As Washington struggled to hammer out a compromise over the mortgage bailout, investors expressed their reservations about political gridlock and just how bitter a pill they would be asked to swallow by pulling their money out of stocks and moving it into commodities.
The Standard & Poor’s Retail Index closed on Monday at 371.13, a drop of 23.11 points, or 5.9 percent, the second-largest drop since the index was recalibrated in mid 2002. The largest drop for the measure of retail stocks was last Wednesday’s 6.4 percent fall.
The Dow Jones Industrial Average fell 3.3 percent, or 372.75 points, to 11,015.69, losing the relative composure it managed to maintain on Friday. The money draining away from Wall Street appeared to be going toward commodities, such as oil. The price of a barrel of oil shot up $16.37 to $120.92 — marking the end of a respite in which prices sank into the $90 range.
“Oil was certainly a principal reason for the weakness in retail stocks,” said Laurence C. Leeds Jr., chairman of Buckingham Capital Management, which invests in the sector. “People are worried about the economy, they’re worried about the consumer, they’re worried about the price of oil. It should not come as a surprise that retail stocks got severely mauled today. Generally speaking, it’s going to be a difficult period for retailing. That’s what the stock market is saying and it’s hard to argue with them.”
Among the department store stocks getting hit the hardest were Bon-Ton, down 12.4 percent to $2.97; Dillard’s, 9.8 percent to $12.65; Macy’s, 7.7 percent to $18.42; Saks, 6.5 percent to $9.82, and Kohl’s, 6.3 percent to $46.84.
On the specialty store side, Cache Inc. saw its stock drop 16.6 percent to $9.50. After the market closed, the firm lowered its third-quarter guidance, due in part to a difficult homecoming dress season and temporary store closures after tropical storms. For the third quarter, Cache’s comparable-store sales are expected to fall by approximately 4 percent, and its net loss per share is estimated to range from 12 to 14 cents, which compares with the retailer’s previous guidance for earnings in the range of 1 to 2 cents.
Specialty players following Cache down included Zale, down 15.7 percent to $26.05; Pacific Sunwear, 10.3 percent to $7.54; Chico’s, 8.2 percent to $6.96; Abercrombie & Fitch, 6 percent to $41.45, and Limited Brands, 5.2 percent to $18.44.
Apparel vendors watching their market caps shrink included Phillips-Van Heusen, down 7.8 percent to $38.69; Polo Ralph Lauren Corp., 5.1 percent to $67.79; Kenneth Cole, 6.7 percent to $16.38, and Jones Apparel, 4.5 percent to $18.44.
Investors were also digesting Washington’s reaction to the sweeping financial crisis, which has already seen the bankruptcy of Lehman Bros., the sale of Merrill Lynch and federal takeover of American Insurance Group, Freddie Mac and Fannie Mae. Most recently, the Federal Reserve said investment houses Goldman Sachs and Morgan Stanley could become banks.
On Capitol Hill, Democratic leaders said they would not write a “blank check” to the Bush administration to bail out financial institutions and continued to press for several provisions to be added to the White House’s $700 billion proposal that would give sweeping new powers to the Treasury Department to purchase distressed mortgages. Congressional leaders continued negotiations with the Bush administration on a compromise legislative package into Monday night.
“The Bush administration has called on Congress to rubber-stamp its bailout legislation without serious debate or efforts to improve it,” said Senate Majority Leader Harry Reid. “That will not happen.”
Calling the administration’s proposal a “starting point,” Reid said the package should include “more oversight, more transparency, more accountability and more controls to prevent conflicts of interest.”
Reid said Democrats would press for limits on compensation for executives of financial firms, taxpayer returns in recovering financial firms rescued by the government, mortgage aid for people losing their homes to foreclosure and a stronger oversight mechanism. Reid also stressed the need for an “economic recovery plan to create jobs, provide better unemployment insurance, and invest in our crumbling infrastructure.”
Not everybody is comfortable with the thought of additional government involvement in the markets.
“The government is getting real big, real fast,” Paul Nolte, director of investments at Hinsdale Associates, said. “What we’re buying into now is an awful lot of authority being wielded by the Treasury Department. The plan essentially says, ‘Trust Us.’”
The consumer is also going through seismic changes, Nolte said.
“We’re going to go back to a 1950-1960-type mentality, where you save a percentage of your take-home pay to start and you live within your means beyond that,” he said. “That’s going to be a tough one for the Baby Boomers because they haven’t had to do that.”
In addition to all the macroeconomic changes on the landscape, some retail stocks were pushed down by their own particular woes — such as analyst downgrades, which weighed on both The Buckle Inc. and Target Corp.
In the face of an “ugly credit environment” that is “getting worse,” Lazard Capital Markets retail analyst Todd Slater downgraded Target to “hold” from “buy.” A secondary driving force behind the valuation was rising delinquent payments and charge-offs on Target’s credit card operations.
Target’s stock fell 6.6 percent to $49.80.
“Delinquencies as a percentage of receivables increased to the highest level we have seen, while charge-offs increased to the highest level since the bankruptcy law changed in October 2005,” Slater said.
With unemployment on the rise and an uncertain credit environment, Target’s comp sales are “likely to continue to underperform its peers,” he said.
Shares of Omaha, Neb.-based Buckle dropped 8.5 percent to $56.33 after being downgraded to “neutral” from “overweight” by J.P. Morgan Securities Inc. analyst Anna Andreeva. The company has been on a tear lately, with a 22.4 percent leap in August comps, as well as an 88.9 percent jump in second-quarter profits.
“While we don’t expect margins to collapse when comps do slow given low overhead and lean inventories, at 20 percent, Buckle’s margins are the highest in our universe, very impressive for a retailer selling third-party brands,” said Andreeva. “We think further upside would be tougher to come by as the company laps several years of merchandise margin expansion.”
Andreeva said that while Buckle is “one of the few retailers out there with a fashion trend that is working,” she is concerned that department stores J.C. Penney, Macy’s and Dillard’s, which are starting to carry a mix of brands similar to Buckle’s, will begin stealing some of the teen retailer’s market share.
And the stock market pain wasn’t just felt in the U.S.
In London, traders pushed the FTSE 100 down 1.4 percent, or 75.04 points, to 5,236.26. Among the decliners were Burberry, down 5.3 percent to 4.33 pounds; Marks & Spencer, off 3 percent to 2.37 pounds, and Asos, down 1 percent to 3.84 pounds.
Shares losing ground elsewhere in Europe included Hermès, off 5.4 percent; Swatch, 4 percent; PPR 3.3 percent, and Richemont, 2.6 percent.
In Tokyo, the benchmark Nikkei 225 managed to start off the week on a positive note with a 1.4 percent, or 169.73 point, rise to 12,090.59. Also on the rise were apparel maker Onward Holdings, up 2.4 percent to 1,164 yen, department store firm Isetan Mitsukoshi, 2.1 percent to 1,213 yen, and Link Theory Holdings, 1.4 percent to 2,200 yen.