Wall Street’s credit nightmare — made all the more vivid last week by the on-again, off-again government bailout and the largest U.S. bank failure ever from Washington Mutual — is giving consumers and fashion companies a fright.
This story first appeared in the September 29, 2008 issue of WWD. Subscribe Today.
For firms teetering on the edge, it might be too much to bear.
Jim Rice, a senior credit analyst at F&D Reports Creditintel, said because of the erosion of the credit market, there is virtually no financing activity.
“The good companies can still get financing, but if a firm is less than stellar, the financing isn’t going to come through,” Rice said. “Should the bailout pass, the credit market will slowly ease up, but it would still take a while to do so. Basically everyone is still nervous.”
Efforts to solidify a $700 billion rescue plan for the financial markets devolved Thursday and Friday into a round of finger-pointing in Washington. On Sunday, Congressional leadership from both parties said they had crafted a tentative deal and hoped to present it to the House and Senate on Monday.
The plan called for the federal government to infuse funds into cash-starved financial firms and take over massive amounts of devalued assets from the companies in the hopes of unlocking frozen credit.
Despite being held in relative limbo by the political wrangling, investors did muster some optimism Friday and pushed the Dow Jones Industrial Average up 1.1 percent, or 118.20 points, to 11,140.26. The Standard & Poor’s Retail Index staged a late-day advance to finish ahead 1.2 percent at 375.67.
“I don’t think passage of bailout legislation would prevent the upcoming holiday shopping season from being the worst since the 2001 recession,” said John Lonski, who heads up the economics group at ratings agency Moody’s Investors Service. “However, without the legislation, holiday shopping could be substantially worse.”
Lonski expects the labor market to get worse before it gets better.
Already, the U.S. has lost 605,000 jobs this year — a figure all the more sobering given the economy is estimated to need roughly 150,000 new jobs each month to keep up with population growth. In August, unemployment rose to 6.1 percent, a height not seen since 2003.
Congress sent a $634 billion spending measure on Saturday to President Bush, who was expected to sign it even though it spends more money and contains more pet projects than he would have liked. The measure, which basically keeps the government running, doesn’t include specific job creation initiatives, but ensures ongoing programs are properly funded and avoids another financial quagmire.
Meanwhile, the worries besieging average consumers and lenders have also helped clamp down on real estate development.
“When the credit markets freeze the way they have been frozen, it really reduces the development opportunities,” Alan Shor, president and co-founder of The Retail Connection, a real estate development and investment firm, said. “You’ve got some lenders who simply are so afraid of real estate that they’re not lending.”
Mostly lenders have simply ratcheted up credit terms, requiring developers to put more equity into projects and insisting they have more tenants ready to fill the space, he said, noting the end result is fewer new stores.
“In some respects, that’s not bad,” Shor said. “The result is you get more quality development done. We have too many retail stores overall and what a cycle like this does is sort of clean that out.”
Such a bloodletting might allow retailers to come back stronger when the market turns, though when that will be remains to be seen. The current weakness is also slowing real estate development for stores.
“Retail is in a bit of a slump,” said Shor. “Retailers are opening up fewer stores. The pipeline for new development has slowed very significantly because of what’s happened in the last six months.”
Even before the financial turmoil that has characterized this month — and encompassed the federal takeovers of Freddie Mac, Fannie Mae and American Insurance Group and the bankruptcy of Lehman Brothers — real estate companies had taken a cautious turn to protect their finances.
Despite being financially stable overall, real estate investment trusts, or REITs, have adjusted to the realities of the marketplace, said Merrie Frankel, a commercial real estate debt analyst at Moody’s Investors Service. For instance, some have issued additional stock to raise capital when, in the past, they might have issued debt instead.
“Everybody wants to keep their powder dry,” Frankel said. “That’s the mantra these days. Everybody wants to make sure they have enough money in the till.”
In that vein, the firms have also become more judicious about how they spend their money.
“They all have, in the last number of months, gone through their development portfolio and they’ve either expanded the time line for getting projects done or cut out projects,” she said. “It all depends on how far down the road the project is to be completed.”
Even in the wake of the Washington Mutual collapse and word that Wachovia was in preliminary merger talks with Citigroup, the late rally in stocks Friday erased some of their losses from earlier in the week. The Dow ended up declining 2.2 percent last week, but the close was more than 5 percent higher than on Sept. 17, when Wall Street endured its biggest declines of the recent crisis.
Retail shares also staged a comeback as the Standard & Poor’s Retail Index ended the week down 4.7 percent but up 0.5 percent since Sept. 17.
On Friday, misses’ retailers continued to be pressured as Christopher & Banks Corp., Caché Inc. and Chico’s FAS Inc. dropped 7.4 percent, 6.8 percent and 4.2 percent, respectively, closing at $8.02, $6.35 and $5.52. However, The Dress Barn Inc. picked up 6.2 percent to close at $15.87 and, across the mall in the teen area, Aéropostale gained 3.2 percent for a $31.70 final tally.
Among the stronger finishers on Friday were four REITs — General Growth Properties (up 6.6 percent to $17.05), Tanger Factory Outlet Centers Inc. (up 4.6 percent to $44.20), Developers Diversified Realty Corp. (up 4.4 percent to $33.40) and Simon Property Group (up 4.3 percent to $99.70). Unlike the others, however, Tanger ended the session close to its 52-week high of $46.30, reached on Sept. 19.
All the European stocks tracked by WWD were lower on Friday, except French Connection, which finished trading in London flat. Firms shedding at least 3 percent of their value included Asos (3.7 percent), Hennes & Mauritz and Luxottica Group (3.6 percent), Richemont (3.3 percent), IT Holding SpA and PPR (3.2 percent), Marks & Spencer Group plc (3.1 percent) and Escada (3 percent).