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Retail Stocks Feel the Heat as Index Dips 1.3%

The Dow Jones Industrial Average closed down 1.1 percent to 13,851.08 Friday as investors cashed in profits after the exchange posted a record high just over 14,000 earlier in the week.

The Dow Jones Industrial Average closed down 1.1 percent to 13,851.08 Friday as investors cashed in profits after the exchange posted a record high just over 14,000 earlier in the week.

Wall Street also balked as earnings trickled in from several large companies, including Google Inc. and Dow component Caterpillar Inc., both of which posted lackluster second-quarter results, dragging the markets down as investors tasted their first disappointment of the second-quarter earnings season.

The S&P 500 Retail Index followed suit, shedding 1.3 percent to 515.52.

“I think the retailers are continuing to react to difficult business conditions,” said A.G. Edwards analyst Robert Buchanan. “And it is a summer Friday, so you can get some pretty wild swings for no good reason.”

Buchanan expects the retail sector to remain under pressure — as “negative psychology,” after slides in consumer spending and same-store sales since spring, deepens its grip on consumers and investors alike.

“The group has been weak for a long time — and that is in reaction to weak consumer spending, which has been sliding for so long now there is a certain depressing aspect to it,” Buchanan said.

Meanwhile, analysts are looking to this week, when retailers start to post second-quarter results. On deck are: Cache Inc., Columbia Sportswear Co., Hanesbrands Inc., Kenneth Cole Productions Inc., Luxottica Group SpA, Mothers Work Inc., Nike Inc. and Skechers USA Inc.

First Albany Capital analyst Paula Kalandiak expects Mother’s Work to meet expectations for its third quarter, results of which will post on Tuesday. However, she believes the company could report bad news to come.

“We believe Mother’s Work is being severely impacted by fashion trends that enable expecting mothers to purchase much of their maternity wardrobe from nonmaternity stores,” said Kalandiak in a research note.

Skechers is also slated to report Tuesday. Wedbush Morgan Securities analyst Jeff Mintz, who noted the stock’s 20 percent decline since its April 26 first-quarter report, said in a note that he expects Skechers results to beat estimates.

This story first appeared in the July 23, 2007 issue of WWD.  Subscribe Today.

Mintz noted Skechers is poised to increase its square footage presence in both its own retail stores, which it plans to open 33 of this year, and in department stores.

“We also believe the strength of the Skechers brand is causing major accounts such as Famous, Macy’s and J.C. Penney to allocate more space to Skechers,” said Mintz, who added that this allows the company to sell more merchandise as long as product remains trend-right.

Nollenberger Capital Partners analyst Ann Poole started coverage of Aeropostale Inc. with a “buy” rating and Pacific Sunwear of California Inc. with a “neutral.”

Poole believes Aeropostale has effectively evolved its brand beyond a low-priced product and elevated its image through improved merchandise and marketing, which she sees translating into sales and earnings growth, especially in the back half of the year.

“We believe the new back-to-school assortment is significantly stronger than last year.” Poole said in a note. “The assortment is more focused and offers a better variety of wear-now and fashion-appropriate merchandise as well as a stronger bottom collection.”

Poole is less optimistic about Pacific Sunwear.

“We think the core PacSun concept is challenged to reestablish a niche in the competitive teen marketplace,” Poole wrote. “While the company was founded to be a cool, authentic destination for surf and skate apparel, we believe the massive size of the retailer has compromised what once made the company so unique and successful.”