Good News at Last: Retail Shares Buck Stock Market’s Fall

While investors on Wall Street dumped stocks Tuesday on fears of a recession, there was renewed optimism about at least one sector: retail.

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While investors on Wall Street dumped stocks Tuesday on fears of a recession, there was renewed optimism about at least one sector: retail.

This story first appeared in the January 23, 2008 issue of WWD.  Subscribe Today.

The S&P Retail Index surged 5.4 percent to 394.39 as shares of retailers across all channels responded to the Federal Reserve Board’s emergency — and unprecedented — interest rate cut of 75 basis points. Investors are already banking on another rate cut next week.

The much-battered retail area was, ironically, the lone star as the Dow Jones Industrial Average closed down 1.1 percent to 11,971.19, after dropping more than 460 points earlier in the day. The S&P 500 slid 1.1 percent to close at 1,310.50. The New York market declines Tuesday followed steep falls Monday on Asian and European markets.

American investors rallying to retail were betting that an economic stimulus package from the Bush administration — as well as lower rates on variable interest debt such as home equity loans, credit cards and adjustable rate mortgages — would put more cash in consumers’ hands.

American Eagle Outfitters Inc. was one of the top gainers on the New York Stock Exchange, soaring 11 percent to $21.86. Women’s apparel retailer Chico’s FAS Inc. also rose sharply, up 13.1 percent to $7.95, while Talbots Inc. increased 7.6 percent to close at $7.51.

Valuations also jumped for department stores. After unveiling a structural overhaul of its business, Sears Holdings Corp. swelled 11.7 percent to close at $99.85. Macy’s Inc. increased 5.2 percent to $24.25, J.C. Penney Co. Inc. rose 6.1 percent to $43.42 and Kohl’s Corp. jumped 6.8 percent to close at $42.71. High-end retailer Nordstrom Inc. rose 8.9 percent to $32.52.

Shares of discounter Target Corp. increased 6.9 percent to $29.63, even though the company on Monday said January sales are trending at the low end of its reduced forecast. Wal-Mart Stores Inc. also jumped 3.3 percent to $49.13.

On Wednesday, analysts and economists set aside the debate of whether the U.S. was in a recession or not and replaced it with questions on improving economic conditions. Inflationary prices on consumer goods, a poor job outlook, low-wage growth and overall uncertainty in a presidential election year seemed to have sapped consumer confidence and spending, which drives two-thirds of the country’s economic engine. One economist said the focus should be on the housing market.

“What we really want to do is stabilize housing by the peak spring selling season. Perhaps the most efficient way to do that is getting mortgage yields as low as we can,” said John Lonski, chief economist at Moody’s Investor Services. “Lower mortgage yields firm up home prices.”

A mortgage yield is a measure of yield on a mortgage-backed bond. Lonski said in the past when mortgage rates plunged, prices shot up, which contributed to the current housing crisis. But he said this is what’s needed to stabilize the housing market.

Regarding the financial stimulus efforts currently being employed, which should benefit the economy, Lonski said such moves “won’t prevent recession, but it should shorten its stay and lessen its severity.”

“In the final analysis, subpar consumer spending will persist,” Lonski said.

From a broader Wall Street perspective, the Fed’s rate cut may have been too little too late. At Tuesday’s opening, investors were keyed into declining indices in the major financial markets on Monday, a trading holiday in the U.S. On Tuesday, the Japanese Hang Seng Index plummeted 8.7 percent to 21,757,63, reaching its lowest point since Sept. 11, 2001. Components of the index include contemporary apparel retailer Esprit Holdings Ltd., which fell 5.7 percent, and Li & Fung Ltd., which tumbled 7.2 percent. The Nikkei 225 dropped 5.7 percent to 12,573.05, a new 52-week low.

When the Fed made the rate cut announcement early Tuesday morning, investors initially shrugged off the news. The sell-off continued but slowed as trading progressed and investors weighed the emergency measure.

The London Stock Exchange’s FTSE 100 declined on Monday, losing 20 percent of its value compared with the summer, but it rose Tuesday, closing up 2.9 percent, while retail stocks showed some signs of recovery. Burberry Group plc shares closed up 2.2 percent at 4.05 pounds, or $7.94, while Marks and Spencer Group plc rose 5.8 percent to 4.32 pounds, or $8.47. French Connection Group plc rose 1 percent to 99 pence, or $1.94, while Mulberry Group plc was down 1.3 percent to 1.71 pounds, or $3.35.

British shoppers seem spooked from spending by a slowdown in house prices, higher food and energy costs and the Bank of England’s decision earlier this month to leave interest rates unchanged.

On Friday, the British Retail Consortium trade association called the Christmas season “grim” for retailers, with year-on-year sales growth in December at 0.3 percent — its slowest rate in three years.

Italy’s S&P/MIB Index closed up Tuesday for the first time in six days following the Fed cut. The index gained 1.2 percent to 34,302. On Monday, it slumped 5.2 percent, the most since Sept. 11, 2001.

Italian luxury goods and fashion stocks have been feeling the effects of the U.S. downturn this year. Shares in Benetton Group SpA lost more than a third of their value earlier this month, prompting the Benetton family to add to its controlling stake in the clothing company last week. The Benetton family bought 5.5 million euros, or $7.98 million at current exchange, of shares through an investment vehicle, which holds about 67 percent of the company.

Benetton chairman Luciano Benetton and chief executive Gerolamo Caccia Dominioni also bought a combined 380,000 shares to counter the slump. Benetton gained 3.4 percent to 8.50 euros, or $12.34, at the end of trading on Tuesday.

Armando Branchini, deputy chairman of Milan-based luxury goods consultancy Intercorporate, said the downturn in the U.S. economy was not the only threat to European luxury goods companies this year. The poor state of the Japanese economy over the last two years, and the high value of the euro against the dollar and the yen were also worries.

In Paris, PPR, the French retailer that owns Gucci Group, saw its stock tumble from a high of 118 euros, or $172.52, on Dec. 11 to 83.66 euros, or $122.31, on Monday, when stocks across the Continent fell deep into the red. For its part, LVMH Moët Hennessy Louis Vuitton’s stock has slid from above 84 euros, or $122.81, on Dec. 11 to 65.41 euros, or $95.63, on Monday.

Both stocks have been hit by the specter of slowdown as well as the rising value of the euro against the dollar and the yen. PPR will report its yearly sales on Thursday, while LVMH will report results in early February.

Retailers equally have been hurt by signs of a slowing economy in Europe, with most stores reporting weak holiday sales and forecasting more difficulty ahead.

Most luxury and retail stocks in Europe rebounded on Tuesday on news of the U.S. rate cut. PPR bounded 5.3 percent to close at 88.07 euros, or $128.76, in trading on the Paris Bourse, while LVMH gained 3.4 percent to 67.60 euros, or $98.83.

The Fed’s action Tuesday was further evidence of the growing concern over the health of the American economy. In Washington, the Bush administration and Congress continued to chip away at a compromise economic stimulus package on Tuesday. Treasury Secretary Henry Paulson Jr. touted the outlines of the President’s proposed growth package in an address at the U.S. Chamber of Commerce.

“Specifically, the President called for a robust package that is large enough to have a real impact on our economy and will bolster consumer spending and business investment this year,” said Paulson. “We know from experience that both immediate tax relief for income tax payers and incentives for businesses to invest and hire are effective in creating growth and jobs in the short term.”

Bush unveiled a stimulus blueprint last Friday that would include tax cuts for individuals and businesses. He said any package would need to represent approximately 1 percent of the gross domestic product, or about $140 billion to $150 billion. Bush met with Congressional leaders Tuesday to discuss an economic plan.

On Capitol Hill, the Senate Finance Committee called on Peter Orszag, director of the Congressional Budget Office, to present economic stimulus options at the first of two hearings the committee will hold this week as it shapes its own economic plan. Orszag warned lawmakers that enacting policies that have longer-term effects, such as a cash infusion for highway and bridge improvements — a measure lawmakers are considering to boost employment in the flagging construction sector — could be counterproductive and exacerbate the budget imbalance.

“The thing that [provides] the largest bang for the buck is getting cash into households that spend money, quickly, including rebates for such households and expanded unemployment benefits and food stamps,” said Orszag, adding that business incentives, such as a cut in corporate tax rates or incentives for new investment, could have a positive effect.

From a trade finance perspective, an economic downturn in the U.S. is bad news for overseas vendors and manufacturers who are already feeling pressure from a tighter credit market.

“When the United States sneezes economically the world catches a cold and that is beginning to be felt in the international trade marketplace,” said Tony Brown, international managing director at First Capital, whose clientele typically consists of foreign suppliers.

Brown said, “There are some very plausible grounds to believe that we are approaching a recessionary environment. This is partly due to real estate problems, partly due to the dollar and partly due to the fact that people are uncertain and they’re starting to keep money in their pocket rather than spend it. We are in a cautionary environment.”

To add to the effect of reluctant consumerism, “there is no more fat, we are into lean profit margins and lean manufacturing, and vendors are relying on buyers’ orders to be honored,” said Brown.

Brown said overseas vendors are experiencing the same credit crunch that is occurring in the U.S., especially in the rapidly expanding China market. As a result, factories and exporters in China are struggling to obtain the financing they need to support the orders from American buyers.

Meanwhile, Kevin Sullivan, executive vice president at financial services firm Wells Fargo, said more fashion-focused segments will likely be at a greater risk during an economic downturn. “If somebody is doing more of a fashion-oriented item, and it gets canceled, we’re much more concerned about that,” Sullivan said, adding that nonfashion related items aren’t as trend-driven and seasonal, so pushing these types of orders back doesn’t affect either of the parties involved as drastically.

Sullivan said stylized garments are most difficult to sell in a subsequent season. In response to this, his clients are making “more basic products.”

For Gary Wassner, president of factoring firm Hilldun Corp., the tightening credit market is more of a cash flow issue than a bottom line issue.

Wassner said he is hearing “that stores are pushing deliveries ahead by 30 or 60 days from when they originally committed, but that’s a timing issue, it’s not a bottom line issue in the long run.”

Later deliveries means cash flow woes for vendors. But is also means merchandise will eventually ship.

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