Retail Shares Dip Monday Amid Swine Flu Jitters

Retail shares fall 1.7 percent as major indices have smaller declines.

U.S. investors appeared to look past concerns of a global swine flu pandemic and focused instead on the continuing saga in the auto sector and the recession Monday as retail shares fell 1.7 percent.

This story first appeared in the April 28, 2009 issue of WWD.  Subscribe Today.

Forty cases of the swine flu were confirmed in the U.S., including 28 in New York, according to the Centers for Disease Control and Prevention.

So far more than 100 people have died in Mexico from the disease, the symptoms of which mimic seasonal influenza and include fever and coughing. The outbreak prompted the European Union’s health commissioner to warn against traveling to either the U.S. or Mexico, according to published reports, and it did weigh on markets in Mexico, which also suffered an earthquake Monday, and those in Hong Kong, but didn’t affect U.S. equities to any great degree.

Although it seems to be business as usual so far, infectious diseases can wreak havoc on fashion. The 2003 outbreak of SARS, or severe acute respiratory syndrome, clamped down on travel to Asia, twisted up business plans for months and complicated sourcing.

For now, Wall Street seems more focused on the health of the economy. The S&P Retail Index fell 5.57 points to 332.66 Monday as the Dow Jones Industrial Average slid 0.6 percent, or 51.29 points, to 8,025. The Dow benefited from a more than 20 percent rise at General Motors after the carmaker said its Pontiac brand would be phased out and more workers would be laid off in its bid to survive.

Among the retailers losing ground were J.C. Penney Co. Inc., down 2.4 percent to $27.48; Target Corp., 1.7 percent to $39.39, and Kohl’s Corp., 1.3 percent to $44.86.

However, Citigroup analyst Deborah Weinswig singled out these three companies as potential beneficiaries of the deflationary pressures bearing down on apparel producers.

“The current global economic crisis has spurred a significant decline in orders, which has created excess factory capacity,” said Weinswig in a research note Friday. “As a result, factories and suppliers have become quite willing to reduce their pricing in order to try to keep their factories open.”

Companies carrying a higher proportion of private label goods should be able to benefit more, she said, noting Penney’s had a private label concentration of 45 percent last year, while private label accounted for 38 percent of Target’s nonfood business and 28 percent overall at Kohl’s.

“Because retailers have only recently begun to receive more favorable pricing during their negotiations with suppliers, we believe product cost deflation benefits have not been fully embedded into the retailers’ annual guidance,” Weinswig said.

The analyst predicted product costs on apparel, footwear and home goods would fall 5 to 7 percent in the second half of the current year.

“Retailers are likely to keep some of the cost savings to enhance their margins, and invest the remainder back into delivering greater value…through quality improvements,” Weinswig said.