming this autumn. Walmart, Nordstrom, Macy’s, Kohl’s, Gap, Adidas and Target all cut their outlooks for the rest of 2022, fearing a more substantial economic downturn and anticipating the need for greater promotions and markdowns to get rid of excess inventory.

The reasons for pessimism are well documented at this point: inflation has reached its highest levels in decades. Russia’s invasion of Ukraine has sent energy costs soaring in Europe, with UK home utility bills expected to soar 80 percent this autumn. In China, the government remains committed to the country’s zero Covid strategy, which has hampered economic growth.

For mass-market brands, this is all cause for concern. That doom and gloom mentality hasn’t yet spread to luxury, however. Big luxury labels continue to report record sales and profits. Zegna even raised its outlook after seeing its half-year revenues rise by over 20 percent.

One reason for optimism is that luxury’s core customers are less likely to cut back on shopping if their heating bill spikes, after all; Nordstrom chief executive Erik Nordstrom said that signs of weaker demand are coming primarily from lower-priced items at its main stores, as well as its off-price business, Nordstrom Rack.

“The softening trend was more significant in customer segments with the lowest income profiles, while we saw greater resilience in the higher income segments,” Nordstrom said. “Within our designer business, higher-priced luxury products significantly outperformed lower-priced product.”

Luxury brands are even benefitting from some of the same forces that are triggering those downgraded outlooks. Currency fluctuations are fuelling inflation concerns in Europe and the UK. But it’s an ideal setup for high-end labels that pay Italian workers in euros and then collect dollars from their US-based customers.

It’s not clear how much longer those American consumers will keep spending. It’s true that gasoline prices have fallen back from their summer peak. But in a speech at Jackson Hole, Wyoming last week, US Federal Reserve chairman Jay Powell reiterated the central bank’s commitment to raising interest rates in order to rein in inflation. That course increases the odds of a recession in the US, which would likely be joined by contractions in Europe, the UK and elsewhere.

How severe that downturn will be is anyone’s guess. This week, Steve Hanke, an applied economics professor at Johns Hopkins University, predicted a “whopper” of a recession in 2023. Goldman Sachs issued a forecast that the US housing market will see further downturn next year, too. (Not all forecasts are quite as grim: Randall Kroszner, a former member of the Federal Reserve Board of Governors, said that while he believes a recession is coming, it won’t be “devastating.”) A consensus is forming that the UK and big European economies such as Germany will enter a recession later this year, a downturn hastened by an expected spike in energy prices this winter as Russia limits gas supplies.

No corner of the fashion industry will be immune if that happens. In a note earlier this week, HSBC predicted that luxury brands would enjoy one more quarter of its post-pandemic boom. But come October, the bank said, all bets are off.

THE NEWS IN BRIEF

FASHION, BUSINESS AND THE ECONOMY

Sézane store interior with a large seating area and racks of clothing.

Téthys joins General Atlantic to back DTC brand Sézane. The Bettencourt-Meyers family office is taking a minority stake in the Paris-based fashion label, whose sales have skyrocketed in recent years.

PVH to cut jobs as demand wanes. The owner of Calvin Klein announced it would cut 10 percent of its global workforce and scaled back its full-year outlook, saying that high inflation is hurting spending on discretionary products.

Burberry, Zalando and the British Fashion Council team up on diversity initiative. Dubbed “The Outsiders Perspective,” the initiative will provide mentoring opportunities to people of colour seeking to break into the fashion industry in various fields, such as sales, merchandising, operations, marketing and legal.

Selfridges wants to make nearly half its sales circular by 2030. By the end of the decade, the retailer is aiming for 45 percent of transactions to come from products made from recycled materials or through services like resale, repair or refills.

Harlem’s Fashion Row and LVMH unveil the Virgil Abloh award. The new accolade, which is meant to “celebrate like-minded individuals who embody Virgil’s spirit, brilliance, and vision, through invaluable contributions to culture, community, and innovation,” the organisation said, will be presented by Abloh’s wife Shannon Abloh on Sept. 6.

Amid US retail gloom, Uniqlo shines on Covid-triggered revamp. The flagship brand of Fast Retailing said it’s poised to book its first annual profit in North America — after 17 years of trying — aided by a revamp of its logistics and pricing strategy, introduced during the pandemic, and essentially halting discounting.

Ted Baker’s store revenue gains on recovering footfall, formalwear sales. Ted Baker, which last month agreed to be bought by Juicy Couture and Forever 21 owner Authentic Brands, said revenue for the 14 weeks to July 29 was up 3.4 percent, compared with last year, but still down 28 percent compared with pre-pandemic levels.

UN Report accuses China of “serious” rights abuses in Xinjiang. The report from UN High Commissioner for Human Rights Michelle Bachelet cited testimony alleging “patterns of torture or other forms of cruel, inhuman or degrading treatment or punishment” as part of a campaign that China said is aimed at clamping down on extremism and terrorism, Bloomberg reported.

Lululemon lifts annual forecasts on strong demand from affluent customers. Boosted by a strong second quarter, Lululemon raised its net revenue forecast for 2022 to between $7.87 billion and $7.94 billion from $7.61 billion to $7.71 billion, Reuters reported.

Athleta enters the underwear space. The Gap Inc.-owned activewear brand will be launching an intimates collection called “Rituals” on Sept. 20, available on its website. The brand previously sold underwear for a brief period in 2018.

Singapore’s FJ Benjamin returns to profit. The retailer recorded a net profit of 3 million Singapore dollars (US $2.14 million) in the year to June 30, a reversal of a 10.9 million net loss in the previous year. The result marked the company’s first significant profit in six trading years.

THE BUSINESS OF BEAUTY

The finale of a Balmain show.

Estée Lauder Cos. nearing a beauty deal with Balmain. The arrangement is said to be a licensing agreement similar to the conglomerate’s venture with Tom Ford, where Estée Lauder would make, market and distribute makeup and other products for the French fashion house.

Skin care brand Glow Recipe taps Goldman Sachs for sale. The brand, known for its fruit-based products, is exploring a sale that could value it at $400 million to $500 million, according to people with knowledge of the matter, reports Bloomberg.

Amorepacific buys American beauty brand Tata Harper. The South Korean beauty conglomerate says it has acquired the brand’s parent Tata’s Natural Alchemy as a stepping stone for its plan to accelerate expansion across North America.

PEOPLE

PVH Americas CEO Trish Donnelly.

Trish Donnelly exits Calvin Klein. The former chief executive officer of PVH Americas and Calvin Klein Global’s job will be split into two: a regional role for PVH Americas and a global brand leadership position for Calvin Klein. Stefan Larsson, chief executive of PVH Corp. will take over in the interim.

MEDIA AND TECHNOLOGY

Kim Kardashian covers Allure's August 2022 issue.

Allure to shutter print edition. The last print issue of Condé Nast’s beauty-focussed publication will be the December 2022 edition, editor-in-chief Jessica Cruel announced in a note this week to staffers.

Alibaba’s Lazada eyes Europe push to take on Amazon and Zalando. Its specific plans will depend on macroeconomic and market conditions, Lazada Group chief executive officer James Dong told Bloomberg News.

Compiled by Darcey Sergison.



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