The tightening global credit crisis and economic slowdown exacted a 6.2 percent toll on retail shares Tuesday and may begin to limit retailers’ plans for international expansion.
Once viewed as a partial remedy for the ills of the U.S. market, stores searching for growth abroad could begin to get a cooler reception overseas as consumers throughout Europe and Asia cut back, experts said.
The prospects for slower growth and the absence of an effective hedge for U.S. weakness were among the concerns during another adrenaline-packed day in the markets. Investors worried about what central banks can and will do to inject liquidity and confidence into the financial system and retailers anxiously awaited September comparable-store sales results that will be reported today and Thursday.
The Standard & Poor’s Retail Index plunged 19.99 points, or 6.2 percent, to 303.59, hitting a new 52-week low and registering the fourth largest point drop and third largest percentage drop since it was recalibrated in mid-2002. Stores suffering double-digit percentage declines in the value of their shares included Delia’s Inc. (13.3 percent to $9.59), The Talbots Inc. (11.2 percent to $10.29) and Retail Ventures Inc. (11 percent to $3.07). Substantial dips also were registered by department stores and national chains, led by Nordstrom Inc. (9.3 percent to $21.89), Dillard’s Inc. (8.7 percent to $9.59), Macy’s Inc. (8.5 percent to $13.70) and Sears Holdings Corp. (8.1 percent to $78.79).
During much of the day, the Dow Jones Industrial Average flirted with the 52-week low of 9,503.10 set on Monday, and eventually closed at 9,447.11, down 508.39 points, or 5.1 percent. It was the sixth worst point drop in the Dow’s 80-year history and its second sub-10,000 finish in as many days.
In the U.S., prospects for the rest of this year continued to worsen.
“This sluggishness of real incomes, together with tighter credit and declining household wealth, is now showing through more clearly to consumer spending,” Federal Reserve chairman Ben Bernanke said Tuesday in remarks to the National Association for Business Economics.
“Since May, real consumer outlays have contracted significantly,” Bernanke said. “Meanwhile, in the business sector, worsening sales prospects and a heightened sense of uncertainty have begun to weigh more heavily on investment spending as well.”
He suggested that the Fed could lower interest rates at its next meeting on Oct. 28 and 29.
During previous downturns, and in the initial phase of the current one, retail chains could look for growth abroad. But a weakening consumer climate around the world is darkening the outlook except for value players such as Wal-Mart Stores Inc. and The TJX Cos. Inc., which are expected to fare relatively well as they export their money-saving models.
Just over a quarter, or $49.2 billion, of Wal-Mart’s first-half sales came from its international operations.
Joseph Feldman, managing director and senior research analyst at Telsey Advisory Group, said with the exception of Japan, where Wal-Mart continues to struggle, the world’s largest retailer is “very well positioned in all of the markets that they’re in. They’re benefiting here in the U.S. from the macro economic slowdown. If the global economy does slow down, logic would dictate they should at least hold their own.”
A handful of retailers, including Wal-Mart, might be able to move into new markets via acquisition.
“You are going to see a few retail companies use this as an opportunity to acquire,” said Frank Badilla, senior economist at TNS Retail Forward. “Who are the deep pockets in good financial shape? Maybe a Wal-Mart is one of them, maybe a Tesco is one of them. There are some Chinese companies.”
For many other retailers, though, there will likely be challenging days ahead on the international front.
“It’s going to be much tougher to grow in some of these markets the way you thought because the demand isn’t going to be there,” Badilla said. “Some will have to ratchet back.”
With overall growth slowing, each market will feel the impact in its own way.
“In some cases, it will be a moderate falloff of growth, but in other cases it will be a steep falloff in growth,” Badilla said. “But in either event, we are seeing what will be a global recession. What’s happening in the U.S. won’t be contained here.”
Both China and India have thrived, in part, by exporting to the U.S., an economic cornerstone that has eroded as American consumers have pulled back.
“If that demand isn’t there, that means growth in places like China and India is going to be slower than it was,” Badilla said.
Slower growth in those markets means consumers won’t have as much money to spend, and U.S. brands trying to get a foothold will have a more difficult time.
Although not a panacea against a global recession, a broad base is a positive.
“People who have a more diversified international presence are frankly weathering this storm much better than those who are solely focused on the U.S.,” said Craig Johnson, president of Customer Growth Partners, citing Wal-Mart, Costco, TJX and Coach.
“In each case, their growth has been strongest internationally in recent years and the most recent quarter,” he said.
However, international expansion has to be done strategically.
“Gap, we think, is a little bit vulnerable internationally,” Johnson said. “Gap is still heavily overstored in the U.S. — Gap and Old Navy both. Internationally, there are a lot of Gap stores, and the brand doesn’t have the uniqueness and the excitement it did a few years ago.”
The international division saw second-quarter sales rise 10.5 percent to $412 million, as comparable-store sales slid 6 percent.
Even successful luxe players have challenges overseas. With Wall Street layoffs in New York and the weak economy in Europe, jeweler Tiffany & Co. is feeling the squeeze.
“We are concerned that the higher earners in London are being affected by the current market crisis similar to those in New York,” said Stacey Widlitz, retail analyst at Pali Capital Inc. Half of Tiffany’s European business is done through London.
Tiffany’s comps in Europe, which were in the double digits in the second quarter, are expected to hit the midsingle digits next quarter because of a “halt in spending,” the analyst said.
The jeweler is not scaling back on store openings, but it is looking to robust sales in Asia to help offset some of the slowdown in Europe, she said.
Fashion vendors are also using international retail distribution as a safety net, though it is unclear if that will continue to safeguard their businesses.
J. Michael Stanley, managing director at factoring firm Rosenthal & Rosenthal, said many vendors were having success using overseas markets such as the Middle East and Asia as a hedge against the softening U.S. economy. “Until recently, Europe, in particular, was a lucrative market for many brands,” he said.
That strategy might lose strength as Europe starts to deal with rising unemployment and declining consumer confidence, Stanley said.
“These individual countries are beginning to protect their own turf,” he said.