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No Relief for Luxe Retailers

How can you tell we're still in a recession? Same-store sales at Saks are down 28 percent compared to this time last year, the company said this morning.

Bargain retailers such as Wal-Mart and McDonald's have not only survived but thrived during this recession, now in its 17th month, thanks to the "trade-down effect," meaning that bargain-conscious shoppers are eschewing pricier retailers for cheaper ones.

No such relief for high-end retailers such as Saks.

Even though Saks beat Wall Street's expectations by doing a better job of cost-cutting -- the chain is working with suppliers to lower costs -- it's the same-store sales number that tells you about the health of a retailer.

Earlier this month, Nordstrom reported a 10.8 percent drop in April same-store sales. Neiman Marcus saw its April same-store sales plummet by 24.6 percent.

And there's more bad news: The go-go golden days of the high-end retailers -- the era that spawned the mini-Beverly Hills shopping strip along Wisconsin Avenue in Chevy Chase, Md., in the early part of this century, for instance -- was fueled by what we now know to be some falsely created wealth.

The credit bubble that led to the housing bubble that led to another credit bubble -- as people took out home-equity loans, treating their homes like ATMs -- was pumped up by Wall Street debt-to-equity, or leverage, ratios that we are unlikely to see again. Indeed, that may be made illegal. Goldman Sachs, for instance, successfully petitioned the SEC to allow the investment bank to lever up to 30-to-1 debt ratio, something that would never be allowed today.

It's the same reason that it will likely take a long time for the Dow to reach 14,000 again -- the peak of the market in October 2007. Those earnings were based on leverage that's not coming back.

That means less cash for consumers and fewer $500 Louis Vuitton bags on their arms.

-- Frank Ahrens
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By Frank Ahrens  |  May 19, 2009; 11:13 AM ET
Categories:  The Ticker  | Tags: Louis Vuitton, Neiman Marcus, Norstrom, Saks, retail  
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