Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

When it comes to luxury retail, the American dream is turning into a nightmare.

The latest reporting season has exposed a fissure between U.S. high-end names and their European counterparts.

That’s been reflected in share prices. The Bloomberg Intelligence European Luxury Index, which traded at a discount to the Bloomberg Intelligence U.S. Luxury Index for most of 2016, has now pushed ahead.

Eurotrash No More
The Bloomberg Intelligence European Luxury Index is trading at a premium to its U.S. counterpart for the first time in a year
Source: Bloomberg Intelligence

There are several reasons for the dislocation.

First, the strong dollar is putting some tourists off visiting the U.S., stripping American luxury brands of a much-relied upon cohort. Instead of a trip stateside, shoppers are heading to Europe, including the U.K., where they can get more Prada bags and Louis Vuitton wallets thanks to a weaker sterling.

Strong Dollar, Weak Sales
The U.S. dollar has surged, damping demand from foreign tourists
Source: Bloomberg
Note: Index tracks the performance of a basket of 10 leading global currencies versus the USD. Index starts from Dec 31, 2004 with a base level of 1,000.

Department stores such as Neiman Marcus Group Inc., Nordstrom Inc. and Macy's Inc. -- places shoppers once turned to for upmarket shoes and purses -- are struggling to attract customers who'd rather shop online or directly with the likes of Ralph Lauren Corp. and Kate Spade & Co.

While luxury brands are trying to diversify away from department stores, sales through that channel still make up a meaningful portion of their businesses. For Ralph Lauren, wholesale sales comprise 44 percent of revenue. It's also hard to wean customers off an addiction to department-store discounts, as Coach Inc. and Michael Kors Holdings Ltd. have found.

Diverging Trends
European luxury sales are far outpacing those across the pond
Source: Bloomberg Intelligence

There are some company-specific factors coming into play, also.

Tiffany & Co.'s Chief Executive Frederic Cumenal resigned last week after failing to reinvigorate the high-end jeweler, which has fallen out of favor with millennial shoppers looking for trendier styles. The company's Fifth Avenue flagship store, which represents roughly 10 percent of sales, has also been hit by depressed traffic due to its proximity to U.S. President Donald Trump's private residence.

Ralph Lauren boss Stefan Larsson will also exit in May after he couldn't agree with the creative vision of the eponymous fashion brand's founder on how to jump start the flagging firm. And Michael Kors is grappling with an over-exposed brand, whose desirability in the eyes of consumers is waning.

It all goes to underline the shortcomings of U.S. brands that will need fundamental, and time consuming overhauls.

Bouncing Back
Global luxury demand is set to rebound this year, but spoils might not be equally shared
Source, Bain, Altagamma, HSBC
Note: 2016 and 2017 are HSBC estimates.

That's not to say there isn't distress in Europe: Burberry's sales have been boosted by the pound's drop but that hasn't helped reinvigorate its brand. Swiss watch groups Cie Financiere Richemont SA and The Swatch Group AG are also suffering from weak demand. But, even at Europe's weakest brands, there are signs the worst might be over.

For one, the laggards are catching up. Prada SpA, knocked hard by the slowdown in China, said sales rose in January for the first time in more than a year. Germany's Hugo Boss AG, which last year parted company with its chief executive after a bad profit warning, now expects 2016 operating income to be at the upper end of expectations.

A revamped Gucci, meanwhile, has turbocharged Kering SA, whose stable also includes Bottega Veneta and Christopher Kane, while European power brands LVMH Moet Hennessy Louis Vuitton SE and Hermes International are motoring along quite nicely.

Some factors on the horizon could even things out a little.

Tax cuts for the wealthy from President Trump may boost U.S. demand for designer clothes and watches once more. An ever-rising stock market, which makes rich people feel richer, could also help stoke demand.

European luxury goods groups that sell in the U.S but make their products outside the country -- as most do --  could also be impacted by a U.S. border tax. (It's little wonder LVMH CEO Bernard Arnault told Trump he wanted to make more products in America.)

And the divide could be bridged in another way: M&A.

Coach has made several informal takeover approaches to Burberry, according to the Financial Times, while Michael Kors and Tiffany have been mooted as takeover targets. Shares in Kate Spade rose the most in seven weeks on Tuesday after a report that said the handbag maker was awaiting first-round bids from would-be acquirers.

Michael Kors has been linked with a bid from LVMH, but, as Gadfly has argued, it's hard to see what the group would want with a name that's lost its luster. Anything Kors does, the Louis Vuitton brand could do better. And LVMH's purchase of Donna Karan International Inc. didn't work out so well either. It sold the business last year.

It is possible U.S. brands could attract European suitors with stronger performances and higher valuations. Should that transpire, this transatlantic dichotomy could prove short-lived. If not, expect the luxury gulf to widen.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Andrea Felsted in London at afelsted@bloomberg.net
Shelly Banjo in New York at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net