Debt downgrades for luxury retailers Nordstrom Inc., Neiman Marcus Inc. and Saks Inc. failed to blunt a leap on Tuesday in retail stocks, which posted their second-largest gain this year and their fifth advance in six sessions. Retail shares rose 5.4 percent and outpaced the broader market amid hints of stability in parts of a consumer economy in general free fall.

This story first appeared in the March 18, 2009 issue of WWD.  Subscribe Today.

The S&P Retail Index perked up 13.74 points to 269.34, 17.7 percent above its March 9 level of 228.76. The Dow Jones Industrial Average rose a milder 2.5 percent, or 178.73 points, to 7,395.70.

Market research from The NPD Group Inc. showed evidence of stabilization in consumers’ feelings about job security — still not good, but not getting worse — and government figures showed February housing starts rose a seasonally adjusted 22.2 percent compared with January.

But for every hint of stability there seemed to be several pieces of bad news, from signs of trouble in consumer credit card payments to debt downgrades. Moody’s Investors Service reduced its debt ratings for Nordstrom’s, Neiman Marcus and Saks and gave ratings for all three companies a negative outlook. Nordstrom’s senior unsecured rating was cut to “Baa2” from “Baa1.”

“The downgrade reflects our expectation that Nordstrom’s operating results will continue to be negatively impacted by the current recession and downturn in consumer spending, and are unlikely to return to their pre-recession levels over the next 18 to 24 months,” Moody’s said.

Neiman’s probability of default and corporate family ratings were both moved to “Caa1” from “B1,” and Saks’ probability of default rating was cut to “B3” from “B1,” and its corporate family rating to “B2” from “B1.”

In other rating action, Standard & Poor’s downgraded Quiksilver Inc.’s corporate credit rating to “B-minus” from “B-plus” and placed the rating on CreditWatch with developing implications, meaning the rating could be raised or lowered after a review. Quiksilver is exploring a range of strategic and financing options to improve its liquidity.

The bump in retail stocks might ultimately say more about how far they’ve fallen, down 36.9 percent from their 52-week highs, than how long it will be before the economy turns around.

“Generally, the retail stocks are relatively inexpensive versus a historical context,” said Tom Chin, managing director of consulting and analytics at Telsey Advisory Group. “There’s a lot of interest in those names that have declined significantly. These stocks have tremendous value and opportunity if it’s a business model that can sustain itself long-term.”

Chin pointed to J. Crew Group as an example of a company with a sustainable business model, low debt load and strong management team. The stock rose 5.8 percent to $11.33 Tuesday.

Other retail gainers included Charming Shoppes Inc., up 29.4 percent to $1.19; AnnTaylor Stores Corp., 15.9 percent to $3.93; Dillard’s Inc., 12.9 percent to $5.25; Destination Maternity Corp., 10.1 percent to $5.03; Bebe Stores Inc., 9.8 percent to $5.38; New York & Co. Inc., 9.5 percent to $2.65; Urban Outfitters Inc., 8.3 percent to $18.16; Macy’s Inc., 5.6 percent to $8.35; Kohl’s Corp., 6.2 percent to $39.70; Target Corp., 5.6 percent to $30.45; Nordstrom, 4.5 percent to $15.71, and Saks, 4.4 percent to $1.90.

But business could still be a tough slog for some time in retail.

“From an operational perspective, I think the companies will still be challenged by personal consumption because of the unemployment overhang that’s out there,” Chin said.

The NPD survey found 34 percent of consumers were “very concerned” about their job security or income in February, down from 36 percent in January and 38 percent in December.

“While I think it’s premature to talk ‘recovery,’ I think if we are able to spot signs of stabilization, we’ll be better positioned for recovery and then the return to growth,” said Marshal Cohen, NPD’s chief industry analyst.

But NPD’s research also showed consumer attitudes toward the economy last month were at their lowest point since October. The firm’s Retail Response Indicator, which measures consumer spending intentions, fell to 35.4 in February, down from 37.6 percent in January and 37.1 percent in December.

Consumers are also still struggling to pay off their credit card debts. Credit card data from a number of companies suggests a continuation of rising delinquencies and charge-offs for issuers, said Charles Grom, equity analyst at J.P. Morgan, in a research note. Grom described Nordstrom’s February credit card performance as “disappointing,” with a 27 basis point increase in delinquencies to 4.07 percent and a 128 basis point rise in charge-offs to 8.71 percent. The analyst also said Target Corp.’s credit card portfolio would likely show rising delinquency and charge-off trends as well.