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Global Economic Headwinds Have Industry Execs on Edge

U.S. fashion companies face an uncertain economic future given troubles in Europe and Asia.

Outside a Lululemon store.

Forget winning — it looks like the best the U.S. economy can hope for this year is not losing.

Given the global outlook — with the euro zone facing an existential crisis and China cutting interest rates to support sagging growth — a status quo performance in the U.S. would not be such a bad thing.

Executives at some of fashion’s biggest companies have been warning investors that, while business trends have been solid, they see a weakening in the second half. The concerns range from a general consumer malaise and unemployment to fewer tourist dollars coming from Europeans and the weakness in China.

Perennial outperformer Lululemon Athletica Inc. tripped some warning bells for investors Thursday when it said comparable-store sales gains would slow from a 25 percent first-quarter rise to something in the low-double-digit range in the second three-month period. The company, which attributed the first-quarter comp growth rate to low inventories a year earlier, saw its stock drop 8.8 percent to $63.84.

Net income attributable to Lululemon rose 30.8 percent in the first quarter to $43.6 million, or 32 cents a share, from $33.4 million, or 23 cents, a year earlier. Revenues for the three months ended April 29 increased 53 percent to $285.7 million from $186.8 million.

While the yoga-inspired apparel-maker’s been on a growth tear, like other fashion companies this year it has been supported by employment gains that have given shoppers the confidence to spend, even with just 69,000 new jobs added in May. And the pressure from gasoline prices has eased — a gallon of regular has gone from almost $4 two months ago to $3.56, according to AAA.

People also started off the year with more money on an absolute basis. Household net worth grew by $2.8 trillion, or 4.7 percent, in the first quarter, the Federal Reserve said Thursday. But that gain was highly dependent on stock holdings and now the market is on increasingly shaky ground, coming off a rally as investors try to get a handle on the huge uncertainties overseas.

Wall Street opened up with a bang Thursday after the People’s Bank of China reduced its benchmark interest rate for deposits and loans by 25 basis points — the first rate cut since December 2008, according to the country’s official news service.

By midday, Federal Reserve chairman Ben S. Bernanke threw cold water on the rally at a much-anticipated appearance on Capitol Hill. It wasn’t so much what Bernanke said as what he didn’t say. Investors were hoping for — and left wanting — some hint that the central bank was considering injecting money into the U.S. economy to keep it from weakening too much.

“Economic growth appears poised to continue at a moderate pace over coming quarters, supported by accommodative monetary policy,” the Fed chief said in testimony. “Income growth has remained quite modest, but the recent declines in energy prices should provide some offsetting lift to real purchasing power.”

By the end of the day, the Dow Jones Industrial Average had eked out a mere 0.4 percent increase, or 46.17 points, to 12,469.96, while the S&P Retail Index fell 0.33 percent, or 1.99 points, to 605.31.

Among the decliners were Michael Kors Holdings Ltd., down 6.6 percent to $36.04, and Coach Inc., off 1.2 percent to $62.07. Stifel Nicolaus analyst David Schick attributed the falls to worries about slower sales trends among department stores, but said the concerns were overblown in the case of Coach, which he rates.

The seesaw markets Thursday indicated more than ever that the future is unusually fuzzy.

“There are just too many question marks about some of the fallout from Europe, let alone fallout from China, what that might mean in terms of slowing growth here in the U.S.,” said Frank Badillo, senior economist at Kantar Retail.

The economist said retail sales excluding automobiles and gasoline would slow to a growth rate of about 4 percent, from 6 percent this spring. “Still relatively modest growth compared to what we’ve had recently,” he said.

Chris Christopher Jr., director of U.S. and global consumer markets at IHS Global Insight, noted the consumer has held up better than other parts of the economy, with warmer weather and pent-up demand spurring sales earlier this year.

Christopher said weakness in Europe and a slowdown in China could help U.S. apparel companies get good prices from Chinese suppliers. “There’s some good hope for apparel, it sounds bad, but it sort of may be a disguised blessing,” he said.

It’s a different case, of course, for U.S. luxe companies selling goods to tourists who have to pay in dollars when the euro is weak, trading at $1.25.