By  on September 2, 2009

September got off to a difficult start for retail investors Tuesday.

Retail shares pulled back 1.8 percent, and the major indices slightly more. Financial stocks led a broad market sell-off, dragging the Dow Jones Industrial Average down 2 percent, or 185.68 points, to 9,310.60.

As the first anniversary of the Lehman Brothers’ bankruptcy and the onset of the financial crisis approaches, publicly held retail companies are at a key point. The year-ago comparisons are going to start to get easier, making business look better. That equation, combined with tighter inventories and margin-saving cost cuts, could propel stocks.

But retail shares have had a strong run in recent months as investors looked ahead to a better holiday season, so signs of weakness could deflate the sector.

Even with Tuesday’s decline, which pushed the S&P Retail Index down 6.62 points to 357.93, the sector is up 11 percent since the end of June. Retail stocks losing ground on Tuesday included Zale Corp., down 9 percent to $5.90 ahead of its fourth-quarter financial report today; Charming Shoppes Inc., 8.6 percent to $4.79; Chico’s FAS Inc., 5.3 percent to $12.06; Saks Inc., 4.9 percent to $5.80; AnnTaylor Stores Corp., 4.5 percent to $13.45; J. Crew Group Inc., 4.4 percent to $32.58; Tiffany & Co., 4 percent to $34.93; Dillard’s Inc., 3 percent to $11.07, and Macy’s Inc., 2.3 percent to $15.16.

“Shares of retail stocks paused in May and June, but we have seen momentum pick up in July and August after companies reported their [second-quarter] earnings,” said Daniel Binder, broadline analyst at Jefferies & Co., in a research note.

“Overall we continue to see positive data points on the macro front and we believe the early cycle trade will play out through the end of the year,” Binder said. Historically, retail stocks have been the first to perk up after economic downturns, making them “early cycle.”

Back-to-school could be a time for stores to begin anew with cost structures that are much leaner.

“September is the time to start thinking new and fresh and regardless of what has happened in the past year,” Jennifer Black, analyst and president of Jennifer Black & Associates, said in a research note ahead of Thursday’s reports on same-store sales by major retailers. “This is the time for companies to stop retrenching and start retooling, beginning with new fashion trends, which we believe will set the stage for the winners and losers this fall.”

But the analyst said the b-t-s and holiday selling seasons are the only likely catalysts for consumer spending on the horizon.

“One misstep by retailers in this environment can mean that they are shark bait for other retailers who are ready to sweep in and grab the sales by providing the right fashion merchandise at attractive price points,” Black said.

For some, the liquidity issues that weighed so heavily on stocks last fall and early this year remain.

Embattled lender CIT Group Inc., which narrowly avoided bankruptcy last month and was bailed out by its major bondholders, said in a filing with the Securities and Exchange Commission it would defer a Sept. 15 interest payment on debt maturing in 2067 because its financial position doesn’t meet certain conditions in the debt agreement. Interest will continue to accrue and compound on the notes until payment is made.

Shares of CIT fell 15.5 percent to $1.47

On the other side of the Pacific, the Shanghai Composite Index regained some of the ground lost as August ended and rose 0.6 percent Tuesday. The index began the week with a 6.7 percent drop as investors worried that lower bank lending in China would curb economic growth.

In Hong Kong, the Hang Seng Index inched up 0.8 percent and in Tokyo the Nikkei 225 advanced 0.4 percent.

In London, the FTSE 100 closed down 1.8 percent after a three-day weekend, and the CAC 40 in Paris dipped 1.9 percent.

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