By and  on August 8, 2011

Retail stocks took their worst one-day plunge since the depths of the financial crisis three years ago, signaling that the sector could be in for major turbulence in the second half of the year.

Investors fixated on the U.S. downgrade from Standard & Poor’s and hit the panic button Monday, sending retail stocks down 6.1 percent and pushing the Dow Jones Industrial Average below 11,000 for the first time in eight months.

The S&P Retail Index lost 30.07 points to close at 465.36 — the sector’s worst day since December 2008. The Dow fell 5.6 percent, or 634.76 points, to 10,809.85 after losing 700 points last week. And equity investors around the world moved toward safety, pushing gold up more than $50 an ounce and breaching the $1,700 mark for the first time as the DAX lost 5 percent in Frankfurt, the CAC 40 fell 4.7 percent in Paris and the Nikkei 225 declined 2.2 percent in Tokyo.

“Now it’s just a snowball rolling down the hill,” said Andrew Fitzpatrick, director of investments at Hinsdale Associates, noting that investors were trading on fear and not companies’ underlying strengths or weaknesses.

“Markets are on edge and a lot of that’s politics and global economic worries and European debt levels,” Fitzpatrick said. “The volatility has increased and it’s something that, as investors, you don’t want to get too caught up in.”

Among the fashion companies getting hit the hardest were The Bon-Ton Stores Inc., down 19 percent to $6.07; The Talbots Inc., 18.2 percent to $2.79; Liz Claiborne Inc., 17.8 percent to $4.70; Zale Corp., 16.2 percent to $3.84; Abercrombie & Fitch Co., 13.2 percent to $61.05, and PVH Corp., 13.1 percent to $57.93.

There is no telling how long it will be before markets settle, but the sell-off as well as a host of economic concerns — from high unemployment to a drop in June consumer spending — have pulled down expectations for the second half and signaled tougher times ahead.

The first hint of the attitudes retailers will carry into the fall and key holiday selling seasons should come this week as companies weigh in with quarterly results. Macy’s Inc. will kick earnings season off on Wednesday with Polo Ralph Lauren Corp., followed by Kohl’s Corp. and Nordstrom Inc. on Thursday and J.C. Penney Co. Inc. on Friday.

How sales and earnings actually fared during the fiscal quarter that just ended will likely be of secondary importance as investors try to get a feel for the back-to-school season, how consumers are reacting to higher prices caused by steeper cotton costs, and marketing and promotional plans for the fall and holiday seasons.

Adrianne Shapira, analyst at Goldman Sachs, tempered her earnings estimates for broadline retailers for the next 12 months given economic projections that point toward a weaker consumer.

“While retailers have had little trouble passing along [low-single-digit and midsingle-digit price] inflation, we believe the back half of this year could be a different story,” Shapira wrote in a research note. “Given high unemployment and inflation across food and gas in addition to apparel, we expect the low to moderate consumer to show more resistance to these increases.”

Shapira expects companies she described as “secular winners” — including The TJX Cos. Inc., PVH, Nordstrom, Polo and Tiffany & Co. — to continue to gain market share on their various strengths as other retailers are held back by the weakening macro environment.

Craig Johnson, president of Customer Growth Partners, said retail sales growth would slow from a 6.2 percent gain during the b-t-s season to 4 percent in the fourth quarter.

“This Christmas we do think they’ll be some modestly negative impact from all the uncertainty that’s out there and the continued very weak job growth,” he said.

Johnson was polling consumers in stores over the weekend for his rolling survey and said the U.S.’ downgrade hadn’t immediately shaken their mood. “The downgrade didn’t really effect retail, the stores were just about as crowded as they were last August at this time with back-to-school shopping,” he said.

Consumers, luxury shoppers in particular, will no doubt start to pay more attention should the markets continue on their jagged, but steeply downward path in the coming days and weeks.

The Obama administration lambasted S&P over the weekend for the credit downgrade and the President himself took to the airwaves Monday in an attempt to calm investors’ nerves and consumers’ fears.

“Markets will rise and fall, but this is the United States of America,” said Obama in televised remarks from the White House. “No matter what some agency may say, we always have been and always will be a AAA country.”

S&P cut the U.S. credit rating to “AA-plus” from “AAA” Friday.

Paul Nolte, managing director with investment firm Dearborn Partners, described it the downgrade as a political statement of what everybody already knew: that the U.S. simply has too much debt.

“We’re the cleanest shirt in the laundry,” Nolte said. “You’re still going to come to the U.S. to get debt, you’re going to buy our treasuries. We’re still going to pay our debts, so it doesn’t mean that we’re bankrupt.”

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