After the outright free-fall of last fall and winter, retail stocks found their footing in the second quarter and rose 9.8 percent during the months of April, May and June.
“Catastrophe has been averted,” said Paul Nolte, director of investments at Hinsdale Associates, noting government spending has helped stabilize the economy.
“The next step is to actually start to see real improvement in the economy,” Nolte said. “If we don’t get real improvement…we kind of wallow around here for a while.”
But changing consumer mores could upset the historical ebb and flow of retail shares, which in the past have been “early cycle stocks,” rising midway through a recession in anticipation of increased spending as the economy improves.
Analysts are split on whether the pattern will hold true for this recession, the worst in more than 70 years.
“You’re going to see more saving than spending,” Nolte predicted. “That obviously will hurt retail. My gut would tell me that they’re [retail stocks] probably not going to be early cycle anymore. I don’t know what will be the early cycle or for that matter where retail will fit in. My guess is that retail will be a midcycle [sector], it will much more closely follow economic trends.”
The S&P Retail Index ended the quarter with a 0.7 percent dip Tuesday to close at 322.55. Retail stocks hit their low for the year on March 6 and have risen 44.5 percent since then.
Taking a broader look, the Dow Jones Industrial Average fell 1 percent Tuesday, but advanced 11 percent for the quarter to end at 8,447. So far this year, retail stocks are up 15.5 percent, a far better performance than the Dow, which has retreated 3.8 percent.
Stocks are often looked at by calendar quarters, even though most retailers are about a month behind, following a fiscal year that begins in early February.
There are still a host of challenges for the economy, consumers, retailers and their suppliers in the second half.
Consumer confidence fell last month and unemployment stands at 9.4 percent and is projected to keep rising. Consumers are also saving more, stashing away 6.9 percent of their disposable income in May, an increase from a savings rate of 1.8 percent for all of last year.
A rise in savings is good news for household finances, but trouble for retailers who have spent the last several years positioning themselves for never-ending growth. And hanging over everything in the fashion world is the question of the lasting impact of the financial crisis on the consumer, who is still contending with the fallout in the housing sector and tight credit markets.
Luxury, once thought to be nearly recession-proof, could prove to be a canary in the coal mine.
High-end department stores have been among the hardest hit in the recession and some designers, such as Stefano Gabbana and Domenico Dolce, are working to lower their prices in the face of a changing consumer. The duo cut prices 10 to 20 percent for spring shipments of both Dolce & Gabbana and D&G.
“The idea is to peel off the superfluous because there are too many clothes, too many seasons, too much advertising — too much of everything that is tacked onto the final price,” Dolce said. “We want to go back to how things were 20 years ago. It’s about drawing the line.”
Whatever happens over the rest of this year, there were plenty of opportunities for investors to make boatloads of money in the fashion sector in the second quarter.
One of strongest gainers was Jones Apparel Group Inc., which shot up 155.5 percent in the quarter, when it posted a smaller-than-expected first-quarter loss and said it would close 225 unprofitable stores by the middle of next year. Saks Inc., among the hardest hit stocks in the early stages of the credit crunch, and J. Crew Group also saw its shares more than double and many others bounced back strongly.
“These stocks doubled and tripled because they were way oversold,” said Todd Slater, analyst at Lazard Capital Markets. “Investors were nervous about consumer names generally.”
Even though the retail stocks are more realistically priced than they were, Slater said the sector could still hit its stride in the early part of the economic cycle and move higher this year.
“We anticipate a meaningful margin recovery in retail and consumer names starting in the fourth quarter, and I believe investors should be placing their bets now, while the environment is a little bit soft,” he said.
Even if stocks do bounce back further, the dynamic in the sector is undeniably changing as chains curtail their expansion plans and focus on leaner organizations.
“Right now, it’s not about growth, it’s about survival,” Slater said, projecting there would be a net loss of about 500 apparel stores this year. “The retail world needs to contract probably even at a greater rate.”
Some of the industry’s strongest players actually turned in the worst stock performances this spring.
Among those losing ground in the quarter were Wal-Mart Stores Inc. and one of its suppliers, VF Corp. Both companies are seen as well managed with a broad enough base to weather the economic storm and neither felt the brunt of the biggest stock declines in the half-year leading up to the second quarter.
“Azzedine has been one of the biggest influences in my life. He has always been such a strong, loving, fatherly figure to me. I call him Papa. His designs are indescribably unique, they are pieces of art. He knew how to make the female form look its loveliest. I have so many memories of him; my favorite might be during my first show with him in Paris. He liked me and he wanted to help me get more work. He called all his friends at Kenzo and Comme des Garcons, and asked them to book me. They said, ‘But she can’t walk!’ And he said, ‘but she has such a great ass!' His friendship and support has been the great privilege of my career. I can't imagine life without him. Repose en paix mon Papa.” - @stephanieseymour tells @wwd. #wwdfashion (📷: @steveeichner) #alaia #azzedinealaia
Azzedine Alaïa, flanked by two of his closest friends, models Stephanie Seymour and Naomi Campbell.
He designed Seymour’s dress for her 1995 wedding to Peter Brant, and treated Campbell (who famously called him Papa), like a daughter. For more on the legendary designer, tap the link in bio. #wwdfashion #alaia #azzedinealaia
Azzedine Alaïa's “I-did-it-my-way” ethos stood out starkly at a time when brands are experimenting with consumer-facing fashion shows, coed formats and trans-seasonal collections – anything to perk up lackluster sales of ready-to-wear in an age of Insta-everything. “It’s not creation anymore. This becomes a purely industrial approach,” the late designer told WWD in an interview last year. “But anyway, the rhythm of collections is so stupid. It’s unsustainable. There are too many collections.” Read more about the iconic designer’s life and work on wwd.com, link in bio. #wwdfashion #azzedinealaia (📷: @WWD Archive, 1986) #alaia
Sneaker reselling app @goat’s latest exhibit, "The Greatest: New York," tells the story of New York's sneaker culture. To celebrate the exhibit, an intimate crowd gathered on Thursday night at the pop-up gallery space, located at Platform in Culver City, to hear guest speaker and illustrator @esymai talk about her own rise in streetwear and women in the business. "For me I'm just someone who is creative. I like to create things," said Chang. #wwdfashion
Azzedine Alaïa, one of the most iconic couturiers of the modern era whose body-con designs defined Eighties fashion, has died in Paris. The diminutive Tunisian-born designer, known for his structured knitted dresses with fitted waists and impeccably cut, figure-hugging second skin silhouettes was deeply admired by his peers, and counted supermodel Naomi Campbell - his adoptive daughter - among his inner circle, one of a gang of glamazons including Farida Khelfa, Carla Bruni and Stephanie Seymour who became ambassadors of his style. (📷: Alexandre Guirkinger) #wwdblast