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Versace is perhaps best known for redefining the plunging neckline with a famous green dress cut to the belly button, as worn by Jennifer Lopez in 2000. But far from the red carpet, the Italian fashion house is gaining more notoriety for its plunging profit. Yesterday, Gianni Versace SpA announced it would cut 350 jobs worldwide, one-quarter of the company's work force.

"Trading conditions in the wake of the global financial crisis have been severe and the company expects to make a loss in 2009," Versace's chief executive officer Gian Giacomo Ferraris said in a statement. "No organization can allow a situation like this to continue."

It's the first major step in a three-year restructuring plan launched by Mr. Ferraris to return the fashion icon to profitability. He took over as CEO in June, amid reports that the former head of the company had stepped down because of disagreements about the company's future.

The privately held company is projecting losses of roughly €30-million ($48-million) in 2009, according to a Milan-based consultant working on the restructuring with the company. Versace is planning for a flat 2010, with a modest increase in sales in 2011, the consultant said. There will be no capital expenditures and no store openings in the coming year as executives clamp down and attempt to move the company forward.

The global recession has dealt a major blow to the entire luxury retail sector, as fashionistas have reassessed their need for the latest it bag or decadent designer frock.

"Many shoppers began the year by 'shopping their closets,' deferring new purchases, and focusing on more durable items with less fashion content," said a report released last week by consulting firm Bain & Co., which forecast an 8-per-cent drop in worldwide sales for the luxury industry. Moderate gains are expected in 2010, but the recovery in the sector will not hit its stride until 2010 or 2011, it said.

Those who did want to spend were confronted with "luxury shame" at the purchase of "more ostentatious items" in the midst of the downturn, the report said, fuelling a go-big-or-go-home approach to buying - they either went all out or settled for discount fashions.

Last week, LVMH Moët Hennessy Louis Vuitton SA, the world's largest luxury goods company, reported revenue fell 6 per cent for the first nine months of 2009, compared with the same period last year. However, the company said it has seen improvements in the third quarter that bode well for the industry in the year to come.

However, retailers should be prepared for a new reality in the luxury goods sector: Sales were up in the third quarter, but only customers at the highest income levels are opening their wallets, according to a report by Pamela Danziger, president of Unity Marketing, a consulting firm in Stevens, Pa.

Versace's financial woes stretch back to 2004 when it struck a deal with the banks on a €120-million debt-restructuring package.

Revenue was also hurt this year by the insolvency of Ittierre, a key Versace licensee that manufactured and distributed its JVC line of jeans and sportswear. Ittierre was granted bankruptcy protection in February.

Versace would not specify where the 350 layoffs will occur, but said the cuts should be done by the middle of next year.