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Retail Stocks Slide on Wal-Mart Downgrade

Retail shares fell Monday, dropping 1.4 percent after Goldman Sachs cut Wal-Mart to “neutral” from “buy.”

Retail shares fell into a funk Monday, dropping 1.4 percent after Goldman Sachs & Co. cut Wal-Mart Stores Inc. to “neutral” from “buy” and said there were few “positive catalysts” to drive the stock higher.

This story first appeared in the June 16, 2009 issue of WWD.  Subscribe Today.

And although it might be too soon to count out the rally that’s pushed the sector up 46.7 percent since March 6, there is still little sign of a lasting economic turnaround to support further gains. The stress on retailers is clear, from their belt tightening and deteriorating bottom lines to their efforts to refinance. Limited Brands Inc. said Monday it would try to raise $500 million by selling debt that rating agencies classify as noninvestment grade, or junk.

The S&P Retail Index fell 4.53 points to 327.54 as the Dow Jones Industrial Average fell 2.1 percent, or 187.13 points, to 8,612.13 for the day. Wal-Mart, a Dow component stock, slipped 2.8 percent to $48.46 and the Limited declined 2.3 percent to $12.51.

Despite Monday’s slide, Bill Rhodes, chief investment strategist at Rhodes Analytics, said, “I don’t think…that I’m willing to write this rally off.”

Rhodes described the market’s run-up since early March as a “bear market rally” and predicted it could continue. “There’s still cash on the sidelines.”

But a more lasting turn in the market is going to require higher sales, he said.

“It’s not enough to have an economy that’s deteriorating more slowly than you thought, which is what got this rally sparked,” Rhodes said. “Somewhere beyond that you have to reach another inflection point where you say things are actually improving — and you don’t know when you’re going to reach that stage.”

Despite some signs of stabilization, May sales at apparel and accessories stores still fell 7 percent from a year earlier, according to government statistics. On the troubled housing front, the National Association of Home Builders/Wells Fargo Housing Market Index fell 1 point to 15 this month as interest rates perked up and credit remained tight.

By and large, Wal-Mart has been in the right place at the right time for the recession, with its low-priced merchandise appealing to cash-strapped shoppers. But the stock’s advantage might be fading.

“Wal-Mart has and should continue to gain share across today’s still challenging consumer spending environment, but with ongoing expense pressures and tougher sales comparisons, we see little near-term positive catalysts to drive shares higher in the near term,” said Adrianne Shapira, equity analyst at Goldman.

Shapira said other broadline retailers would have greater earnings momentum as they come up against easier year-ago comparisons versus fall 2008, when consumer spending ground nearly to a halt. The analyst also lowered her target price on Wal-Mart to $56 a share from $58.

If it was any consolation on Monday, U.S. investors followed the global markets down. The Nikkei 225 in Tokyo dropped 1 percent as the Hang Seng Index in Hong Kong fell 2.1 percent. In Paris, the CAC 40 was off a steeper 3.2 percent and the FTSE 100 in London fell 2.6 percent.

Shares of Li & Fung Ltd., a Hang Seng component, fell 3.2 percent to 22.45 Hong Kong dollars, or $2.90, despite a vote of confidence in the company from Moody’s Investors Service following the bankruptcy of one of L&F’s biggest clients, the German retailer Arcandor Group.

Elizabeth Allen, a Moody’s debt analyst, said the insolvency of Arcandor, for which Li & Fung serves as the buying agent, “will likely result in both the loss of an outstanding agency commission of $5.4 million and some future business. But the commission loss is manageable.”

Limited, the Columbus, Ohio-based parent of Victoria’s Secret and Bath & Body Works, said its new debt would be guaranteed by some of its subsidiaries and come due in 2019. The company said it would use the proceeds to pay down existing debt and for general corporate purposes.

Debt watchdog Standard & Poor’s assigned the issuance a “BB” rating, the first notch into junk territory. S&P put $2.15 billion of the firm’s unsecured notes on review since the new debt would be repaid before the unsecured notes in the event of a default. The rating agency affirmed its “BB” corporate credit rating for the firm and said it has a negative outlook since the recession will impede management’s ability to improve the business for at least six months.

On the other side of the Atlantic, Italy’s Bulgari SpA said Monday it has increased to 150 million euros, or $205.5 million at current exchange, its equity-linked bonds, exercising its over-allotment option. Last week, the Italian jewelry company placed 130 million euros, or $178.1 million, of equity-linked bonds due in 2014 to diversify its sources of funding and lengthen its debt maturity profile. The settlement and delivery of the bonds is expected to take place on or around July 8. Goldman Sachs International is managing the issue. Application will be made to the Luxembourg Stock Exchange SA.