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Retail Stocks in Flux

Store shares rise 3.8% but long-term outlook uncertain.

Retail shares showed signs of life Wednesday, rising 3.8 percent, but hold the Champagne.

There’s little indication that the market has bottomed and little hope for any kind of a real turn before fall, analysts and economists said. Some experts also anticipate that the fashion industry that emerges from the worst business and consumer environment in decades will be substantially different from the existing model.

“We wouldn’t be pounding our fists on the table for retail stocks today, with a few exceptions,” said Marie Driscoll, equity analyst at Standard & Poor’s. “There’s going to be a lot of bad news, sales are not going to be great and earnings comparisons are going to be negative.”

The S&P Retail Index rose 10 points to 276.92 on Wednesday as the Dow Jones Industrial Average advanced 2.5 percent, or 200.72 points, to 8,375.45. Retail shares and the market overall are each down about 32 percent from a year ago.

Driscoll said the market could be looking toward an unemployment peak in the first or second quarter of next year and then see hints of a turnaround. The unemployment rate was 7.2 percent in December, up from 4.9 percent a year earlier.

At the same time, demand could begin to approach retail supply after months of clearing inventory and as the Obama administration’s planned stimulus package starts to take hold, she said.

Historically, retail stocks have led the charge as the economy pulls out of a recession. But some have argued that the consumer and economy have changed enough that old patterns won’t hold, or that retailers selling staples such as food and toothpaste will bounce back as fashion retailers flounder.

“Contrary to the old adage, we no longer believe retail stocks are early cycle, as we seem to be at the inflection of a 25-year consumer bull run,” Paul Lejuez, equity analyst at Credit Suisse, said in report this month. “This belief makes us hesitant to think the worst is behind us just one year into the downturn.”

Lejuez said investors looking to buy shares should focus on the strength of a company’s balance sheet, its opportunities to trim expenses and stocks priced low enough to account for risks to earnings.

“For the apparel retail landscape to improve, malls need to close, an extremely rare occurrence over the past six to seven years,” Lejuez said. “While this would be a welcome development for the long term, the process is likely to be a painful one.”

Some of the forces that were already part of retail’s evolution, such as shorter product life cycles and Internet shopping, are being supercharged by the downturn, said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University.

“We’re going to come out of the recession with substantial changes in the attitude of the consumer,” Ghadar said. Demographic changes, such as the increase in Hispanic shoppers, also continue to churn.

“The convenience [of online shopping], the changes in style, the ethnicity shift are all playing into substantial change in the next three years,” Ghadar said.

The Wal-Marts and Targets of the world will charge on, but more targeted players will find their niches changing rapidly, he said.

“The consumer is at least in the early stages of changing some of their stands regarding spending for probably the first time in 30 to 40 years,” said Paul Nolte, director of investments at Hinsdale Associates. “You’re going to see a slow building in the savings rate, which used to be in the 8 to 10 percent range, but a year or two ago was at zero.”

That consumer pullback will lead to fewer specialty chains and fewer stores overall as saving comes back into vogue, Nolte said.

“It doesn’t mean that retail is dead,” he said. “You’re still going to want to have the latest fashion or the tools of whatever it is you’re looking for. It might not be right around the corner from you.”