By  on October 6, 2008

Retail stocks joined world markets on a gut-wrenching roller-coaster ride Monday, and there’s no telling how or when the stomach pains will end.

Shares fell by as much as 8.1 percent before a late rally helped the industry recoup some of its lost ground in the final hour of trading. Driven at least in part by the ever-worsening outlook for the holiday season, the Standard & Poor’s Retail Index ended the day down 2.5 percent, or 8.25 points, to 323.58.

The continued deep freeze on credit and signs the clampdown was spreading to Europe helped push the Dow Jones Industrial Average down 3.6 percent, or 369.88 points, to 9,955.50, its first close below 10,000 since Oct. 26, 2004, and its first move below the mark since April 20, 2005.

All the action is tearing at the already frayed nerves of investors.

“People are scared,” Bill Rhodes, chief investment strategist at Rhodes Analytics, said. “They don’t know what’s going to happen. Uncertainty is very high and markets hate uncertainty, so what they’re doing is selling into it.”

Money is being pulled out of investments that have performed well and put into even safer investments, further driving down stocks, he said.

“What you’re looking for here is the bottom,” Rhodes said, noting it was unclear when stocks would find their lows. “I’ve never seen anything like this in my career. I don’t think there’s anyone who’s younger than 90 who’s ever seen anything like this.”

The sell-off hurt retailers of all stripes.

Broadline retailers losing ground included Saks Inc., down 9.2 percent to $7.31; Dillard’s Inc., 5.1 percent to $10.50; Wal-Mart Stores Inc., 3.1 percent to $57.90; Target Corp., 3 percent to $42.35; Kohl’s Corp., 2.1 percent to $40.60, and J.C. Penney Co. Inc., 1.2 percent to $30.99.

Specialty stores with waning share prices were Caché Inc., down 12.6 percent to $4.98; Chico’s FAS Inc., 12.4 percent to $4.38; The Cato Corp., 5.5 percent to $14.70; New York & Company Inc., 4.7 percent to $7.97, and Urban Outfitters Inc., 4.2 percent to $25.44.

Among the hardest hit vendor shares were Coach Inc., down 5.4 percent to $20.39; VF Corp., 4.7 percent to $69; Nike Inc., 3.3 percent to $61.14; Kenneth Cole Productions Inc., 2.8 percent to $12.70, and Polo Ralph Lauren Corp., 2.9 percent to $56.33.

International stock markets took severe hits with the Hang Seng Index in Hong Kong, falling 5 percent, or 878.64 points, to 16,803.76, the FTSE 100 in London sliding 5.8 percent, or 281.15, to 4,589.19 and the CAC 40 in Paris spiraling down 9 percent, or 368.77 points, to 3,711.98.

“It’s a little hard to view this as a terribly Merry Christmas for retailers,” said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com.

“The outlook clearly has deteriorated fairly significantly over the last month” particularly affecting the ability of businesses to borrow “and therefore their ability to hire, which feeds right to consumer income,” he added.

So far this year, the economy has shed 760,000 jobs, about half the 1.5 million jobs Hoyt expects to be lost before the job picture begins to improve again. Consumers are also expected to curtail spending simply because they are unsure where the economy is heading and what it means for their own personal balance sheets.

“In the short term, it’s more of a confidence story, but longer term, the bigger drag is clearly through fewer jobs,” Hoyt said.

The upheaval that began last month seems to have cracked down on retailers’ top lines.

September women’s apparel sales plummeted 9.1 percent versus a year earlier, according to MasterCard Advisors SpendingPulse, which sifts through sales data from more than 300 million U.S. credit cards and adjusts for certain variables. Prices on women’s apparel fell 3.1 percent as the number of purchases dropped 6.1 percent.

“We’re seeing a pretty significant drop in prices and a real slowdown in just shopping in general [for women’s apparel],” Kamalesh Rao, director of economic research for MasterCard Advisors SpendingPulse, said.

Luxury sales fell 4.8 percent last month, or a slightly steeper 5 percent excluding jewelry sales, said SpendingPulse.

“Consumer perception became reality,” Brian Tunick, specialty store equity analyst at J.P. Morgan Chase & Co., said in a research note in which he lowered expectations for September sales.

Tunick reduced his September comparable-store sales projections on eight retailers, including Aéropostale Inc., Caché, Chico’s, Children’s Place Retail Stores Inc., Limited Brands Inc., Ross Stores Inc., The TJX Cos. Inc. and The Wet Seal Inc.

And the weakness seen last month is expected to continue into the remainder of the year.

Adrianne Shapira, equity analyst at Goldman, Sachs & Co., cut 2008 earnings estimates on 12 of the broadline retailers she covers by 3 percent on average and noted particular weakness at department stores.

“As the financial crisis intensified [last month], consumers were paralyzed and retail spending in September seemed to suffer a severe setback,” Shapira said in a research note outlining her reductions.

That said, some stores are still seen as relatively good bets, thanks to their business models and focus on saving shoppers money.

“We continue to recommend investors stay defensive keeping funds focused in companies with value-oriented business models,” she said, singling out Wal-Mart, Costco, Target and TJX Cos.

“Looking ahead, the only thing we see in this environment that we can depend on is continued volatility,” Shapira said.

That’s exactly what regulators and politicians around the world are afraid of.

European leaders tried to inject confidence into the market by saying they would work together. Countries are also taking action on their own and, on Sunday, Germany said it would guarantee all of its consumer bank deposits.

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