This recession has been atypical in many ways -- including its effect on the luxury-goods sector. In the other recessions we've seen since World War II, the luxury sector mainly stayed intact. However, this time it appears to have lost its luster.

High-end retailers Tiffany (NYSE: TIF) and Ralph Lauren (NYSE: RL) have been battling for sales, while off-price retailer TJX (NYSE: TJX) -- owner of T.J. Maxx and Marshalls, which sell designer clothing at reduced prices -- just raised its full-year sales outlook.

Consulting firm Bain & Co. projects the luxury sector won’t recover until 2011 or 2012. However, the sector is weathering the storm by using smart pricing strategies and inventory management.

Altering pricing strategies
High-end accessories retailer Coach (NYSE: COH) has rebalanced the pricing of its current assortment of handbags. By increasing the proportion of handbags introduced at prices below $300 from about 30% in fiscal year 2009 to 50% now, Coach has been able to reduce its average retail in handbags by about 10% to 15% in its North American retail stores. “This rebalancing gives the consumer more choices at prices she is willing to pay or is able to afford … [allowing us to] still generate excellent margins,†said Lew Frankfort, chairman and CEO of Coach.

Similarly, Saks (NYSE: SKS) is also reconfiguring its pricing strategy by shifting a greater amount of inventory into more moderate price ranges, while still maintaining high-level pricing within brands. "We have a strategy that's all about what we call ‘high-end and accessible luxury,'" Stephen Sadove, chairman and CEO of Saks, said in an interview. “That means selling luxury at a good, better and best price point.â€

Saks has shifted a slice of its pricing from the “best†price point down to “good†and “better.†“We've learned that people continue to like brands, and they don't want to trade down from one brand to another, but will [buy at lower price points] within the brand,†Sadove said. “So if customers happen to love Prada -- within the brand of Prada, they're changing some of their desires relative to price points.â€

High-end department store Nordstrom (NYSE: JWN) has also lowered prices through the second quarter on its brands. The retailer said on its second-quarter earnings call that it expects lower-than-average prices through the end of this year compared with last year.

In contrast, luxury retailer Tom Ford International is being very judicious about adjusting prices, with the exception of adjustments made for currency fluctuations, which may alter prices depending on the region. “We looked at the overall collection and there were some price points that we adjusted, but the basic positioning of the brand was not changed,†Domenico De Sole, chairman of Tom Ford International, said in an interview.

Tom Ford International is situated at the very high end of the luxury goods market, which means its higher prices go along with the brand positioning. If the company were to lower prices dramatically, it would risk altering its brand image and positioning.

“If you have a brand and you have a certain price positioning, which every brand has, that's what you are,†De Sole says. “You can address some of the pricing issues, but Chanel cannot become [ Gap (NYSE: GPS)]. You can change some prices, but you can't change who you are.â€

Consumers and the outlook for luxury
Higher-end consumers are beginning to resurface after taking a hiatus since last fall. “We've seen that consumers are gradually coming back to visit stores and malls at levels they did not in recent quarters,†says Coach's Frankfort. “We are also seeing improvement in consumers' attitudes. Clearly, we're well over the worst, which was last holiday season.â€

Saks' Sadove agrees that the trend in shopping compared with the beginning of the year is “substantially better,†though still down from in the past. “I would describe it as if we're in a little bit of an ‘L,' where it went straight down and we're now at the bottom of the ‘L,' where it's stabilized,†says Sadove.

After a difficult spring, De Sole says he is starting to see a slow recovery and better performance in the U.S. this fall: “I suspect this fall will be an improvement compared to a year ago, but nothing special.†Continued...