By  on December 2, 2008

Investors focused on the impact of Black Friday markdowns on fourth-quarter profits and pushed retail shares down a record-breaking 9.3 percent on Monday.

The Standard & Poor’s Retail Index fell 24.41 points to 238.34 and registered its largest percentage drop since the index was recalibrated in June 2002. The measure of retail shares has logged its 13 steepest declines since the credit crisis began in September.

The retail sector wasn’t the only one hit Monday, as the overall Dow Jones Industrial Average dropped 679.95 points, or 7.7 percent. The broader Standard & Poor’s 500 stock index declined 8.9 percent to 816.21, and the Nasdaq was down 9 percent to 1,398.07.

The sell-off came as the National Bureau of Economic Research made official what most Americans had sensed for some time: The U.S. economy has been in recession since last December. That was the peak of the last economic expansion, which began in November 2001.

In the aftermath of Black Friday, as the focus shifted to e-commerce on Cyber Monday, retail declines were widespread and severe. Among the hardest hit retail shares were Charming Shoppes Inc., down 34 percent to 99 cents; The Talbots Inc., 25.6 percent to $1.77; New York & Company Inc., 21.3 percent to $1.48; Charlotte Russe Holding Corp., 19.8 percent to $4.01; Casual Male Retail Group Inc., 18 percent to 53 cents; Limited Brands Inc., 18.7 percent to $7.57; Dillard’s Inc., 17.2 percent to $3.03; Caché Inc., 17.1 percent to $1.70; Aéropostale Inc., 15.7 percent to $12.75; Abercrombie & Fitch Co., 14.8 percent to $16.47; Guess Inc., 14.2 percent to $11.35; J.C. Penney Co. Inc., 12.9 percent to $16.55; Target Corp., 12.5 percent to $29.54; Kohl’s Corp., 10.9 percent to $29.09, and Saks Inc., 10.4 percent to $3.86.

Macy’s Inc. saw its shares diminish by 13.6 percent to $6.41, even after Standard & Poor’s reaffirmed the retailer’s debt rating at “BBB-minus,” one slot above junk bond status. The outlook on the rating continues to be negative.

Diane Shand, S&P debt analyst, said the company had “generally good operating performance and a strong management team,” but that its credit profile was lessened by the debt-financed acquisition in 2005 of longtime rival May Department Stores Co.

“The negative outlook recognizes that Macy’s profitability will decline significantly in the fourth quarter of 2008 and that the weak U.S. economy will impede management’s ability to improve the business until the second half of 2009,” S&P said.

On the vendor side, shares of Liz Claiborne Inc. fell 26 percent to $2.11. The stock was removed from the S&P 500 Index once trading closed on Monday and will now be included on the S&P SmallCap 600. Some large funds are compelled to sell stocks if they are removed from the benchmark index.

Other fashion suppliers losing ground Monday included Kenneth Cole Productions Inc., down 18.9 percent to $7.10; the Warnaco Group Inc., 12.7 percent to $15.62; Nike Inc., 9.8 percent to $48.02, and Polo Ralph Lauren Corp., down 9.4 percent to $39.15.

What hope there was for fashion in stronger than expected Black Friday sales has receded.

“Retailers provided consumers with a reason to get out of bed by offering compelling doorbusters and low prices on hot gifts for holiday,” said Deborah Weinswig, equity analyst at Citigroup. “However, aggressive promotions couldn’t keep customers in the stores for long and shoppers soon headed home to bed and pulled the covers back over their heads.”

Weinswig said many retailers were left with heavy inventories and a tough holiday season ahead of them.

“We do not think that retailers moved through as much product as expected on Black Friday, and we anticipate seeing additional promotions throughout the holiday season as retailers attempt to clear inventory before the end of the year,” she said.

Looking ahead, investors on Thursday will get a look at company reports on comparable-store sales for November and, on Friday, the latest reading on the nation’s employment trends.

How far the economy will ultimately fall depends on how well consumers and businesses stand up under continued credit pressures and other financial strains, but already the slowdown seems destined to be ranked as the worst in more than a half century.

“The U.S. economy remains under considerable stress,” said Ben Bernanke, Federal Reserve chairman, in a speech to the Greater Austin Chamber of Commerce in Texas on Monday. “Economic activity was weakening even before the intensification of the financial crisis this fall. The sharp falloff in consumer spending during the summer was particularly striking.”

Personal consumption fell at an annual rate of 3.7 percent in the third quarter, he said. According to retailers across the price spectrum, spending began to fall even more dramatically as the banking system floundered.

Over the last several months, the Fed has slashed interest rates, taken direct stakes in banks and other financial institutions and put up billions of dollars to help keep money flowing through the financial system and into consumers’ wallets. So far, the results have been uneven, although the credit crunch has eased some.

“Even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time,” Bernanke said. “In particular, household spending likely will continue to be depressed by the declines to date in household wealth, cumulating job losses, weak consumer confidence and a lack of credit availability.”

Bernanke said the government could still step in with further aid for the economy, buying up Treasury bonds or lowering interest rates further. The benchmark federal funds rate stands at 1 percent, after nine rate cuts since September 2007.

Through October this year, U.S. payrolls declined by 1.2 million, driving the unemployment rate up to 6.5 percent from 5 percent at the close of last year. The employment picture is expected to have continued to worsen last month.

“We are anticipating a very ugly November employment report,” said Joseph LaVorgna, an economist at Deutsche Bank. “We are forecasting a 425,000 decline in non-farm payrolls, which will likely push the unemployment rate up to 6.8 percent.”

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