Things went from bad to worse for retailing and the financial world Monday.
In Washington, House lawmakers voted down a $700 billion Wall Street bailout package by a 228-205 margin, prompting investors to wonder when — and how — the credit freeze would thaw, and pushing retail stocks to record declines as already-skyrocketing fears over consumer confidence and holiday spending entered the stratosphere.
The Standard & Poor’s Retail Index plummeted 6.7 percent, or 25.25 points, to 350.42 — the largest percentage drop in the index since it was recalibrated in mid-2002. Both the second and third largest drops, 6.4 and 5.9 percent, respectively, were registered earlier this month as investors rode roller-coaster markets driven by bank failures, government takeovers and a severe lack of credit.
The 777.68 point drop in the Dow Jones Industrial Average, to 10,365.45, was the single biggest point decline on record, nearly 100 points worse than when the markets opened on Sept. 17, 2001, following the 9/11 terrorist attacks. The 7 percent decline in the Dow was the 17th worst on record in percentage terms.
The continuation of the crisis will only add to the anxiety of shoppers, who are already battling a host of economic woes.
“It will make it more difficult for the consumer to have any confidence in the government because of the lack of leadership,” retail consultant Walter Loeb said.
And the news, even with the defeat of the bank bailout, just keeps getting worse as consolidation roils on in the banking sector. On Monday, it was the government-backed sale of Wachovia Corp. to Citigroup which followed last week’s collapse of Washington Mutual, marking the largest bank failure ever. This month the government has also taken over mortgage giants Freddie Mac and Fannie Mae, as well as insurance giant American International Group. Investment house Lehman Brothers was allowed to fail.
Still, the fallout could ultimately provide some opportunity for investors.
“You have to let the fury of the current day go past and in the next few days, people will realize neither industrial nor any commercial companies have really failed as a result of this,” Loeb said. “There is still a lot of potential in these industries. The market will go up and recover some of the lost ground.”
But the commotion in Washington is ultimately expected to weigh on the consumer, who already has been laid low by high fuel costs and a worsening job outlook.
In August, personal income rose $61.5 billion, or 0.5 percent, as disposable personal income fell $93.3 billion, or 0.9 percent, according to a monthly Commerce Department report issued Monday. Personal consumption expenditures increased $3.9 billion, or less than 0.1 percent.
The Conference Board is set to release its latest reading on consumer confidence today.
“It’s a difficult business environment across the board, all the way from luxury to mass,” Neil Cole, chairman, chief executive officer and president of Iconix Brand Group Inc., said. “I don’t see any bright spots. This is the most difficult environment I have ever seen.”
Despite holding out hope the presidential election will help boost confidence for the holidays, Cole’s outlook for consumer spending is decidedly less than optimistic.
“I don’t think there’s a chance until the second half of next year for a pickup as retailers are now planning their inventory conservatively,” he said. “I think it will be a difficult spring.”
Business forecasting, always an inexact science at best, has been made all the harder by the persistent credit problems and the sometimes inelegant rush to fix them.
“The fires are still raging and the smoke is yet to clear to really know what the damage is,” said Jeffry Aronsson, who cofounded Aronsson Group.
The depressed markets have the potential to both give and take. For instance, they could spur some deal-making in fashion. “Values are just going to be coming back a little bit down to earth,” Aronsson said. “This is a good time for equity deals.”
But as strategic acquirers prowl for deals, shoppers, even at the higher end of the business, are seen tightening up.
“It definitely will impact the spending habits of an aspirational consumer, and by that I mean someone who will buy at an opening price point of a luxury brand to be in it,” said Aronsson, who before his deal-making days was ceo of both Donna Karan International and Marc Jacobs.
“Prior to the latest crisis, the cheap dollar has been helpful to maintain if not increase sales of many of the brands, at least on the two coasts,” Aronsson said. “As the banking and credit crisis spreads around the world, continued performance will be dependant on something more than a cheap dollar.”
The ceo of one major importer, who spoke on the condition of anonymity, said retailers were cutting back on purchases, with some chains carrying a large inventory overhang.
All this also spells trouble for suppliers, who are already dealing with rising raw material and labor costs.
The ceo said a profit margin squeeze would come from “cost inflation that could not be passed through as price increases, which means either improve productivity or perish.”
The painful trading day left a number of retail stocks with double-digit losses, among them Eddie Bauer Holdings Inc., down 17.2 percent to $5.30; Casual Male Retail Group Inc., down 14.9 percent to $3.60; Dillard’s Inc., down 12.8 percent to $11.20; Macy’s Inc., down 10.9 percent to $17.28; Rite Aid Corp., down 11 percent to 81 cents; American Eagle Outfitters Inc., down 10.4 percent to $14.25, and The Children’s Place Retail Stores Inc., down 10 percent to $33.04.
Falling just shy of the 10-percent decline mark were Coldwater Creek Inc., down 9.9 percent to $5.45; American Apparel Inc., down 9.3 percent to $7.80; Saks Inc., down 8.6 percent to $8.48; Retail Ventures Inc., also down 8.6 percent to $3.81; Stein Mart Inc., down 8.5 percent to $3.64, and Abercrombie & Fitch Co., down 8 percent to $35.74.
Target Corp. was also down 8 percent, finishing at $47.35, while rival Wal-Mart Stores Inc. dropped 3.7 percent to $58.45.
Emerging from the storm with gains for the day were Delia’s Inc., which jumped 17.2 percent to $2.93 after agreeing to sell its CCS skateboard unit to Foot Locker Inc., and Gottschalks Inc., up 8.6 percent to $1.52 as investors continued to give the thumbs-up to its $30 million cash infusion from Everbright Development. Another regional department store, The Bon-Ton Stores Inc., was up 7.3 percent to $3.17.
In Tokyo, where markets open first and investors often set the tone for traders in Europe and then the U.S., the Nikkei 225 fell 1.3 percent, or 149.55 points, to 11,743.61. Stocks on the downtrend included Link Theory Holdings Co. Ltd. (5.3 percent), apparel maker and marketer Onward Holdings Co. Ltd. (2.2 percent) and Mitsubishi Rayon Co. Ltd. (4.8 percent).
By the time the London Stock Exchange closed, the outlook had worsened and the FTSE 100 fell 5.3 percent, or 269.70 points, to 4,818.77. Among the decliners were Burberry Group plc, down 7 percent to 378.25 pence, and Marks and Spencer Group plc, off 5.8 percent, to 208.25 pence.
With the presidential and congressional elections just five weeks away and mounting opposition from their constituents back home, rank-and-file members from both major political parties defied House leaders and defeated the bill. Republican lawmakers criticized the package for putting taxpayers at unnecessary risk and violating free-market principles, and 133 Republicans joined 95 Democrats to defeat the measure.
House leaders huddled behind closed doors after the measure failed and it remained unclear whether they would try to proceed with a new bill. The vote effectively killed the bill and leaders would have to go back to the drawing board, craft another bill and hold a new vote in order to advance a package. The House is set to reconvene on Thursday following the Rosh Hashanah holiday rather than adjourning for the year as was originally planned.
Praising the 60 percent of Democrats in her caucus who voted for the bill, House Speaker Nancy Pelosi said: “This is the President’s proposal, acted upon in a bipartisan way, improved upon in a bipartisan manner. The legislation has failed. The crisis has not gone away. We must work in a bipartisan way in order to have another bite at the apple in terms of some legislation.”
Pelosi told reporters she had spoken with Treasury Secretary Henry Paulson Jr. after the vote and that the “lines of communication remain open” with the Bush administration and Republicans. She did not provide any details about whether leaders would try to hold a new vote on a repackaged bill in the near future.
“What happened today cannot stand,” Pelosi added. “We must move forward and I hope that the markets will take that message.”
“Our tool kit is substantial but insufficient,” said Paulson. “Therefore, I will continue to work with Congressional leaders to find a way forward to pass a comprehensive plan to stabilize our financial system and protect the American people by limiting the prospects of further deterioration in our economy. We’ve got much work to do. This is much too important to simply let fail.”