Stocks Fall on GE Downgrade

Retail shares escaped the worst of another late-day swoon on Wall Street on Thursday but couldn't get away unscathed.

Retail shares escaped the worst of another late-day swoon on Wall Street on Thursday but couldn’t get away unscathed after investors pulled back following Standard & Poor’s reduction of General Electric Co.’s outlook to “negative” from “stable.”

This story first appeared in the December 19, 2008 issue of WWD.  Subscribe Today.

After spending most of the day in positive territory, the Standard & Poor’s Retail Index dropped 1.4 percent to 286.61. It fared better than the Dow Jones Industrial Average, which dropped 2.5 percent to 8,604.99, and the S&P 500, down 2.1 percent to 885.28. Both retreated quickly in the late afternoon after S&P lowered its outlooks on both General Electric Co. and its General Electric Capital Corp. (GECC) unit, based principally on concerns about GECC’s effect on GE’s gold-standard “AAA” long-term credit rating.

“GECC will account for about a third of GE’s earnings in 2009 — or less if worse-than-expected credit losses further reduce GECC’s earnings,” wrote S&P analyst Robert Schulz. “Even with its current stand-alone credit profile of ‘A-plus,’ GECC remains one of the world’s most profitable and highly rated financial institutions.”

However, he said, “fundamentals-based earnings and cash flow could decline sufficiently during the next two years to warrant a downgrade.”

GE’s commitment to the financial unit has been demonstrated in recent months by the infusion of $5 billion in equity into GECC and the reduction of GECC’s dividend payout to GE to 10 percent of net earnings from 40 percent.

The status of GECC is critical to the apparel and retail industries because it provides credit to consumers as well as retailers and wholesalers. It provided financing to Goody’s Family Clothing Inc. when the retailer entered bankruptcy in June and again when the firm exited Chapter 11 in October. Goody’s is reportedly running low on cash yet again. GE also extended financing to Steve & Barry’s prior to that company’s bankruptcy and subsequent liquidation and to the troubled Finlay Enterprises to help with the 2007 acquisition of Bailey Banks & Biddle. Lord & Taylor and Gottschalks, among many others, also have credit arrangements with the firm.