Luxury-goods market is booming after last year's troubles

Strong sales of bags, clothing and perfume during the crucial holiday season could boost the luxury-goods industry to near-record sales, according to a Bain & Co. study to be published Monday, as the sector rebounds from a 2009 decline that was the industry's worst since it began consolidating in the 1990s.

In its annual study of the luxury-goods industry, Bain projects 2010 world-wide sales of as much as 170 billion ($237 billion) if sales increase 10% during the holiday period. Even its worst-case scenario only 2% holiday growth, resulting in annual sales of 167 billion would be a significant improvement over last year's 8% decline to 153 billion in sales. The industry peaked in 2007 at 170 billion, according to Bain.

"The recovery has been faster than expected," says Claudia D'Arpizio, the Milan-based head of Bain's fashion and luxury practice. "We will probably have strong full-price sales and not enough merchandise to fulfill the need during the holiday season."

Last year, the economic downturn and tumbling consumer confidence plunged the luxury industry into a crisis. Department stores marked merchandise down 70% and brands such as Versace pulled out of Japan, one of the luxury sector's biggest markets. Meanwhile, fashion labels slashed catwalk budgets.

But the big spenders are back. Bain's bullish projections have been borne out by the most recent numbers from top luxury-goods competitors. Last week, industry leader LVMH Mo t Hennessy Louis Vuitton and Burberry PLC both reported double-digit increases in quarterly sales.

Luxury-industry stock prices have gotten a boost from the quick recovery. LVMH, Gucci owner PPR SA and Herm s International have been some of the top performers on the Paris stock exchange this year.

The robust growth that the industry has experienced this year will likely cool next year to 3% to 5% growth, Bain estimates, because the basis of comparison will be so high. Despite concerns of a double-dip recession and high unemployment, the luxury industry isn't likely to revert to a slump, Ms. D'Arpizio predicts.

"It is now a psychological rebound and everything is growing," she says. Ms. D'Arpizio adds that in the U.S., where she expects 12% sales growth this year, "the concern over unemployment and the economy is not over yet, but wealthy customers understand it doesn't have a major effect on their personal wealth."

The factors driving this year's growth are likely to continue to bolster the luxury-goods industry for many years, Bain predicts. Chinese consumers' appetite for luxury goods continued unabated this year, with sales expected to increase 30%, Bain says. In addition, millions of new Chinese travelers are boosting luxury sales in tourist destinations such as New York, Paris and London. However, Japan remains in decline as an aging consumer base cuts back on splurges.

However, some luxury labels are having trouble keeping up with the fast growth. Louis Vuitton is closing its French stores an hour earlier each day until the end of November because the company says it is running short on inventory. "It's a question of forecasting and planning," Ms. D'Arpizio says. "Investments in operational excellence will become crucial to fueling organic growth."