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Retail Shares Dive Again as Outlook Darkens

Investors pushed stores? shares down on persistent fears shoppers will freeze their spending well into next year

Credit jitters have given way to holiday dread.

The severity of the retail downturn was on full display Wednesday, in the process further depressing already downtrodden stocks and anemic holiday expectations.

On a day marked by disappointments on several fronts, the Commerce Department reported declines in nearly every category of retail sales in September, including department and specialty stores; the National Retail Federation issued its lowest forecast for holiday spending in the seven years in which it has issued them, and the weakness recently seen in retail shares swept over the vendor community, led by a nearly 30 percent drop in the price of Jones Apparel Group Inc. shares. Jones reduced its earnings estimates for the year after the market closed Tuesday.

Fears of just how far shoppers will pull back in the run-up to holiday combined with the fresh signs that consumer activity fell off a cliff last month to drive retail shares down a record-breaking 8.4 percent Wednesday.

The fall is the second record decline in as many weeks as the Standard & Poor’s Retail Index dropped 24.09 points to end at 263.01. The index, which was recalibrated in mid-2002, has registered its top six declines since the banking and economic crisis kicked into high gear last month.

The Dow Jones Industrial Average dropped only slightly less — 7.9 percent, or 733.08 points, to 8,577.91 — a fall of more than a quarter since the end of August. The declines in the Dow over the last two days almost wiped out all the gains the index made in its record-setting spurt on Monday.

And the more data that becomes available, the worse the news appears to get for increasingly beleaguered retailers. Sales at specialty apparel stores fell 2.3 percent in September compared with August, and department store sales declined 1.5 percent, the Commerce Department reported. Compared with September 2007, specialty store sales slid 0.4 percent to $18.8 billion and department store sales dropped 5.3 percent to $16.5 billion. Sales in September declined in every retail category compared with August, with the exception of gas stations and health and personal care stores.

There were no signs of holiday cheer to lift spirits or stocks. In conjunction with BIGresearch, NRF said Wednesday that consumers would spend $832.36 on average for gifts, merely 1.9 percent more than the $816.69 spent last year, when the gift purchasing rose 3.1 percent. This represents the lowest increase in planned consumer spending since the survey began in 2002.

However, NRF is sticking to its holiday sales forecast of a 2.2 percent gain to $470.4 billion.

NRF stated that some consumers might be holding back on self-purchasing to take advantage of holiday pricing. Also, expecting that retailers will be taking markdowns earlier this year, 40.2 percent of consumers will start their holiday shopping before Halloween.

Spending is expected to be particularly weak among young adults, as 18- to 24-year-olds plan to spend $50 less on gifts than a year ago. The survey polled 8,117 consumers and was conducted Sept. 30 to Oct. 7.

With neither a hot trend nor an economic recovery in sight, retailers this week have unleashed a wave of promotions to lure shoppers back to the stores.

“Given where the world is now, it’s likely to become more promotional over the holiday season,” said Saks Inc. chairman and chief executive officer Stephen I. Sadove.

Saks Fifth Avenue anniversaried its “friends and family” promotion by extending it to a greater audience. J. Crew sent out an e-mail offering an extra 20 percent off merchandise already on sale through Saturday and Henri Bendel sent an invitation to customers earlier this month inviting them to “enjoy 25 percent off on full-price purchases of your choice.” It’s good for a single transaction on one day only and expires Oct. 31.

Two-for deals have become ubiquitous. This week, Lord & Taylor ran an ad saying “buy more, save more” by getting 20 percent off on two or more pairs of boots, while Dress Barn offered 50 percent off the purchase of a second sweater.

In an attempt to generate traffic and sales and work down inventories, discounting is expected to accelerate as the holiday season approaches and be even more intense than last year, according to retail sources.

During his presentation at the Argyle Executive Forum for retail and consumer products executives at the New York Athletic Club Wednesday, Saks’ Sadove stressed the need for inventory control if aged merchandise is to be cleared out and fresh goods brought in to keep fashion customers coming back. He noted that fall was planned six to nine months ago, when business wasn’t as bad.

He also said international tourism was slowing down and cited a “bifurcation” in selling, with special and sometimes high-price merchandise checking out and basics more apt to linger. With the stock market going through dramatic swings, “the consumer starts to get frozen,” Sadove said, adding he’s optimistic the government bailout is “going to go a long way to easing how a consumer thinks.”

Still, based on retail weakness, Kate McShane, equity analyst at Citi, reduced her earnings estimates and target prices on a group of six apparel producers — Liz Claiborne, Phillips-Van Heusen, Polo Ralph Lauren, Under Armour, VF Corp. and Quiksilver. VF is the only vendor stock the analyst rates as a “buy.”

“Given last week’s disappointing September same-store sales results and reduced forecasts from several major department stores, including Macy’s Inc., J.C. Penney Co. Inc., Nordstrom Inc. and Saks, we expect increased risk to manufacturers with higher department store exposure,” McShane said.

“We still think there is risk to top-line expectations in [the second half] from possible order cancellations, which will also result in expense deleveraging,” McShane said. “According to industry contacts, retailers have already slowed down and pushed back orders, which could easily turn into order cancellations.”

Additionally, Liz Claiborne’s stock was downgraded to “sell” from “hold” by Marie Driscoll, equity analyst at Standard & Poor’s.

Shares of Jones dropped 29.7 percent after the firm warned that its adjusted 2008 earnings would range from 93 cents to 98 cents a share, down from the $1.20 to $1.35 previously expected and the $1.26 earned a year ago. The stock closed down $4.01 to $9.51.

Specialty retailer Charming Shoppes Inc. was down even further, sinking 37.2 percent to $1.84.

Retailers didn’t fare much better, with Macy’s seeing a 17.5 percent stock drop to $8.66. Moody’s Investors Service changed its outlook on Macy’s debt to “negative” from “stable,” reflecting the retailer’s warning that earnings this year would range from $1.30 to $1.50 a diluted share rather than the $1.70 to $1.85 previously projected. The ratings service currently ranks Macy’s debt at Baa3, a medium-grade rating.

“Should operating performance decline by more than the company expects, then — barring other changes in the company’s capital structure or cash flow expectations — debt protection measures could weaken further and be more appropriate for a lower, non-investment grade rating,” Ed Henderson, vice president and senior analyst at Moody’s, said.

Other broadline retailers losing substantial ground were Dillard’s Inc., down 15.4 percent to $7.27; Saks, 10.3 percent to $5.33; Kohl’s Corp., 10.5 percent to $29.09; Target Corp., 10.2 percent to $35.72, and Wal-Mart Stores Inc., 8.1 percent to $50.05.

Guess, which also has wholesale operations, dropped 16.8 percent to $22.41; New York & Company Inc., 13.4 percent to $3.29; Nordstrom, 12.4 percent to $16.54, and J. Crew, 11.3 percent to $18.50.

Coach Inc. was down 15.7 percent to $16.23; Liz Claiborne Inc., 15.3 percent to $9.96; Polo Ralph Lauren Corp., 14.3 percent to $44.19; Nike Inc., 11.8 percent to $50.36, and Kenneth Cole Productions Inc., 10.2 percent to $10.32.

Meanwhile, anecdotal reports about economic activity indicated steep declines in discretionary spending in most regions of the country in September, according to the Federal Reserve Board’s Beige Book report.

Consumer spending decreased in most of the districts tracked in the report, including Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis and Kansas City. San Francisco and Dallas reported sluggish sales in September. New York and Boston both indicated mixed-sales results, and sales slightly below plan.

One department store manager of a location in an upscale mall near Washington said business slumped as much as 12 percent to 15 percent in September. In Chicago, discount stores saw small sales gains, but apparel retailers reported declines. An apparel retailer in Minnesota said slow mall traffic hampered sales.

Discount stores in Philadelphia have seen some increases in traffic and sales, but retailers selling luxury and higher ticket items saw a decline. Boston merchants said consumers were increasingly looking for price deals, sometimes preferring private label items, and several retailers said they had initiated a “soft hiring freeze.” Others said they recently reduced or planned to reduce employee head counts.

“The holidays are going to be ugly,” said one Philadelphia retailer.