By and  on August 11, 2009

Retail shares ended a two-day winning streak with a 2 percent decline Monday as a group of Citi analysts forecast a tough back-to-school season, although one with some potential upside.

Comparable-store sales at broadline retailers are forecast to fall 3 to 4 percent for August and September combined — a significant drop from the 0.9 percent b-t-s rise last year and the 10-year average increase of 4.3 percent, said Citi analyst Deborah Weinswig on a conference call with fellow Citi analysts Kimberly Greenberger and Kate McShane.

But chains could scrape through relatively unscathed even if they have to cut prices to clear sales floors for the holiday season.

“If back-to-school sales don’t materialize early, we believe that retailers could become very promotional in an attempt to drive traffic and sales,” Weinswig said. “However, product cost deflation provides some flexibility to lower prices without a significant negative hit to gross margins.” Retailers will pay 5 to 7 percent less for apparel, footwear and home goods in the second half, she predicted.

And the consumer pressure is sure to be on.

Forty-five percent of shoppers plan to spend less on b-t-s goods this year and discount stores are expected to be the primary shopping destination, according to a Citi survey.

Weak sales over the b-t-s season would be a continuation of recently dour trends. July comps were down, although similar to those in June, and comparisons with last year won’t really start to ease until October, the first full month after last fall’s credit meltdown.

Divining how retail stocks will fare in the coming weeks and months remains a difficult process and one that includes how stores perform versus expectations and how they are projected to do as year-ago comparisons ease.

Investors will get a read on how chains did this spring and hints on expected performance for the third quarter and beyond when companies begin reporting second-quarter results this week, with Macy’s Inc. set to kick off the retail earnings season on Wednesday.

Perhaps wary of a sobering up after the recent rally, investors took money out of retail Monday after the sector hit a new high for the year last week.

The S&P Retail Index fell 7.4 points, or 2 percent, to 365.30 Monday, as the Dow Jones Industrial Average retreated 0.3 percent, or 32.12 points, to 9,337.95.

The companies reporting second-quarter results this week were mostly down for the day, including Macy’s, off 4.8 percent to $15.23; Urban Outfitters Inc., 4.4 percent to $26.84; J.C. Penney Co. Inc., 3.5 percent to $33.21; Nordstrom Inc., 3.1 percent to $29.36; Kohl’s Corp., 1.8 percent to $52.53, and Abercrombie & Fitch Co., 1.6 percent to $32.28.

Wal-Mart Stores Inc., scheduled to report on Thursday, bucked the trend and rose 0.9 percent to $49.72. The results will be the first since the discount giant ceased reporting monthly sales results at the end of the fiscal first quarter, in April.

One heavy hitter that’s liquidated some of its retail holdings in the rally this year is investment firm Lord, Abbett & Co., which sold 5.3 million shares of J. Crew Group Inc. between Dec. 31 and July 31, according to a Securities and Exchange Commission filing. Shares of J. Crew shot up 130.8 percent over that seven-month period. The company now owns 6.5 million shares of the firm, or 10.4 percent of those outstanding.

As of July 16, chairman and chief executive officer Millard “Mickey” Drexler beneficially owned 8.5 million shares of J. Crew stock, or 13.5 percent of the shares outstanding. The stock dipped 4 percent to $30.82 on Monday.

However retail plays out over the next few years, Coach Inc. chairman and ceo Lew Frankfort is expected to be on hand to steer his company through it.

Coach said Monday its board approved a contract extension for Frankfort. The new arrangement will push his contract, previously set to expire in July 2011, through 2013. The extension came with a performance-based award of $10 million in restricted stock set to fully vest in June 2013 and subject to Coach meeting certain financial goals, the company said.

Shares of Coach slid 2.3 percent Monday to $29.68.

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