Another Wild Ride: Fashion, Retail Stocks Miss Late Recovery

NEW YORK — A curious mix of bargain hunters, optimists and President Bush buoyed the financial markets late Monday, arresting a dramatic skid and leaving some hope that the bottom, if not reached, may have been approached.<br><br>Retail stocks...

NEW YORK — A curious mix of bargain hunters, optimists and President Bush buoyed the financial markets late Monday, arresting a dramatic skid and leaving some hope that the bottom, if not reached, may have been approached.

This story first appeared in the July 16, 2002 issue of WWD.  Subscribe Today.

Retail stocks went along for Monday’s wild ride, though generally they tended to drop farther than the overall market and rebound not as much.

Department stores seeing the Marcus, down $1.65, or 5.5 percent, to $28.40; Dillard’s, $1.12, or 4.4 percent, to $24.53; Nordstrom, 76 cents, or 3.8 percent, to $19.02, and J.C. Penney Co., down 48 cents, or 2.6 percent, to $18.06.

Specialty stores generally suffered even greater declines. Urban Outfitters was down $3.09, or 10 percent, to $27.75; Cache, $1.51, or 9.3 percent, to $14.70; Charming Shoppes, 71 cents, or 9.1 percent, to $7.12 and Too Inc., $1.36, or 5.2 percent, to $25.04. Posting smaller declines, but still off more than 4 percent, were American Eagle Outfitters, down 77 cents to $18.05; Abercrombie & Fitch, $1.22 to $24.17; Hot Topic, $1.02 to $23 and Pacific Sunwear $1.03 to $21.97.

On the vendor side, shares of Tommy Hilfiger dropped 55 cents, or 4 percent, to $13.05; VF Corp. dropped 44 cents, or 1.2 percent, to $35.35; Sara Lee slid 12 cents, or 0.7 percent to $18.03. Ralph Lauren’s stock managed to pick up 22 cents, or 1.1 percent, to close at $20.20.

After sinking like a stone most of the day, with intraday declines on the Dow Jones Industrial Average exceeding 435 points, the New York Stock Exchange finished down 45.34 points, or 0.5 percent, at 8,639.19. The Standard & Poor’s 500 also regained much of its loss for the day, coming to rest at 917.93, down only 3.46 points, or 0.4 percent. While still far from its 52-week high of 2,102.53, the Nasdaq managed to rise mildly, closing up 9.12 points, or 0.7 percent, to 1,382.62.

Rather than being driven by any fresh scandal, the financial markets appeared to be caught in the confusion of a spooked Wall Street. The markets dropped further after words from President Bush that were intended to soothe jittery nerves. And stocks had failed to respond positively to word earlier in the day that Coca-Cola would change its accounting procedures so its stock options would more directly affect its earnings. In what became footnotes to the day’s dizzying events, the dollar slipped below parity with the euro for the first time in more than two years and a major merger was announced in the pharmaceutical world.

Unable to mount a late-day rally as they did in the U.S., European markets fell dramatically. Burberry closed unchanged, at $3.38, in its second day of trading, but London’s FTSE 100 closed down 5.4 percent.

In a speech Monday at the University of Alabama in Birmingham, President Bush sought to buoy markets with an upbeat assessment of the economy. However, just like his get-tough-on-corporate-crime speech last week on Wall Street, Bush’s assurances proved unconvincing to traders as markets continued spiraling downward.

To show that the economy is “fundamentally strong,” Bush cited various indicators such as interest rates, low inflation, increases in productivity and a first-quarter gross domestic product of 6.1 percent. He suggested Americans are suffering from an investment “hangover” after Wall Street’s salad days in the Nineties.

“America must get rid of the hangover that we now have as the result of the binge, the economic binge we just went through,” Bush said. “We were in a land [where] there was endless profits. There was no tomorrow when it came to the stock markets and corporate profits. And now we’re suffering a hangover for that binge.”

Bottom-feeding rather than calming words, though, seemed to do more to pull the lagging markets from their depths. James Glassman, an economist at J.P. Morgan Chase Securities, said the end of the huge sell-off Monday afternoon was probably due to investors saying the stock prices on companies were too low and saw good buying opportunities on the eve of a speech by Federal Reserve Board Chairman Alan Greenspan.

He explained that investors look for signs that people are panicking and that the market has gone into a free fall. That is when they start to turn around and buy as prices became attractive again. “People smelled the opportunity because there was no reason for the fall,” Glassman said.

While seen as a step in the right direction, economists and apparel executives weren’t especially impressed by Coke’s proclamation that it would change its accounting practices so earnings would reflect the value of the stock options it grants to executives and others. This action alone, they noted, wouldn’t be sufficient to ease the factors currently eroding consumer confidence.

John Lonski, economist at Moody’s Investors Service, said the news was somewhat marginal since only stability in the marketplace would placate consumer’s confidence. Rather, he said what is needed to turn the ship around is “the passage of time with no more announcements of accounting irregularities, coupled with broad-based profits.”

Still, he warned that the performance of the stock market remains in doubt as investors weigh the ongoing war on terrorism and the possibility of an attack on Iraq, the accounting scandals and second-quarter profits. “The environment is deemed too uncertain, so the Coke announcement does not have an affect for investors or consumer confidence,” Lonski said.

Ken Goldstein, an economist at The Conference Board, said Coke’s announcement does not stop the bleeding and said the markets’ continued downward spiral is due to the overall lack of meaningful action to restore confidence in the hobbled equity markets. He said to restore confidence in both investors and consumers, “someone needs to say, ‘We will do whatever it takes,’ but we are not getting that. People are looking for some leadership [on these accounting scandals] and it just is not there.

“This situation requires large and fundamental reform and the absence of suggestion of what the reform is and what kind of support, that is part of the fundamental reason why the markets remain skittish,” Goldstein said. “It is as if no one is out front on some of these things.”

Apparel executives regarded Coke’s accounting move as all sizzle and no steak, reasoning that most of the information involved is data that’s already public, which means that analysts and investors can figure out the effect options have on their bottom lines.

“I don’t think it makes one bit of difference,” said Willis Moore, chief financial officer at Greensboro, N.C.-based yarn texturizer Unifi Inc. “I think most stock analysts worth the price of admission do it anyway. The disclosures are there whichever way you want to do it. It’s just a matter of what they deem appropriate. We use the old method, that as long as they are issued at fair market value, where the exercise price is equal to that day’s price, we don’t regard it as an expense. Because if the price never gets above that, there is no compensation.”

Unifi’s top officers held 1.8 million exercisable options at the close of the firm’s fiscal year.

At VF Corp., also of Greensboro, a spokeswoman said the company already reports its options grants in footnotes, but added “it’s not a material impact,” because the number of options awarded by the company is relatively small. At the end of last year, VF officers held 6.4 million exercisable options. There were 111.3 million shares outstanding at that time.

A.G. Edwards & Sons analyst Robert Buchanan noted of the scandals dominating headlines as of late: “What some people would like to see is a ceo or two flogged in town square. Arguably the decks have been stacked against the even-handed investor in recent years.”

In addition to the scandal du jour on Wall Street, Buchanan blamed much of the economy’s sputtering on overcapacity in the industrial sector. “This is something I certainly haven’t seen in the 20 years I’ve been in the business,” he noted. “It’s dragging consumer psychology and it’s just a matter of time before we start seeing some real damage being done in terms of sales growth.”

While same-store sales were growing in the neighborhood of 5 percent, he said, they would slip to 2 percent by the holiday season.

Buchanan said this downturn is unique because the industrial side of the economy has failed to pick up due to increased capacity at home and abroad. “There has to be a reduction in capacity and it’s going to take a while for that to happen. The overcapacity issue has put the kibosh on the market and the market is going to put the kibosh on the consumer. There’s going to have to be some companies that go under before this mess gets cleared up,” he said.

Burberry’s ability to even tread water in such turbulence impressed overseas financial sources. “It was a staggering effort for Burberry to remain unchanged, considering the markets have been to hell and back,” said Ashley Willing, a fund manager at Gartmore Investment Management. “I think the stock was priced well, the investors are of a high quality, and they are taking the long view on Burberry.”

Burberry made its debut Friday on the London Stock Exchange during one of the most volatile sessions of the year. It closed down 2 percent at $3.38, earning financial industry praise for a solid debut amidst shaky market conditions.

“The fact that Burberry held its ground today is a good indication that the valuation was fair,” said one analyst who asked not to be identified. The analyst terms the volume of trading impressive: some four million Burberry shares changed hands on Friday, compared with just under two million for LVMH Moët Hennessy Louis Vuitton and about a million for Gucci in New York and Amsterdam.

“It’s an active stock,” the analyst said. “Investors are interested in it.”

Rose Marie Bravo, Burberry’s chief executive officer, said it wasn’t easy taking the company public and she was relieved it was done. “It was a really trying moment — what with the market dropping and all the new scandals. The process required a lot of tenacity and stamina. We were working against all odds,” she told WWD in a phone interview.

She paid homage to Mike Metcalf, Burberry’s chief operating and chief financial officer, who she described as “chirpy and enthusiastic during the road show, while I was often dragging and grumpy. He was just amazing.

“Now we’re all back to running the business — and the goal is to work on improving profits and revenue,” Bravo said.

Burberry’s profit margins will be under the equity analysts’ microscopes now as they evaluate the stock and its financial performance. As reported, some analysts are wondering if the stock will eventually be valued more like a luxury firm, à la LMVH, or a fashion firm in the style of Polo Ralph Lauren.

Profit margins will be the key. Traditionally, luxury companies have higher margins, due partly to their large accessories sales and stocks that trade at higher multiples to earnings, while fashion companies have lower margins, due in part to their reliance on the more cyclical apparel business. As a result, apparel firms trade at lower multiples.

Bravo said she believes Burberry inhabits the middle ground and defies direct comparison with companies in either camp.

“Yes, we do behave like certain groups, but we have our own strategic model and unique dynamic. In our own stores, for example, more than one-third of the revenue comes from accessories. At the same time, our roots and our heritage are in apparel, and especially outerwear. For Burberry, it’s a balancing act. Accessories is our fastest-growing division, but we will never be a company that does 70 to 90 percent of its business in accessories. We will always be strong in apparel.”

A London-based analyst commented: “Burberry is competing with Gucci for market share; yet its operational structure is more like an apparel company. It’s managed as if it were a luxury brand, and I think that as times goes on, it will look operationally — and behave — more like its luxury counterparts.”