Retail Stocks Welcome 2011 With Multiyear High

A solid holiday selling season and a rebound in the manufacturing sector helped solidify the feeling the economy is on the upswing.

The Ann Taylor Loft prototype in Paramus, N.J.

Investors started off 2011 the way they ended 2010 — with a loud, joyful bang.

This story first appeared in the January 4, 2011 issue of WWD.  Subscribe Today.

Retail stocks and the broader market were lifted to multiyear highs Monday, the first trading day of the new year, as a solid holiday selling season and a rebound in the manufacturing sector helped solidify the feeling the economy is on the upswing.

The S&P Retail Index rose as high as 516.57, a height not seen since July 2007, before settling some to 514.01, a 1.1 percent, or 5.63 point, increase for the day. The Dow Jones Industrial Average also hit a high not seen in better than two years and perked up 0.8 percent, or 93.24 points, to close at 11,670.75.

Supporting the good cheer Monday — and adding to the 23.5 percent increase registered by the S&P Retail Index in 2010 — was word from the Institute of Supply Management that the manufacturing sector expanded for the 17th straight month in December, while the Commerce Department reported a 0.4 percent increase in construction spending during November.

“There’s a lot of holiday cheer here,” said Andrew Fitzpatrick, director of investments at Hinsdale Associates. “It’s a carryover from the last few months where you had the tax cuts extended, you had a little bit more of a moderate tone from Washington, so you’ve got a little bit more certainty there.”

Still, the rally is telling only part of the recovery’s story.

“The market’s discarded a lot of lingering issues that are still out there: housing, unemployment, the European debt levels, government debt levels here,” Fitzpatrick said.

Fears of a double-dip recession have receded in recent months and analysts are generally optimistic that 2011 will show continued improvement for retailers, but there are also concerns about cost pressures building in the supply chain and the consumer’s willingness to continue to spend.

Many retailers weigh in with December comparable-store sales results on Thursday.

“We had a Christmas, Santa came this year and so I think people are looking forward to monthly comps and the holiday sales updates that are coming,” said Erika Maschmeyer, analyst at Robert W. Baird & Co.

Still, she cautioned: “The consumer’s really bipolar. They come out when they have a reason to buy.”

Paul Lejuez, analyst at Nomura Securities, said the overall holiday sales gain would be strong enough to keep markets focused on retail for now.

“I don’t know if it’s going to blow away expectations, but I think it was good enough to keep people looking ahead and thinking things can get better,” Lejuez said.

But he said investors could be setting themselves up for a fall, particularly as companies try to figure out how to manage rising costs after years of deflation.

“There’s just a little too much complacency out there,” he said. “We’ve got our concerns about cost increases.”

And the first quarter could be a difficult one for retail stocks given tough comparisons with a year earlier, a late Easter and rising sourcing costs, said Amy Noblin, analyst at Weeden & Co. “We’ve got very tough numbers that we’re up against in February and March,” Noblin said. “The first quarter could be a little choppy.”

Among the retail stocks gaining ground Monday were Saks Inc., up 4.6 percent to $11.19; Nordstrom Inc., 2.4 percent to $43.39; The Men’s Wearhouse Inc., 1.7 percent to $25.40, and Rue 21 Inc., 2.7 percent to $30.10.

On the losing end was AnnTaylor Stores Corp., which saw its stock fall 5.2 percent to $25.98 after Piper Jaffray analyst Neely Tamminga downgraded the stock to “neutral” from “overweight” on concerns that a recovery in the Loft division could be delayed.

However, AnnTaylor proved a standout — among the top stocks of the 171 tracked by WWD — in 2010, more than doubling in value to $27.39. Other companies yielding strongly last year for their investors included department stores Dillard’s Inc. (up 105.6 percent), Saks (up 63.1 percent) and Macy’s Inc. (up 51 percent). Specialty retailers benefiting from improved sales results as well as a flurry of interest in mergers and acquisitions at the end of the year included not only AnnTaylor, but also the sizzling Zumiez Inc. (up 111.2 percent), Abercrombie & Fitch Co. (up 65.4 percent), Limited Brands Inc. (up 59.7 percent) and the recuperating jeweler Zale Corp. (up 56.6 percent).

Among those leading the recovery in the luxury sector in 2010 were Burberry Group plc (up 87.7 percent), the highly coveted Hermès International (up 68 percent), Compagnie Financière Richemont SA (up 58.4 percent), LVMH Moët Hennessy Louis Vuitton (up 57.1 percent), Tiffany & Co. (up 44.8 percent), PPR (up 41.3 percent) and Bulgari (up 40.5 percent).

Beauty companies also dotted the list of best performers last year, led by Sally Beauty Holdings Inc.’s 89.9 percent advance and The Estée Lauder Cos. Inc.’s 66.9 percent. Also sharing in the market’s positive take on fragrances and cosmetics were Elizabeth Arden Inc. (up 59.5 percent), Inter Parfums Inc. (up 54.9 percent) and Parlux Fragrances Inc. (up 38.7 percent). Revlon Inc. didn’t share in the bounty, sliding 42.2 percent during 2010.

While a general sense of improving sales bathed retail and fashion shares in a flattering light throughout the year, investors were particularly kind to the stocks of companies perceived as being on the road to recovery or expansion. Movado Group Inc. shares spiked strongly after signs its turnaround plans were succeeding emerged with its third-quarter results, helping boost the stock 66.1 percent for the year. G-III Apparel Group Ltd. shares were up 62.2 percent as it continued to outperform expectations and diversify its business beyond outerwear and further into retail. Phillips-Van Heusen Corp., with an eye on becoming the world’s largest apparel company, saw shares appreciate 54.9 percent during the year as it appeared to successfully integrate the Tommy Hilfiger business into its fold. Coach Inc. shares rose 51.4 percent and Polo Ralph Lauren Corp. shares 37 percent over the course of the year, two of many issues to be rewarded for their adjustment to a more global marketplace and a more particular aspirational consumer, as well as strong operational fundamentals.

Dress Barn Inc. absorbed Tween Brands into its portfolio and its shares finished the year 14.4 percent ahead of their 2009 conclusion. On Monday, the company said it had completed its reorganization and would now be known as Ascena Retail Group Inc., trading over the counter under the ticker symbol “ASNA.”

Declines were relatively few among the stocks tracked by WWD. While 134 issues enjoyed increases, there were just 36 declines and one flat performance. Among those failing to post increases were American Apparel Inc., down 46.5 percent, as it continued to be dogged by issues ranging from the integrity of its accounting to the ability to meet financial covenants. Charming Shoppes Inc. shares were off 45.1 percent as the retailer conceded to losing customers as it clumsily attempted a turnaround.

Conspicuous for their concentration in losing territory last year were missy specialty retailers, which are struggling to achieve effective merchandising and marketing strategies. In addition to Charming, those losing ground last year included Coldwater Creek Inc. (down 28.9 percent), Christopher & Banks Corp. (down 19.3 percent), Chico’s FAS Inc. (down 14.4 percent) and The Talbots Inc. (down 4.4 percent). Teen retailers with falling stock prices last year included American Eagle Outfitters Inc., down 13.8 percent, and Hot Topic Inc., down 1 percent.

J. Crew Group Inc. saw shares fall 3.6 percent last year as disappointing results beginning with the third quarter held the stock down, despite its November agreement to be acquired by TPG and Leonard Green & Partners for $43.50 a share.