Citi Downgrades Saks, Nordstrom and Macy’s

Analyst Deborah Weinswig sees weakness in high-end shopper.

View Slideshow

Summer’s just started, but retail might be cooling off, particularly in the rarefied world of luxe.

This story first appeared in the June 28, 2012 issue of WWD.  Subscribe Today.

U.S. retailers started off the year on an upswing that was aided by a particularly mild winter, but the sales gains started to taper off by late spring. That slowdown has now run headlong into a general weakness in women’s designer fashions, slower economic forecasts for the U.S. and China and a flair up in Europe’s debt crisis.

All together, that has muddied the outlook considerably.

RELATED STORY: Weighing Nordstrom’s NYC Effect >>

“We have a cautious view on the consumer for [the second half] and expect the pace of consumer spending to slow, driven by a soft U.S. macro environment; weakness in Europe, including the drag on tourism to the U.S.; uncertainty around the presidential election, and declining consumer confidence,” said Deborah Weinswig, an equity analyst at Citi. “The slowdown is being led by high-income consumers, who account for approximately 50 percent of spending, own approximately 90 percent of U.S. equities, and are most impacted by stock market volatility.”

Weinswig downgraded shares of Nordstrom Inc., Saks Inc. and Macy’s Inc. to “neutral” from “buy,” pushing the stocks lower and weighing on the sector. In her note on Saks, the analyst said, “We see the weakness in women’s designer apparel as a more systemic issue that will likely weigh on [same-store sales] growth ahead.” The category was also cited as a weak point for Nordstrom.

Shares of Macy’s Inc. fell 3.1 percent to $33.14, as Saks Inc. declined 3.1 percent to $9.72, and Nordstrom Inc. dipped 1.5 percent to $47.90. Saks and Macy’s declined to comment on the downgrades. A message left at Nordstrom was not returned.

The S&P Retail Index fell 1.1 percent, or 6.76 points, to 600.83, lagging the Dow Jones Industrial Average, which gained 0.7 percent, or 93.34 points, to 12,627.01 with solid gains in the energy sector. Retail investors were on alert following word Tuesday that Conference Board’s Consumer Confidence Index fell to its lowest level since January, dropping to 62 for June from 64.4 in May.

Concerns about the luxe consumer are not new. Tiffany & Co. ran into troubles in the U.S. in the first quarter and last month lowered its outlook for the year.

Patrick McGuiness, the jeweler’s chief financial officer and senior vice president, told investors at the Oppenheimer 12th Annual Consumer Conference Wednesday that challenges are a result of larger macro issues.

“Discounting in the luxury space has been more and more competitive and I think we will continue to see that in these economic times,” McGuiness said.

Europe’s debt troubles have weakened the euro and made it more expensive for European tourists to spend on their travels. The currency shift cuts two ways, though, since a cheaper euro also makes it less expensive for U.S. retailers to buy European made goods.

The recent weakness might also be a reversion to the mean for retail.

Craig Johnson, president of Customer Growth Partners, said the year is still on track and that the warm winter gave stores an early boost that skewed sales results.

“The year started out a little hot,” Johnson said, noting that core retail sales — excluding automobile, gasoline and restaurants sales — were initially trending toward a better than 6 percent increase. Johnson is sticking by his projection for a 2012 sales gain of 5.7 percent, a modest rise from last year’s growth rate of 5.6 percent.

“We’re in midtide position,” he said. “That tends to separate the better performers from the weaker performers. At the bottom end, the entirety of value is strong and that has not changed. It’s the midtier and the luxe [chains] where you’re getting a separation of the weaker and the stronger performers.”

Johnson said his store checks show that Saks, Neiman Marcus and Bergdorf Goodman have all been under pressure, while Bloomingdale’s has been weaker than its corporate cousin, Macy’s. Nordstrom, according to Johnson, has been doing fine.

Arnold Aronson, managing director of retail strategies at Kurt Salmon, said, “There’s no question that the continued uncertainty is keeping the consumer from becoming exuberant again, but it’s hard, for me at least, to predict a drastic slowing in the business. It will be a moderate stabilization so to speak and then we’ll see what happens.”

Aronson said retailers have been careful to prepare their operations to be able to handle a slowdown

“The caution is not just in sales forecasting, but…in the instruments of earnings and those are inventories levels, which they’re being cautious about, and expense levels, the cost of doing business.”

View Slideshow