By and  on March 28, 2005

NEW YORK — Inflation fears and a slight uptick in consumer prices had investors pulling out of the stock market last week.

As a result, the WWD Composite Stock Index fell 1 percent in the shortened holiday week, closing Thursday’s session at 1,130.18 from 1,141.98 the prior week. Among broader indices, the S&P 500 dipped 1.5 percent to 1,171.42 and the S&P Retail Index gave up 1.1 percent to close at 421.59. The New York Stock Exchange and Nasdaq were closed on Friday for the Good Friday holiday.

Talk on the Street during the short trading week were mergers and acquisitions. At the Merrill Lynch Retailing Leaders Conference, retail executives discussed potential impacts from the impending Federated Department Stores-May Department Stores merger.

J.C. Penney Co.’s Bob Johnson told conference attendees that the department store chain could benefit from the merger should the combined company cater to a more upscale customer. Johnson, director of investor relations at J.C. Penney, said the company could be interested in buying overlapping stores should Federated decide to sell them, according to Merrill Lynch analyst Daniel Barry in a research report.

Jones Apparel Group chief executive Peter Bonaparth said he thinks the Federated-May merger could give way to an improved distribution channel, but he recognized the integration won’t be easy, said Merrill Lynch analyst Virginia Genereux in her note. Bonaparth is concerned that May will be in “limbo” for most of this year, and Federated could move too quickly next year to upgrade existing May stores. Jones derived 26 percent of its revenues in 2004 from Federated and May.

Shares of J.C. Penney closed the week up 0.7 percent at $46.04, while shares in Jones Apparel Group closed Thursday at $31.76, down 0.7 percent for the week.

Meanwhile, massive savings on manufacturing costs anticipated after the removal of quotas on China aren’t likely to materialize, according to analysts who recently visited the country.

According to Wachovia Capital Markets analyst Joseph Teklits, labor shortages and rising costs for electricity and raw materials are putting pressure on Chinese factories. “[Wal-Mart] is saying that it will see 12 percent to 15 percent savings from the removal of quota this year, but all of the companies we met with said that level of saving is on the extreme side of possibilities and could only be achieved with aggressive tactics [focused on price over all else],” said Teklits in a research report released March 21. Teklits also noted the belief that new safeguards on apparel imports from China would be imposed had prevented Chinese factories from being flooded with new orders.

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