In Fashion, Some Like It Haute

By JOHN JANNARONE Shoppers are turning up their noses at high-fashion labels and choosing brands to fit a recession. But would a stake in a fashion icon suit a well-appointed investor? Wreckage among luxury retailers makes it hard to imagine. Saks and Neiman Marcus have been hit by credit downgrades even as they slash prices and eliminate staff. Italy's Bulgari plans to shutter underperforming stores, while Tiffany & Co. will close its chain of pearl jewelry boutiques. But some elite labels are still glittering. LVMH Moet Hennessy Louis Vuitton and Hermès International reported higher sales in the fourth quarter. Hermès said last week that sales have continued to rise so far in 2009. Both Hermès and LVMH's Louis Vuitton unit, which accounted for about half the company's operating profit last year, are helped by their exposure to branded leather goods. Handbags are expensive, but luxury jewelry sells at an even higher price point. Shoppers can easily find cheaper substitutes for engagement rings and other items that don't bear logos. But recognizable handbags have protected Hermès and Louis Vuitton from such "trade down" purchases. What's more, splurges needn't be frequent. Hermès, in particular, entices customers with waiting lists that can last more than a year for exclusive products. Hermès and Louis Vuitton also have been shielded from shrinking inventories at high-end department stores. Those reductions can be painful for companies that sell watches and accessories on a wholesale basis. But Hermès gets roughly 80% of revenue from its own retail network. Louis Vuitton sells strictly through its own shops or boutiques it owns and operates within department stores. Hermès is trading at a luxurious multiple of 28.9 times this year's expected earnings. That is mostly because of speculation that the Hermès family, which owns a majority of the stock, will bid for the outstanding shares. LVMH offers a better opportunity for investors with a multiple of 12.7. Of course, LVMH's businesses include champagne and perfume sales that will suffer in a weak economy. But the stock is still attractive compared with a multiple of 14 for Tiffany. The jeweler said this week it expects revenue to fall 11% in 2009. LVMH's balance sheet also should give investors assurance. The company had €4.5 billion ($6.1 billion) of net debt at the end of 2008, equal to 1.3 times last year's operating profit. Most of its debt is long term and the company has plenty of undrawn credit facilities to cover debt coming due this year. In contrast, Tiffany, looking to bolster its balance sheet, sold $250 million in bonds to Warren Buffett with an expensive 10% coupon last month. Economic crisis doesn't mean the end of luxury. But while many brands have been battered, those that show grace under fire should be coveted investments. Write to John Jannarone at john.jannarone@wsj.com