Frankfurt, Germany: As shoppers across the world gingerly start spending again on luxury, German fashion house Hugo Boss risks being left behind because of its dependence on department store sales and European customers.

Recent results from Richemont, the group behind Cartier watches and Chloe handbags, Burberry and Swatch indicate the wealthy - especially in emerging markets like China - are opening their wallets a little wider.

Richemont and Burberry recorded forecast-beating sales gains for the last quarter of 2009.

But Hugo Boss, which reports in April, expects a roughly 9-percent drop in fourth-quarter sales.

"In comparison to other peers, recovery could possibly be less strong, also because wholesale is still under pressure," Bernstein senior analyst Luca Solca said.

"Department stores are still quite cautious with their commitment."

Known for its sharply cut suits, Hugo Boss has one of the strongest exposures to department stores in a sector that also includes US rival Polo Ralph Lauren and Italy's Ermenegildo Zegna.

While Zegna makes just one third of sales from wholesale, that figure is two thirds for Hugo Boss, which loses out by not having the same responsiveness to customers enjoyed by fashion makers with retail stores.

Order lag

Last year, as the financial crisis bit, Hugo Boss was hit by cautious orders from wholesale customers such as U.S. upscale retailers Saks Inc and Neiman Marcus as well as German fashion department store Peek & Cloppenburg.

Buyers for the current winter season posted their orders in late 2008 and early 2009 - at the height of the financial crisis - which meant they were very cautious.

Nine-month revenue from wholesale customers fell 16 percent.

"Last year's purchasing strategy worked out well for retailers and many buyers are taking the same approach this year - initially ordering cautiously to later reorder if needed," said Siegfried Jacobs, vice president of the German association for textile retailers, BTE.

Boss Chief Executive Claus-Dietrich Lahrs told Reuters that the company benefited from retailers' re-orders in the fourth quarters as some had been too cautious.

Asia weakness

But in Europe, where Boss makes about two-thirds of revenue, rising unemployment is expected to translate into lethargic growth that will not gain pace until the second half.

To secure growth, a strong foothold in fast-growing emerging markets such as China is key, analysts said, and Boss is pushing expansion in the region, acknowledging its need to catch up.

"We are taking future growth potential in Asia and in particular in China very seriously, but we won't neglect our home markets," Lahrs told Reuters, adding he was confident of capturing growth in Asia in the medium term.

Limited firepower

But Hugo Boss's firepower is limited given its financial position.

Boss carries net debt of 459 million euros ($900 million) and its gearing - the ratio of long-term debt compared with equity capital - is relatively high at 260 percent based on 2009 estimates, M.M. Warburg analyst Thilo Kleibauer said.

So far, Boss makes 10 percent of its business in Asia and 20 percent in America. Ermenegildo Zegna - the leading global menswear brand - already generates more than 88 percent of its business overseas, 40 percent in emerging markets.

Italian fashion house Versace saw sales rising more than 20 percent at its stores in China, Hong Kong and Macau in January and Florence-based maison Salvatore Ferragamo said it expected Asia, and in particular China, to drive growth this year.

US consultancy Bain & Co sees China as "the new real frontier for luxury brands" and fashion retailers are lining up to feed China's hunger for designer goods.

From 2011, Boss plans to open 50 own stores per year - about 20 of which will be in China - to boost its share of self-generated retail sales to 60 percent from 30 percent.

New strategy

This is part the new strategy introduced by Lahrs, who has worked for Christian Dior and LVMH in the past.

He has closed underperforming stores and some showrooms, renegotiated contracts with suppliers, repositioned Boss's brands, stopped delivering to high-risk customers in Eastern Europe and is pushing own retail stores and overseas expansion.

The company, in which private equity group Permira holds 88 percent of the voting rights, trades at about 15 times projected 2011 earnings, while Polo Ralph Lauren, Richemont and Burberry are at a multiple around 18, according to StarMine.

Analysts blame lower visibility and sweeping management changes following the 2007 takeover by Permira for the discount.

Lahrs took over in August 2008 from Bruno Saelzer who left after falling out with the new owners, taking a vast part of management with him.

The stock's average monthly trading volume has fallen about 12 percent since Lahrs took over and the company's share price underperformed the DJ STOXX European personal and household goods index by about 4 percent over the same period.

"An investor faces a lot more risk and uncertainty now than about three years ago," said Scilla Huang Sun, who manages Julius Baer's Luxury Brands Fund of about 50 million Swiss francs ($66 million).

She sold her Boss holdings in 2007 after Permira made its takeover offer.

Hugo Boss is still a strong brand with a diverse product portfolio and a solid business model, but it remains to be seen whether the new management's strategy will pay off, she added.