Neither Mary Beth Gonzalez nor Saks Inc. could be happy about the 60 percent discount that the company's Fifth Avenue store in New York offered last week on such luxury items as a $1,995 Dolce & Gabbana messenger bag.
The reduced prices are eroding Saks's profitability, with its operating margin shrinking from 5.3 percent in the fourth quarter to 4.7 percent in the first – less than half of margins at Nordstrom Inc. and Neiman Marcus Group Inc. The cuts also aren't sufficient to get Gonzalez, a media executive, to buy.
“I'm being more conscious of my spending,” said Gonzalez, 42, who left the store empty-handed last week and resolved to cut non-essential purchases in half. “With the economy being uncertain, I feel like I need to have more savings.”
One of the last holdouts in consumer spending – luxury-goods purchases – may be collapsing under the weight of a sluggish and potentially contracting U.S. economy.
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Sales at U.S. luxury stores open at least a year may decline as much as 2 percent in 2008, as wealthy consumers suffer “angst” over financial-industry job cuts and falling stock and housing values, said Michael Niemira, chief economist at the International Council of Shopping Centers.
None of this has been welcome news for Saks' shares. Before Tuesday, they fell 22 percent in the past two weeks and 54 percent since the start of the year.
By comparison, through Monday, Nordstrom's stock dropped 7.2 percent in the past two weeks and 15 percent year-to-date; the Standard & Poor's 500 Index fell 5 percent and 15 percent, respectively.
Neiman and Nordstrom, with better operating margins, are showing signs of strain. Short sales as a percentage of trading volume on Nordstrom stock are the highest in almost three years. Before today, the yield on Neiman's most-traded bond is at the highest since mid-March.
Not everyone is pessimistic. Lazard Capital Markets' Todd Slater recommends buying Saks's shares, now at a five-year low. Citigroup Inc. analyst Deborah Weinswig said June 13 that she is more confident a buyout may occur.
At the beginning of 2008, Niemira said he had expected luxury same-store sales to gain as much as 2 percent this year.