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A trio of financial crises left investors gasping for breath on Monday and the fashion industry wondering just how much more stress the retail markets, and even the resilient luxury sector, can take.
The growing concern over consumer confidence and spending as retailers prep for the key holiday season fed a steep fall in the S&P Retail Index on Monday. While the index didn’t mirror the 500-point plunge in the overall Dow Jones Industrial Average, it did decline 2.5 percent, or 10.16 points, to 396.15.
There were sharp drops in the shares of Macy’s Inc., down 6.5 percent; Saks Inc., 6.4 percent; Sears Holdings Corp., 3.2 percent, and Kohl’s Corp. 2.2 percent. Specialty chains taking hits included American Eagle Outfitters Inc., down 3.7 percent; AnnTaylor Stores Corp., 3.4 percent; Limited Brands Inc., 3.2 percent; Abercrombie and Fitch Co., 2.4 percent, and Gap Inc., 1.3 percent. Also weathering declines were fashion firms such as Liz Claiborne, down 3.8 percent; Polo Ralph Lauren Corp., 3.5 percent; Coach Inc., 3.3 percent, and VF Corp., 1.6 percent.
Overseas players didn’t fare much better. In London, shares of Asos fell 3.6 percent; Burberry Group plc, 2.5 percent, and Marks and Spencer Group plc, 1.9 percent. Luxury players across Europe weathered declines, with Bulgari down 3.8 percent, LVMH Moët Hennessy Louis Vuitton off 2.8 percent and PPR down 2.1 percent.
The question being asked by many observers on Monday was how much worse things could get. The drop in the Dow was the worst since Sept. 11, 2001, and the news of the bankruptcy of Lehman Brothers, the sale of Merrill Lynch to Bank of America and the continuing search for financing by American International Group effectively wiped out any optimism generated last week by the government’s bailout of mortgage agencies Fannie Mae and Freddie Mac. Demands are growing on Capitol Hill for a second economic stimulus package, while the two presidential candidates squared off over the economy (see sidebar).
For many major retailers, the first point of concern was the New York market. Thousands of jobs are expected to be lost at Lehman and Merrill over the next few weeks, contributing to an already deteriorating New York City economy.
“The answer is not to overreact,” said Richard Baker, chief executive officer of Hudson’s Bay Trading Co., which owns Lord & Taylor, Fortunoff, Creative Design Studios, The Bay, Zellers, Home Outfitters and Fields. “It’s a consolidation that in the long term will be good. And the faster all of this bad stuff gets through the system, the better. The faster these guys merge up, the better. If they were to drag, the uncertainty makes it much worse.”
While the crisis is “definitely a negative” for retailing, “it’s much more likely to affect Manhattan retailing than the rest of the world,” Baker said. “The percentage of our sales out of New York City is small, unlike other retailers.”
The flagships of major retailers such as Saks Fifth Avenue and Bloomingdale’s have helped float the remainder of the chains in the current economic downturn, as these stores have been boosted by the influx of tourists into Manhattan as a result of the weak dollar. Now demand from New York residents is likely to fall further just as the dollar has begun to strengthen against the pound and the euro, perhaps impacting the level of tourists.
And not everyone was as sanguine as Baker. When asked about the impact on retailing, one ceo of a national specialty chain who requested anonymity responded: “This is going to kick everyone’s ass — psychologically and practically. New York City is run by bankers who spend a lot of money, and these are global companies. The luxury market has been inflated for a number of years because of Wall Street and real estate money, and now it’s coming down to reality, but this is certainly not good news for most retailers, although those with strong strategic businesses with the right product will win….This will also [further] the resetting of property values and landlords will be more willing to negotiate rents. Wall Street drives an enormous amount of the housing market and everything else here.”
Monday’s sell-off and drumbeat of not just bad, but unprecedented, financial news might well be enough to make even the well-to-do check their stock portfolios and reconsider spending habits.
“The financial markets are in turmoil,” said Ryan Sweet, senior economist at Moody’s Economy.com. “Wall Street’s undergoing a significant reorganization. There’s a significant amount of uncertainty in the health of the financial sector and the outlook for the broader U.S. economy.”
Sweet said it likely would be a volatile week for the stock market and that investors would be watching the Federal Reserve Board closely today to see if it tweaks interest rates or makes any other moves to help calm the waters.
As Wall Street works to sort itself out, shoppers might take the stock market’s sell-off to heart.
“Consumers see a decline in the stock market as a bad omen,” said Sweet. “They become more pessimistic and, in some cases, they may retrench.”
“This is not good news for the luxury business at all,” said Emanuel Weintraub of Emanuel Weintraub Associates. “Luxury is premised on the idea that the rich always have money and are prepared to spend it. Now the luxury-class consumer is asking, ‘How safe are my investments?’ If an icon like Merrill could go down, if a Lehman’s could go down, who else could go down? Luxury retailing should tighten their seat belt. It’s in for a rocky ride.”
Diane Levbarg, executive vice president of Missoni USA, said, “The luxury consumer is buying, but buying differently. I’m uncomfortable and conservatively optimistic. I’m worried that it’s a truly challenging moment.”
She noted that she’d had an “extremely weak August” followed by an “extremely positive September. Am I going to have a good day tomorrow? I hope so.”
Still there are some who will be able to keep spending no matter what happens on Wall Street.
At high-end jewelers, some of the luxe crowd are shopping with an eye toward both fashion and investment.
“So far this year, we haven’t really felt any downside because of the Wall Street situation,” said Henri Barguirdjian, president and ceo of Graff in the U.S., where the average retail sales ranges from $160,000 to $200,000. “We are dealing with a segment of very high-income people, in most cases very new wealth, and these people understand that it’s important to have a certain percentage of what they own in precious stones and jewelry because it keeps appreciating. So in that respect, we are very lucky, and we are still doing well. Having said that, it’s obvious for the jewelry industry in general that [the Wall Street crisis] has created a bad atmosphere that’s not conducive to business. However, I am still optimistic. We are going full steam with our construction on Madison and 63rd Street [site of a new flagship]. We have plans to open stores next year. The crisis is probably a needed readjustment in the world of Wall Street. It’s a painful exercise to deleverage and readjust.”
Not everyone counts the superwealthy among their target audience — a fact of retail life already playing itself out in the retail real estate market.
“Things in New York City aren’t selling as quickly as they did,” said Jeffrey C. Paisner, retail broker at Ripco Real Estate. “What’s changed is the velocity of the market. You don’t see Gap and Banana Republic making deals all over the place. A lot of tenants are not in an expansion mode right now.”
Paisner is confident that the upper end of the market will hold, but said the aspirational luxury customer would get hurt.
“It’s also going to have a great effect on chains such as Ann Taylor and Club Monaco,” he predicted. “Retail properties are staying on the market. The pressure on us to make a move and succumb to landlords’ demands was so great. Now I notice a completely different dynamic. It’s more of a buyer’s market right now. There’s much less competition. The former Ann Taylor Loft store on West 34th Street between Fifth and Sixth Avenues has been on the market for months. A few years ago that space would have been gone, gone, gone. They want $400 a square foot.
“I think it’s going to have a tangible real effect and a psychological effect on consumer spending until there’s a sense that the leak’s been plugged,” Paisner continued. “New York will always be more insulated because it’s an island. But appreciation has leveled off and lost a certain amount of velocity.”
At an afternoon press conference at City Hall, Mayor Michael Bloomberg said New York City would be sad to see Lehman go, but had prepared for such a day.
“As sobering as the economic news is, the city is as well positioned as it’s ever been to handle turmoil on Wall Street,” Bloomberg said. “Like everyone else, I had hoped Lehman Bros. could be saved, along with the jobs that employ more than 12,000 people who live in the New York area.”
He added that one Wall Street job is generally believed to help create two to three other jobs. But, he said, it was premature to quantify the economic impact of those losses.
The mayor said he had spoken to executives at Merrill Lynch and Bank of America, who believed that their deal would result in minimal job losses in the New York area.
According to its Web site, Merrill Lynch employs 60,000 people worldwide.
Bloomberg said that, in preparing for a downturn, the city had factored in a 12 percent decline in tax revenues when setting its fiscal 2010 budget, which will operate on a $2.3 billion deficit. In May, the office of City Comptroller William C. Thompson projected that New York would lose 15,000 to 25,000 jobs on Wall Street between August 2007 and March 2009. According to the comptroller’s office, the financial sector accounts for about 10 percent of the city’s jobs and more than 30 percent of its salaries and wages.
The mayor vowed not to follow in the path of city lawmakers who addressed the city’s financial crisis in the Seventies by slashing services. He also noted a sharpening of New York’s competitive edges in industries outside of finance, such as media, tourism, film and fashion.
New York Governor David Paterson estimated that 20 percent of state revenue is derived from Wall Street and that Bear Stearns, Lehman Bros. and Merrill Lynch cumulatively employed 30,000 in the state, paid 10 percent of all Wall Street wages and were responsible for 15 percent of the financial center’s famed bonuses.
Richard Hastings, consumer strategist at Global Hunter Securities, said some things recently had gotten better for the consumer, such as the decline in the price of fuel, leading to an improvement in consumer confidence. “We are also seeing an uptick in spending intentions. People are starting to get the sense that the worst of inflation has taken place,” he said.
What has gotten worse, Hastings said, has been the ability of the household sector to use credit for spending. “Consumers have used either home equity or home appreciation to fund spending. We don’t see the situation for home equity as bottoming out until 2011,” he concluded.
The problem goes beyond the effect on sales: “For New York City, the decrease in sales receipts will cause a dangerous short in tax collections. The collapse in tax receipts from corporate taxes and sales taxes could be extremely dangerous for New York City and state municipal bonds,” Hastings said.
He foresees continued consolidation in the financial services industry and that the Lehman bankruptcy and Merrill sale are “just the beginning.”
“Sept. 11 was the worst, but today is also an absolute disaster,” he commented. “I lived in New York after the Drexel Burnham Lambert debacle and witnessed the deteriorating mood in New York. I moved away before it bottomed out, but it lasted for about three years.”
In a taped presentation to Safe Money Report subscribers on “From Plague to Pandemic,” editor Mike Larson of Weiss Research listed some firms in varying sectors that could see pressure in the coming months. Those firms include HSBC, Lowe’s, Intel, BJ’s Wholesale and Tiffany.
Larson noted that the problem for a wholesale club is its reliance on high-margin, impulse items such as televisions and other electronics — purchases that are easily postponed in difficult times.
Michael Niemira, chief economist and research director at the International Council of Shopping Centers, saw the bad news on Wall Street as “a continuation of the pressure, to some extent, directly and indirectly, on all retail, but in particular luxury retail. Certainly some of the key markets such as New York, where a lot of these firms are headquartered, would be hurt most.
“It’s a series of issues that are still being worked through the financial system,” he continued, “and maybe we are coming closer to the end of these problems.”
Seizing on his optimism, he added: “We’ve been seeing a series, really now for a year, of financial problems, and this is the culmination of it. There aren’t that many more financial institutions that haven’t been touched. It doesn’t mean that we are out of the woods. It just means that maybe the worst of the financial problems are upon us.”