Retail Stocks Slide Again

After a rebound, index down 4 percent on consumer fears.

Retail’s respite from stock market declines lasted only a day, as investors pushed stores’ shares down 4 percent Tuesday on persistent fears shoppers will freeze their spending well into next year.

This story first appeared in the October 15, 2008 issue of WWD.  Subscribe Today.

The Standard & Poor’s Retail Index fell 11.90 points to 287.10, giving back nearly half of Monday’s record-breaking 9 percent gain. Retail shares have fallen 27.5 percent since the end of August, just before the banking crisis and credit crunch shifted into high gear.

Even as the U.S. and other governments moved forward with plans to take equity positions in banks and ensure the continuing flow of credit to businesses, investors looked beyond the banking world to what is expected to be a global recession.

After starting out the day with a more than 400-point jump, the Dow Jones Industrial Average ended down 76.62 points at 9,310.99, a drop of 0.8 percent. Investors also pushed the price of oil down below $80 a barrel as concerns of weakening demand swirled.

The disparity between the performance of retail shares and the market overall on Tuesday might simply mark a return to normality, with investors focused on companies’ performance fundamentals rather than the market’s sheer terror.

“Stocks have gotten cheap in the sector, but that said the outlook has not improved from last Friday to today,” Marie Driscoll, Standard & Poor’s equity analyst, said. “The only thing that’s different is the world isn’t falling apart. The real fundamentals haven’t really improved.”

Driscoll’s list of concerns include weakening consumer sentiment and employment trends and increasing prices in the areas of health care, food and education.

“For the next 12 to 15 months things do not look that rosy and that’s what’s hurting retail stocks,” Driscoll said. “It isn’t until [the third quarter of next year that] we have a chance of coming out of this. By the time you’re in Q3, that’s nine months away from now, our ability to forecast that far is weak.”

Many retailers cut back their profit predictions for the rest of this year after reporting weak same-store sales for September. Jones Apparel Group, which has both retail and wholesale operations, joined them Tuesday, saying it now expects adjusted earnings for 2008 of 93 to 98 cents a share, down from the $1.20 to $1.35 previously expected and the $1.26 earned a year ago.

“The economic environment continues to deteriorate,” Wesley R. Card, president and chief executive officer, said. “Our retail operations trended negatively during the third quarter, consistent with the overall economic climate, reflecting a drop in consumer confidence and spending levels.”

Same-store sales in Jones’ own doors fell 2 percent during the third quarter.

“Given the difficult business climate, we anticipate a more promotional fourth quarter,” Card said. Shares of the firm fell 6.2 percent to $13.52 prior to the profit warning, which came after the closing bell.

Other vendors with declining stocks included Columbia Sportswear Co., down 6.7 percent to $33.96; G-III Apparel Group Ltd., 5.9 percent to $14.56; Polo Ralph Lauren Corp., 5.6 percent to $51.57, and VF Corp., 5.4 percent to $59.11.

Department stores posting declines included Dillard’s Inc., down 9.4 percent to $8.59; Sears Holdings Corp., 6.5 percent to $63.47; Macy’s Inc., 4.9 percent to $10.50; Saks Inc., 4.5 percent to $5.94; J.C. Penney Co. Inc., 4.2 percent to $22.78, and Kohl’s Corp., 3.6 percent to $32.50.

Among the specialty stores losing ground Tuesday were New York & Company Inc., off 11 percent to $3.80; Chico’s FAS Inc., 10.1 percent to $3.83; Bebe Stores Inc., 9.2 percent to $6.93; Aéropostale Inc., 7.5 percent to $25.90, and Urban Outfitters Inc., 7.5 percent to $23.89. New York & Co. shares have dropped 47.6 percent since the company shifted profit expectations downward on Friday.

Todd Slater, equity analyst at Lazard Capital Markets, said of Tuesday’s retail stock decline, “It reflects the typical volatility you’ve seen in groups that are heavily tied to discretionary spending.”

Beyond the stock market, retail is an industry in flux. Stores are facing steep markdowns to move excess inventory this holiday season and a fresh round of consolidation in which strong chains buy out their competitors and the weak players go out of business.

“What needs to happen is what’s happening,” Slater said. “What you will see is a long-needed supply takeout, less inventory in existing stores and perhaps fewer stores overall. Over time you get a reduction in supply that tends to higher [profit] margins in the long run. It’s healthy. It’s necessary. Obviously, it’s painful for those that are liquidated.”

While U.S. stocks struggled on Tuesday, overseas investors continued to reap the benefits of the international cooperation to relieve the pressure on the banking and credit markets. The Nikkei 225, which was closed on Monday for a holiday, began its week with a 1,171.14, or 14.2 percent, surge to 9,447.57, while Hong Kong’s Hang Seng Index was up 520.72 points, or 3.2 percent, to 16,832.88.

Later on Tuesday, the European markets completed a positive day that had London’s FTSE 100 up 137.31, or 3.2 percent, to 4,394.21 and the CAC 40 in Paris ahead 97.02 points, or 2.8 percent, to 3,628.52. Burberry Group plc shares slumped 10.3 percent after it provided a cautious third-quarter outlook and Escada was down 10.8 percent, but double-digit increases in share value were registered by French Connection Group plc (17.4 percent), IT Holding SpA (12.3 percent) and Safilo Group SpA (11.1 percent).

Investors are also beginning to get a better look at how the Bush administration plans to use its $700 billion bailout kitty.

Officials detailed plans to strengthen troubled banks, which included a voluntary program to purchase equity in institutions, Federal Deposit Insurance Corp.-issued insurance for new debt, an extension of insurance to include non-interest bearing accounts and a new program by the Federal Reserve to serve as the buyer of last resort for the commercial paper market.

— With contribution