When news emerged in mid-April that luxury department store chain Barneys New York was looking for a new CEO, many people in the luxury retail sector viewed it as a good omen.

Earlier in the year, Barneys New York kept popping up in the headlines. The chain, which specializes in high-end fashion apparel, had been facing falling sales for most of last year and an uncomfortably large, $500 million debt load since Dubai-based investment firm Istithmar World Capital bought it for $942 million in 2007.

For a while, rumor had it that Barneys might be on the brink of bankruptcy and that investor Ronald Burkle was angling to acquire a controlling stake in the business in exchange for $50 million in cash. In late 2009, Burkle’s firm, Los Angeles-based Yucaipa Cos., had already bought a large portion of Barneys’ secured term loan and subordinate debt from its lenders. Publicly, Istithmar’s owners denied they were seriously considering Burkle’s offer, but from the outside, it certainly looked like the chain had fallen on hard times.

By late March, however, Barneys seemed to be making a comeback, with a reported 20 percent monthly increase in same-store sales. The search for a CEO was also a sign that Istithmar was once again able to focus on retail operations, rather than bankruptcy talk.

The difficulties Barneys faced last year were the result of a number of different trends that happened to coincide at the worst possible time, says Kelly Tackett, senior consultant with Kantar Retail, a Columbus, Ohio-based consulting firm. Too much debt certainly didn’t help, but Barneys may have also opened too many stores during the boom years, too close to other luxury department stores, Tackett notes. The chain currently operates 10 flagship stores, 19 Barneys Co-ops, 13 outlet stores and three warehouse locations.

Overall, people aren’t buying luxury products as much as they did in the early and mid-2000s, during the heyday of the luxury market, so there might not be enough demand to support a store fleet of that size. Plus, some analysts note that the merchandise sold at Barneys tends to be more fashion-forward than at other luxury stores—and that may put off the affluent folks who are still shopping, but whose tastes tend to be less flashy.

The recent problems at Barneys illuminate the difficulties currently facing the entire U.S. luxury retail sector. The sector is no longer in free fall. Things have improved since last year, when same-store sales plummeted by double digits several months in row. Nevertheless, the sector’s recovery will be a long and challenging process, says Tackett.

What fuelled luxury sales and store growth in the early 2000s was the phenomenon of “aspirational” shopping—middle-class consumers with low or nonexistent net worth breaking the bank to buy status symbols like $400 designer sunglasses or $3,000 Swiss watches. What’s worse, those binges were often financed through credit cards. Consumers—buffeted by a confidence that resulted from a high-flying stock market and rising house prices—were optimistic about the future, says Pam Danziger, president of Unity Marketing, a Stevens, Pa.-based market research firm. Back then, all roads seemed to lead to job security, paid-for retirement, easy access to credit and ever-increasing home values.

Today, the picture is much different, with the U.S. facing a prolonged period of high unemployment, decimated 401ks, contracting consumer credit and housing values that continue to fall. As a result, most consumers have curbed spending, paid down debts and started to replenish their savings. “That doesn’t leave you a whole lot of money at the end of the month to buy a $6,000 handbag,” says Danziger.

While most industry insiders expect that eventually the aspirational shopper will come back, that’s not likely to happen for several years and it’s “not sure we will ever go back to the spendthrift ways of the middle of the decade,” notes Tackett. In the meantime, luxury retailers will have to rely on what historically has been their core clientele—high net worth individuals who can afford luxury goods without going into debt. These consumers tend to place a lot of value on exceptional merchandise quality and store service, rather than on big-name brands, says Danziger—so luxury chains will have to step up their efforts on both counts.

But even then, the number of very wealthy shoppers is limited and may be too small to sustain the number of luxury stores that currently exist in the United States. As a consequence, high-end retailers may need to close some stores stateside and reallocate capital into online operations and overseas expansion, says Tackett. In February upscale department store chain Bloomingdale’s announced the opening of its first international location, in Dubai. The retail industry should expect more such announcements in the coming months.

“I think the [luxury] retailers that have the most exposure to the U.S. were more hard hit,” during the recession, notes Tackett. “That’s why you’ll see a lot of brands focusing on growth outside of the U.S.—in the Middle East, Asia and even Brazil. Those economies are starting to be a little bit more attractive. Even though Dubai was hit with the real estate market collapse, there is still a huge consumer demand for luxury goods and American brands.”

From rags to riches?

While the luxury sector was among those hardest hit during the recession, lately it’s been showing signs of recovery. For example, upscale jeweler Tiffany & Co. reported that in the fourth quarter of 2009, ended Jan. 31, its same-store sales in North America rose 8 percent, after posting double-digit declines in the previous quarters. Coach Inc. registered a 5.1 percent increase in same-store sales for its third quarter, ended March 27.

In March, luxury department stores posted a 14.2 percent increase in same-store sales, according to ICSC. The figure was ahead of the 9 percent growth for all 31 chains that ICSC tracked that month and marked a vast improvement over the 9.1 percent annual decline luxury stores posted in 2009. The picture gets more complicated, however, when it comes to individual chains. Department store chain Nordstrom, which tends to be a favorite with very wealthy shoppers, according to Danziger, but which shies away from the “luxury” image, posted a same-store sales increase of 17.6 percent for its full line stores and 19.1 percent for its total, multi-channel operations. More luxury-oriented Neiman Marcus, on the other hand, posted an increase of 9.2 percent for its brick and mortar stores and 9.6 percent for its multi-channel operations. Saks Inc. posted an increase of 12.7 percent.

The differences may be highlighting consumers’ changing attitudes toward luxury products. While the wealthiest one percent of U.S. households—families that have a net worth of at least $6 million—have not altered their shopping habits as a result of the Great Recession, those in the top 10 percent bracket have, notes Ron Kurtz, principal of American Affluence Research Center, an Alpharetta, Ga.-based research firm focusing on the luxury market.

That’s important because those who Kurtz defines as “affluent” shoppers—the top 10 percent—tend to be less brand-conscious than both aspirational and true “luxury” shoppers—the top 1 percent. “The affluent consumer is a careful spender and an aggressive saver—they typically don’t buy items that are associated with luxury,” Kurtz says. “It’s only that top one percent that seems to be knowledgeable about those brands.”

That might explain why Nordstrom Inc., which sells products at a variety of price points, continues to outperform Neiman Marcus and Saks, which emphasize their luxury credentials. As a result, while many other chains have been announcing layoffs, Nordstrom recently revealed plans to hire approximately 250 people for its new store at the South Shore Plaza in Braintree, Mass., which opened in March. From the third quarter of 2008 to the third quarter of 2009, Nordstrom opened four new regular stores and 13 Nordstrom Rack stores, which sell Nordstrom merchandise at steep discounts. During the same time period, Saks Inc. opened six Saks Off 5th stores, but no new Saks Fifth Avenue stores. Neiman Marcus opened one new store, in Topanga, Calif.

While conducting its twice-yearly Affluent Market Tracking Study in the fall of 2009, American Affluence Research Center found that those in the top 10 percent of wealthiest households, with a minimum net worth of $800,000, are still watching their budgets, spending less and saving more. Of the 684 survey respondents, approximately 80 percent said they had cut expenditures in the past 12 months and planned to continue doing so in the coming 12 months. What’s more, about a quarter of those who have cut down on purchases don’t expect to resume splurging on luxury goods. In other words, there may be a secular shift occurring rather than a cyclical one.

How does that jibe with recent robust luxury retail sales numbers? In part, the comparisons look good because last year’s numbers were so bad, says Kurtz. But a true recovery in the luxury sector won’t occur until those top 10 percent of shoppers see their net worths increasing again and feel confident enough to loosen their purse strings.

“That will be necessary because they did take a big hit in 2008 and 2009,” Kurtz notes. “The people that we surveyed basically don’t expect to see any real improvement in the economy and in their net worth until 2011. Until the housing market comes back and unemployment improves, we’ll see some weakness.”

The American Affluence Research Centers’ Future Spending Index Average remains at its second lowest level in history at 75.2 (the historical low point was recorded in the spring of 2009). In the spring of 2006, it was at 96.5. In the next 12 months, the vast majority of survey respondents expect to spend the same amount or less on furniture, home appliances, apparel, jewelry and dining.

Changing landscape

There is no doubt the drop in demand for luxury goods has had a direct impact on upscale shopping districts and centers around the country, says Kelly Gedinsky, an associate with Winick Realty Group, a New York City-based retail real estate services firm.

As certain brands exited the scene, undone by the recession, retail rents on Madison Avenue between 57th Street and 72nd Street, one of the world’s most prestigious luxury enclaves, have gone from approximately $1,091 per square foot at the end of 2007 to $844 per square foot at the end of 2009, according to data from real estate services firm Cushman & Wakefield. But in the past few months, Gedinsky noticed a growing interest from retailers that are anxious to take advantage of the more affordable rents.

Back in 2006, “you might have had five or six brands looking on Madison,” Gedisnky says—because there was only a handful of tenants that could pay the exorbitant prices. “Now you might have 15 to 20 people looking at the same space because every tenant knows it’s a tenant’s market. You are looking at a lot of people looking at the same stuff, especially if the space is priced on the lower end.”

But Gedinsky, whose firm handles assignments in Chicago, Los Angeles, Boston and Miami in addition to New York, admits the picture may be less sunny in other parts of the country. Most retailers view a Madison Avenue location as an opportunity to promote their brand and might not care as much about the sales figures. In a less prominent market, the temptation to open a new store might be tempered by the need to keep operating costs in check.

During Nordstrom’s fourth quarter earnings call on Feb. 22, Blake W. Nordstrom, company president, warned analysts that consumers’ outlook remained conservative. “As we look ahead, we believe that though trends have improved, customers remain cautious,” he said. That’s why Kelly Tackett expects that for the foreseeable future, luxury retailers will be cautious about expanding.

Rather than opening new stand-alone locations, the smaller players might partner with luxury department stores to promote themselves through store-within-a-store concepts. Meanwhile, the bigger chains will likely set their sights on foreign lands.

“While there are deals to be had, I think [store] growth is going to be fairly muted until these luxury brands really do see increased traffic and increased spending by luxury consumers,” Tackett notes.