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Call it Black Wednesday in retail.

This story first appeared in the September 18, 2008 issue of WWD. Subscribe Today.

The crisis engulfing the financial world fused with growing anxiety about consumer spending to produce record-setting losses for retail stocks. Compounding the declines were numerous reports and analyses predicting that retailers, especially those selling apparel, were facing an extraordinarily difficult holiday season. The reports asserted the credit crisis would be especially hard on stores with large franchises in New York, where the lion’s share of financially related job losses are expected to occur in the wake of Lehman Brothers’ bankruptcy, Merrill Lynch’s sale to Bank of America and other market-altering events.

The government’s $85 billion rescue of American International Group seemed to raise rather than quell fears on Wednesday about which financial firm might be next to hit the wall. Stocks began the day with a 2 percent plunge and never mounted a significant rebound. By the time the dust had settled and traders had a chance to catch their breath at 4 p.m., the Dow Jones Industrial Average had fallen nearly 450 points, or 4.1 percent, to 10,609.66. The Standard & Poor’s Retail Index endured an even sharper decline, shedding 25.63, or 6.4 percent, to end the day at 373.78. It was the largest one-day drop since the retail index was recalibrated in mid-2002. On Friday, the index closed at 406.31.

And, as if to warn of more nerve-racking days ahead, word that Morgan Stanley had discussed a merger with Wachovia and possibly other banks arrived soon after the closing bell sounded.

While declines were nearly universal among publicly held retailers, some of the largest drops were recorded by department stores such as Saks (down 9.6 percent to $9.75) and Macy’s (down 8 percent to $18.55), with their high reliance on New York sales, and teen retailers such as Pacific Sunwear (down 11.1 percent to $6.04), Abercrombie & Fitch (down 9.6 percent to $43.76) and even the more price-sensitive Aéropostale (down 8.8 percent to $33.08).

J.P. Morgan Chase & Co. initiated coverage of Saks Wednesday with an “underweight” rating, due in part to a “heightened risk of heavy New York City financial job losses during the second half of 2008.”

“Given the company’s upper-income demographic and New York City flagship, sales trends tend to be sensitive to swings in equity market conditions,” said broadlines retail analyst Charles Grom, who added that the strengthening dollar could also negatively affect the Fifth Avenue flagship, creating “more downside risk” for comparable-store sales as the euro and other foreign currencies would buy less.

Saks’ New York flagship is estimated to generate about $800 million in sales, nearly a quarter of the company’s $3.33 billion in revenues.

Pali Capital retail analyst Stacey Widlitz said that, while upscale retailers such as Tiffany & Co. and Coach have adjusted their inventories in preparation for difficult months ahead, the “aspirational consumer,” who often stretches to buy a special bag or silver bracelet, “has dropped out.”

“That’s a significant portion of business,” she said. “So, are we cautious of September and October numbers? Yes.”

Still, Tiffany’s New York flagship continues to benefit from bustling trade from European tourists, Widlitz said. U.S. comparable-store sales declined 4 percent for the second quarter, while comps for the New York flagship rose 5 percent, thanks to a 10 percent increase in spending by non-U.S. visitors.

“We know that the consumer is concerned, ” she said, pointing to Wednesday’s retail stocks. “I think it’s more of fear of the unknown. We don’t know who this is going to affect next, or what’s next.”

“Wall Street’s impact has a lagged effect,” said Liz Dunn, retail analyst at Thomas Weisel Partners. “Companies already are impacted based on what they have seen from the ground level.”

Tiffany’s shares dropped 6.2 percent on Wednesday, to $36.58, while Coach’s fell 6.3 percent to $27.60.

Other big declines among department stores came from J.C. Penney (8 percent to $37.11) and Kohl’s (5 percent to $48.99). Specialty stores outside the teen sector with sizeable sell-offs included Charming Shoppes (9.5 percent to $4.58), Guess (7.5 percent to $38.72), Limited Brands (7.3 percent to $18.87) and Ann Taylor (6.3 percent to $22.52).

Vendors losing market capitalization included Liz Claiborne (down 6.7 percent to $16.49), Jones Apparel (6.4 percent to $18.14), Polo Ralph Lauren (5.8 percent to $68.93), Phillips-Van Heusen (5.1 percent to $39.69) and VF Corp. (4 percent to $79.83).

Wednesday began in global markets on an optimistic note, with a rebound on the Tokyo Stock Exchange after a drop the day before. The Nikkei 225 rose 1.2 percent to 11,749.79. Joining in the rise were Link Theory, up 4.5 percent, and Fast Retailing, up 1.9 percent.

By the time trading moved to Europe, however, the markets began to react negatively to the AIG bailout. In London the FTSE 100 dropped 5.8 percent to 4,903.30. Burberry’s stock fell 4.2 percent and Marks & Spencer was off 4 percent.

Elsewhere in Europe, shares of Hermès fell 5.3 percent, PPR was off 3.6 percent and LVMH Moët Hennessy Louis Vuitton dropped 2.1 percent.

“This is all anybody’s talking about in the country right now,” said Fritz Winans, president of Loyaltex Inc., a sourcing specialist with more than $300 million in revenues. “There’s no question this continues to keep people off balance.”

With a handful of exceptions, he expects the consumer climate to continue to be rocky.

“Spring’s going to continue to be tough, given everything that’s going on with the economy, the housing market, all of these things playing on the consumer,” said Winans. “When you start to think about fashion, a lot of people are starting to say, ‘Hey, I’ve got to put food on the table and gas in the car.’”

“It’s unprecedented, unbelievable,” said one financial analyst, requesting anonymity. “The financial markets are going through as much change in a week as retailing went through in 20 years.”

The concerns are likely to be deepest in New York as the financial sector is rocked to its core. According to the city’s comptroller’s office, the New York metropolitan area accounts for roughly 6 percent of the nation’s population, but is responsible for $1.25 trillion, or 9 percent, of the $13.8 trillion U.S. gross domestic product. The office said that proportion is due in large part to the significance of the financial industry.

Speaking at a New York University-sponsored breakfast Tuesday, City Comptroller William C. Thompson estimated that a loss of 25,000 jobs in the securities industry could cause the loss of another 37,500 jobs spread across the city’s economy. He added that the figure did not include the impact of job losses from Bear Stearns’ collapse earlier this year. Thompson said the industry represented five percent of jobs in the city and 20 percent of all wages.

Brooklyn College economics professor Charles Stone spoke of the specifics of the multiplier effect on any New York area layoffs. “The person selling coffee to the employees outside of Lehman is now out of business and you can multiply that by 100 — the brokers selling apartments to new hires, the bonuses that would have been spent in Manhattan in January,” Stone said. He added that information and technology businesses such as data storage and market tracking systems could be particularly hurt.

The dramatic events on Wall Street coincided with the arrival of a number of fairly pessimistic reports from analysts, which accelerated stocks’ declines.

A report from debt agency Fitch Ratings issued Wednesday indicated that retailers’ financial metrics will suffer as consumers’ cash flow, wealth and borrowing capacity continue to erode.

“Discretionary categories, such as apparel and home, will be the most challenged, while staples such as food and prescriptions are expected to show relative strength,” said the report.

How well retailers weather the down consumer cycle and cope with their own rising costs will play a big part in future debt ratings, Fitch said.

“In 2009, apparel inflation from higher wage levels in producer countries, energy costs and raw material prices, combined with a continued weak sales environment in the U.S., will weigh on apparel retailers’ profits,” said the report. “A company’s capacity to sustain operating performance in line with peers and maintain a strong balance sheet will be central to future rating movements.”

The rating agency also expects to see some additional retail bankruptcies this year.

“The consumer’s access to credit is drying up,” said Marie Driscoll, retail equity analyst at Standard & Poor’s. “It’s going to be hard for the consumer to get funding. At the same time, we believe that the economy is going into a recession, that unemployment rates will increase.”

On top of the banking crisis, consumers also are battling high food and fuel prices.

“The average person in the middle of the country, away from all this, has less access to credit in general and less disposable income in general and so that means they’re going to reduce their spending,” said Driscoll.

Closer to the fray on Wall Street, the pain woes also will spread out beyond the generally well-heeled banking community.

“There are a lot of service businesses that are impacted by this,” said Driscoll. “Think of the limo drivers and the dry cleaners and the nannies. They’re impacted by what happened, so it has a ripple effect though the economy.”

“This takeover of AIG forestalls to some extent the recent dangerous escalation of the crisis in the U.S. financial markets — a crisis that has been seriously harming the performance of the economy for over a year now,” said Global Insight chief U.S. financial economist Brian Bethune in an analysis. “However, the risks to the financial system and the economy remain massive, and downward pressure on financial asset prices — and the value of their underlying collateral — continues to mount.”

Bethune described the economic backdrop against which the crisis has been playing out as “troubling,” with industrial production declining, consumption spending contracting and unemployment rising.

In Washington, Treasury Secretary Henry Paulson Jr. sought to reassure the public that the drastic public intervention over the past few days would mitigate the impact of the financial crisis.

“These are challenging times for our financial markets. We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy,” Paulson said. “I support the steps taken by the Federal Reserve…to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.”

Speaking at a briefing on Wednesday, White House press secretary Dana Perino said no guarantee was offered to the President that further bailouts would not happen and that the administration remained “concerned about other companies.” She said decisions would be made on a case-by-case basis regarding other companies.

When pressed about why the AIG bailout happened while Lehman Brothers was allowed to move into bankruptcy, Perino said AIG’s scope and involvement in many different financial products “reached right into the American pocketbook, and that was one of the reasons they decided to take this action last night.” The two presidential candidates cautiously supported the Fed’s bailout of AIG, while at the same time sent strong warnings to Wall Street that stronger regulatory oversight will be enforced if either is elected president.

“The fact that we have reached a point where the Federal Reserve felt it had to take this unprecedented step with the American International Group is the final verdict on the failed economic philosophy of the last eight years,” said Sen. Barack Obama, the Democratic presidential nominee. “While we do not know all the details of this arrangement, the Fed must ensure that the plan protects the families that count on insurance. It should bolster our economy’s ability to create good-paying jobs and help working Americans pay their bills and save their money. It must not bail out the shareholders or management of AIG.”

Sen. John McCain, the Republican presidential candidate, reversed his earlier position against bailing out AIG and said Wednesday that the government was “forced to commit $85 billion to stop the collapse of AIG.”

McCain said the focus of any action should be on the millions of people who hold insurance policies, retirement plans and other AIG accounts.

“We need strong and effective regulation, a return to job-creating growth and a restoration of ethics and the social contract between businesses and America,” McCain said.

Meanwhile, both candidates capitalized on the financial market turmoil, launching a pair of TV ads touting their economic plans, attempting to connect with voters who have lost jobs and are struggling to make ends meet, and professed their determination to crack down on “greedy” Wall Street executives.

Putting the issue of job losses in the spotlight, Obama launched a 30-second TV spot on Wednesday accusing McCain and others in Washington of shipping U.S. jobs to China and voting against cracking down on China for unfair trade practices.

It marked the first time either campaign has focused in a TV ad on China and unfair trade practices, an area closely watched by the fashion industry, which imported $32 billion in apparel and textiles from China in the past year.

The ad, entitled “Sold Us Out,” highlights the closure of a Corning plant in State College, Pa., in 2004, in which hundreds of workers lost their jobs and were rehired temporarily to disassemble the machinery to ship it to a new factory in China.

It also accuses McCain of supporting tax breaks for companies to move overseas, which Obama has pledged to eliminate if he wins the election.�

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