By and  on January 29, 2008

PARIS — Morgan Stanley is getting pessimistic on European retailers.

The investment bank on Monday delivered three separate downgrades on bellwether stocks: Hennes & Mauritz of Sweden, Spain's Inditex and France's PPR, which runs Gucci Group.

It said a consumer slowdown in Europe was sure to dent sales and earnings this year. Morgan Stanley, in a separate note, said the U.K. retailing landscape offered "misty" visibility at present and that tough times were ahead.

"Weak demand looks set to be compounded by acceleration in new space openings and increasing input inflation," the bank said in a note to investors on U.K. retailing. "The key question is whether this input inflation will be passed on — if not things could get really nasty."

Meanwhile, investors in the U.S. are anticipating a cut in interest rates and, on Monday, they gobbled up retail shares, reversing some of Friday's losses. The Commerce Department reported that home sales dropped 4.7 percent in December, and plunged 26.4 percent in 2007 compared with 2006, which could signal the Federal Reserve will lower interest rates when they meet this week.

As a result, the WWD Composite Stock Index grew 2.2 percent to 865.21, while the S&P Retail Index jumped 3 percent ending the day at 406.53. The Dow Jones Industrial Average closed up 1.5 percent to 12,383.89, while the broader S&P 500 grew 1.8 percent to 1,353.97.

Apparel maker Kellwood Co. made the New York Stock Exchange's list of biggest gainers, soaring 18.6 percent to $20.28. Gains came after the company announced on Sunday that it would allow shareholders to decide if they will accept the buyout offer made by Sun Capital Securities Group LLC. On Monday, the company also named George Sokolowski as chief marketing officer and vice president of strategy.

After being slammed for most of the year, shares of women's apparel retailers rebounded, as investors took advantage of steep discounts. New York & Company Inc. buoyed 10.5 percent to $4.95, AnnTaylor Stores Corp. increased 5.3 percent to $22.40, and Chico's FAS Inc. jumped 8.1 percent to close at $9.08. The biggest gainers were Charming Shoppes Inc., which shot up 13.6 percent to $6.01, and Coldwater Creek Inc., growing 11.4 percent to end the day at $5.26.In downgrading H&M, which is set to report fourth-quarter sales on Thursday, and Inditex, the operator of the Zara chain, Morgan Stanley analyst Claire Kent said the bank was "forced" to reassess its previous ratings on the stocks after disappointing results earlier this month from Britain's Marks and Spencer Group plc and Burberry Group plc.

Morgan Stanley double-downgraded H&M from "overweight" to "underweight" and revised its target price from 480 Swedish kronor, or $75.05, to 290 Swedish kronor, or $45.35. H&M's stock closed down 0.58 percent to 344.50 kronor, or $53.87, in trading on the Stockholm stock exchange. Currency conversions were made at current exchange rates.

Kent said she was "taking a more cautious view" on Inditex, too. She downgraded the Spanish firm's stock from "overweight" to "equal-weight" and lowered her Inditex target price from 60 euros to 35 euros, or $88.71 to $51.75.

Inditex shares gained 0.22 percent to close at 36.18 euros, or $53.49, on the Madrid stock exchange.

Though Kent said H&M and Inditex appeared to be headed into rough seas thanks to the "rapid" deterioration of consumer sentiment, she added that both companies offered excellent long-term growth opportunities.

Morgan Stanley also downgraded PPR from "overweight" to "equal-weight" and slashed its price target on the French retail and luxury group from 145 euros to 95 euros, or $214.39 to $140.46.

Last week, PPR reported better-than-expected fourth-quarter sales, driven by its luxury activities. Its stock, however, has come under pressure in recent months as investors sour on retail. PPR's retail operations include a furniture chain and a book and music seller.

PPR shares closed up 0.1 percent to 94.04 euros, or $139.04, in trading on Monday. In October PPR was trading above 140 euros, or $207.

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