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Tickers in this Article: TIF, COH, BID, ROB, LUX
Conventional wisdom says that even during periods of stagnant economic growth, the most affluent consumers will usually continue spending on high-end products like art, handbags and jewelry. Unfortunately for luxury retailers, the current bear market is without past precedent and even wealthy consumers are reining in spending, and with the Christmas shopping season upon us, Santa doesn't appear to be ready to deliver many gifts to high-end retailers.

Rich Penny Pinchers
The overall state of the global economy, combined with a thriftier affluent consumer has proved to be a toxic cocktail for luxury retailers of all stripes. Typically, shares of retailers such as Coach and Tiffany hold up relatively well during recessions compared with their traditional retail brethren. That won't be the case this holiday season as analysts are calling for the toughest holiday retail environment in two decades. This is not welcome news for shareholders in a sector that has already seen substantial downward pressure over the course of 2008. (For more on analyzing companies in this sector, be sure to read our related article Analyzing Retail Stocks.)

Not Moving Off The Auction Block
Recent auctions by Sotheby's and privately held Christie's serve as anecdotes for just how much even the super-wealthy are holding back. Both firms took in significantly lower than expected hauls at recent European jewelry auctions. To make matters worse for already battered Sotheby's, a recent auction for contemporary art netted $125 million against expectations of $200 million. The stock is now approaching small-cap status with a market cap of less than $570 million.

Let's take a look at just how rapid the descent has been for the luxury retailers.

Luxury Retail Decline
Company 3 Month
Nov. 24,
Claymore/Robb Report
Global Luxury ETF
44% $10.36
41% $16.68
24% $18.20
66% $8.81
45% $21.05

Blue Box Blues
Tiffany may be the quintessential luxury retailer. Its blue boxes and sparkling diamonds are known the world over. The company probably has the highest brand recognition and international presence of any high-end retail firm. (To learn how to value a brand, read Can You Count On Goodwill?)

Tiffany's international exposure would be a plus if current economic woes were contained within in the U.S., but they're not and Tiffany shares are feeling the pain. Down over 60% in 2008, the forecast is about as dark as the company's diamonds are clear.

Economic tumult from Japan to the U.K. has sent Tiffany shares tumbling and more pain could be in the offing. The company, which reports earnings on Wednesday, November 25, did recently set a 17-cent per share dividend, showing its cash position is strong, at the least for the time being. Even with a P/E of around 7, investors should wait to see how Tiffany performs over Christmas before buying shares.

Shares Have Been Bagged
Coach, known for its ubiquitous hand bags and wallets, shares a clientèle with Tiffany and a share price almost as depressed. Wall Street shares a similar prognosis for Coach's performance as evidenced by increased put option buying in recent weeks. The $4.8 billion company sports trailing and forward P/E ratios of just over 6, though finds itself in a precarious position headed into the holiday season with its shares down almost 60% for the year and a short interest hovering around 12.3% of its float.

A Spectacle Among Spectacles
When equity markets are surging and home prices are rising, consumers are probably inclined to pay up for a pair of designer eyeglasses or sunglasses. The opposite is true during bleak economic times and consumers in peril have conversely put American depositary receipts (ADRs) of designer glasses maker Luxottica into the same category as Coach and Tiffany. Italy-based Luxottica owns the Sunglass Hut group of retail outlets and sells glasses under designer labels such as Burberry, Dolce & Gabbana and Tiffany.

Luxottica has exposure to consumers of all kinds and, in this environment, that is not a good thing right now. Its ADRs are down nearly 50% this year and shorts love this stock as it has a short interest of over 6%.

Bottom Line: Now Isn't the Time to Play This Sector
With dire forecasts for the holiday shopping season, it is impossible to recommend luxury retailers at this time. Investors interested in this sector should stay on the sidelines and wait for rebounds in both developed and emerging market economies. The Claymore/Robb Report Global Luxury ETF is one way for investors to track the performance of a basket of luxury retailers and might be worth watching over the next few months for any signs of a perk up in the sector. Seasoned investors anxious to play the group should look at buying puts, or for the more adventurous, writing call options.

To learn more, check out Prices Plunging? Buy A Put.

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