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Retail shares posted gains last week after the Federal Reserve slashed interest rates and the sector was upgraded by analysts.
This story first appeared in the February 4, 2008 issue of WWD. Subscribe Today.
This week, Wall Street will have its sights set on January same-store sales, which are released on Thursday.
Also on deck to report quarterly results are VF Corp., Caché and Polo Ralph Lauren.
With the same-store sales report, some analysts see results coming in better than expected as the month is a big clearance time. Gift card redemption also should bolster results. But other analysts say the consumer is much more cautious and has substantially pulled back on spending.
Still, investors have flocked to the retail sector to buy up cheap stocks. As a result, the WWD Composite Stock Index finished the week up 8.1 percent to 915.60 from 846.63 on Jan. 25. The S&P Retail Index rose 7.5 percent to 424.31 from 394.69.
Leading retail stock gainers for the week included Coldwater Creek, New York & Company and Charming Shoppes.
Driving interest in the sector last week was a report from Deutsche Bank, which upgraded the department store and mass merchant sector to “neutral” from “cautious,” anticipating the worst soon will be over.
“For now, we continue to focus on the defensive stocks, with a very stable earnings stream, like CVS and Wal-Mart Stores….As the economy begins to improve in the second half of 2008, we expect several of our department store shares could do very well, including Kohl’s and Macy’s, though we are not pounding the table here yet,” said William Dreher, research analyst at Deutsche Bank.
The market also got a boost after the Federal Reserve cut interest rates for the second time in two weeks. This should bode well for the S&P Retail Index, which typically outperforms the broader S&P 500 Index in periods when rates are declining, Dreher wrote.
Meanwhile, a rash of reorganizations has hit retail, and include Starbucks (closing 100 shops), Ann Taylor (117 stores closing over the next three years), Eddie Bauer (123 layoffs at headquarters) and The Home Depot (500 layoffs at headquarters). Other retailer reorganizations include Talbots (exiting men’s and boys’ wear), Wet Seal (shuttering D.e.m.o.), Goody’s Family Clothing (5 percent of the workforce cut), J.C. Penney (200 layoffs), Sears Holdings Corp. (restructuring the business) and Wal-Mart (revamping the apparel division). So the question of the day is: Who’s next to announce reorganizations and/or store closings?
Richard Jaffe, retail analyst at Stifel Nicolaus & Co., noted that Gap Inc. has an ongoing “store evaluation strategy that continues under the new leadership of Glenn Murphy.” Jaffe said TJX needs to make a “decision about Bob Stores, which have been underperforming in many locations.”
Jaffe said Talbots is reviewing its real estate, and Coldwater Creek “needs to make a decision about its Spa business. Limited did all of this by selling everything, but they still need to reevaluate their Bath & Body Works division and we may see some store closings there, especially of their separate home fragrance stores.”
Jaffe said New York & Co. and Charming Shoppes are “struggling, so we should keep an eye on them. And Pacific Sunwear of California recently announced closures of D.e.m.o. and One Thousand Steps. Macy’s also is closing nine stores, and have been closing stores fairly consistently.”
Christine Chen, retail analyst at Needham & Co., said that, with the exception of Coldwater Creek, “I think everyone in the missy sector needs to restructure. They have too many stores. They grew to their current numbers because there was an opportunity there when department stores weren’t meeting the needs of the demographic. But that has changed and these women have more options.”
Chen said Gap also could use a reduction in square footage, “and I have been saying for a while now that they need to close a ton of stores. They are in too many malls. It is bad for a brand if they are in ‘C’ malls. It takes away the allure of the brand.”
In regard to head-count reductions at corporate headquarters, the field is open, according to analysts. The decision to restructure corporate offices is challenging. Tom Helton, senior vice president of human resources at Eddie Bauer, said the restructuring is being done to get the company on “sound financial footing.”
“We’ve gone through each section very carefully and the cuts are not spread like peanut butter across the board, without regard to business structure,” Helton said, adding that the cuts were focused on areas that don’t face the customer or generate revenue.”
Eddie Bauer’s 2,000-plus corporate employees number about 480 in the company’s Seattle headquarters, with another 460 in the Columbus, Ohio, distribution center and the remainder working in IT-type jobs in Chicago. The cuts hit Seattle the hardest, where 75 employees were laid off, and extended to upper-management levels of vice presidents and division vice presidents.
Interestingly, Helton stressed that the restructuring was not due to the current state of the economy. “We would be taking these actions regardless because we need to get on a more competitive footing,” Helton said. “The economy has not been a part of any of the discussions about this, nor was it a factor in the store closures we announced previously.”
— With contributions from Anne Riley-Katz