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Retail Stocks Fall Thursday Amid Spending Fears

With the banking bailout in limbo, Wall Street jitters prevail.

Even as retail shares fell steeply yet again Thursday on renewed fears of a slowing economy and with the banking bailout in limbo, the fashion industry turned its thoughts to the consumer and wondered: What now?

If retailers and brands want to thrive — or in the case of marginal players, just survive — the holiday season, they’re going to have to figure out how to appeal to a customer who is strapped for cash, paying more for gas and food than a year ago, facing rising unemployment and being besieged by economic doubt.


Thursday was just one in a string of rough days on the stock market that has served to heighten that uncertainty — for consumers and fashion companies alike.

The Standard & Poor’s Retail Index fell 4.2 percent, the ninth largest percentage dip since the recalibration of the index in 2002 and beyond the Dow Jones Industrial Average’s 3.2 percent decline Thursday to 10,482.85.

General Growth Properties lost nearly half its value after a Wall Street Journal report indicated executives of the real estate investment trust, or REIT, had sold shares in recent days. Several fashion firms on both sides of the wholesale-retail divide registered double-digit percentage declines, including a 22.4 percent swoon for Hartmarx, following a larger-than-expected third-quarter loss, and a 15 percent drop for Liz Claiborne Inc. And many suffered hits larger than the S&P Retail’s 4.2 percent slam.

Traders were driven in part by more signs of the weakening economy. Weekly jobless claims rose by 1,000 to 497,000 and orders for U.S. factory goods fell 4 percent in August — the largest decrease since October 2006.

Adding to the jitters was the still unknown fate of the $700 billion bailout for the embattled banking sector, which rests, once again, in the hands of House of Representative lawmakers, who rejected a similar plan earlier this week. The Senate approved a revised bailout plan Wednesday night. The House is expected to vote on the bill today.

It is unclear just how shoppers will react to all of this — already, the National Retail Federation has projected a meager 2.2 percent rise in holiday sales, the worst showing since 2002.

The shifting consumer values and global economic weakness are reverberating throughout fashion’s price scale.

For example, Standard & Poor’s equity analyst Marie Driscoll downgraded Tiffany & Co. stock to “sell” from “strong buy.”

“Upheaval in global financial markets, deteriorating consumer sentiment and economic fundamentals cause us to cut our projections,” Driscoll said in her downgrade. “Recent comments from other consumer luxury brands and retailers suggest a global pullback. We expect fewer travelers to the U.S., which had benefited luxury flagships, and weakened demand in international markets as well.”

Driscoll said she did not see a near-term catalyst for the stock and lowered her target price to $30 from $55.

It isn’t just the luxury sector that appears to be losing shoppers, however.

“In the last 10 days, I think that mall traffic just came to a grinding halt,” retail analyst Jennifer Black, president of Jennifer Black & Associates, said. “Everyone was focused on the television, people were taking money out of their money market funds. Nobody trusted anything.”

Black said women would take to the malls again once the financial waters calm, but could retreat to a comfort zone in their buying.

“In an environment like this, we believe the consumer buys classic, timeless merchandise,” she said, adding, “You cannot have mediocre product. It’s got to be great.”

She gave high marks to Talbots and Polo Ralph Lauren for their classic fashion approach, to J. Crew for its ability to capture shoppers trading down from luxury brands, to Kohl’s for aggressive pricing and to Macy’s for drawing shoppers’ attention with advertising that highlights its national brands, such as Tommy Hilfiger. She questioned the quality of Ann Taylor’s current merchandise.

“The crisis of confidence is affecting everyone,” Catherine Sadler, president of the Catherine Sadler Group brand consulting firm, said. “There’s no question that spending is going to be heavily curtailed. The consumer assesses their wealth not just with paychecks, but with their stock portfolio and their home value.”

The continuing financial turmoil comes at a difficult time for fashion, which has struggled to establish strong trends, leaving consumers to spend their smaller pool of disposable income on other things, such as electronics.

“Too many brands seem to be stuck in a state of sameness,” she said. “I’m concerned that the consumer may decide to sit this one out; she may make do with what she already has.”

Marc Gobé, president of Emotional Branding, a think tank and consultancy, believes that well-established brands at the high and low end of the price spectrum will still resonate with consumers, but, “in this economy, if you’re not Wal-Mart or [Louis] Vuitton, you’re in trouble.”

Brands stuck somewhere between those two poles — with fewer marketing dollars to spend — will need to make sure their offerings and presentation are spot-on.

“The consumer base is going to be completely different psychologically,” Gobé said. “Now you are dealing, from an emotional perspective, with a customer who is in a state of fear, somebody who doesn’t know how they’re going to pay their mortgage, somebody who doesn’t know if they’re going to keep their job.”

He expects that consumers “will be a lot more careful with their dollar. They will make decisions at the point of sale.”

Although the luxury and mass markets have been historically less vulnerable to economic swings, no segment of the market can afford to be complacent.

“I don’t think in these uncertain times that any apparel brand is completely safe,” Mike Toth, president and chief creative officer of Toth Brand Imaging, said. “America is experiencing a real transformation.”

As consumers on the lower rungs of the economic ladder continue to make utilitarian purchases, high-end customers will sharpen their buying focus, Toth said.

“In this economy the luxe customer will be buying less, but rely more on brands to continue to define who they are when everything around them is in a state of flux,” he said.

For companies with brands in the middle, and at the greatest risk, Toth laid out three commandments: remain true to who you are, make sure you know who your consumer is and differentiate in a meaningful way so you can command a premium.

“Any change is nerve-racking,” Toth said. “Consumers will be looking for relief and will be more selective with their choices. Brands that help make a consumer feel a little better, that can transport them to a safe and fulfilling place, will succeed.”�