WWD has a monster of an article today about our dear friend The Economy; contrary to the usual treatment, however, this one's an in-depth exploration of how the financial crisis will affect our fancy European friends. As it turns out, they're not immune over there: Several fashion and luxury-goods houses should batten down the hatches for the next twelve to eighteen months. What to expect?
A drop in revenues almost certainly, with the sector expected to contract in 2009. More seriously, however, industry experts believe there’s a risk of bankruptcy for some firms as heavy leverage cripples their operations.
Companies without debt, like Giorgio Armani SpA, Dolce & Gabbana Srl, and Hermès International should be fine — in fact, there's "significant opportunity" for these houses, should they want to invest during the downturn. But for houses where debt exceeds earnings, there could be trouble on the horizon.
Prada SpA, for starters, finished 2007 with $703 million in net debt. Execs are "convinced that [they] are among those in a better place," financial speaking, but the numbers are such that in September there was speculation that they might sell a minority stake to investors in Dubai (where investors are practically rolled off an assembly line). Escada AG, meanwhile, has cut its annual forecast twice this year and is warning that 2008 may close with bigger losses than 2007's $36.8 million. And IT Holding SpA — which owns Gianfranco Ferré and licenses Just Cavalli, Costume National C'N'C, and Galliano — is "in serious difficulty." They're carrying some $405 million in debt, and their parent company has an additional $178.3 million of debt of its own.
Of course, if and how these companies survive depends a lot on how they've financed everything. But just knowing gloom and doom are a possibility in the European luxury markets is a serious blow to our happy-go-lucky-aspirational-denial coping mechanisms.