Retail stocks started off the week with a 0.8 percent decline as the sector was caught in the general downdraft of European sovereign debt concerns.

This story first appeared in the July 19, 2011 issue of WWD. Subscribe Today.

The S&P Retail Index fell 4.54 points, or 0.8 percent, to close at 538.19 Monday as the Dow Jones Industrial Average also dropped 0.8 percent, or 94.57 points, to 12,385.16.

Last week started with fears that Italy would be the latest casualty of the rolling European debt troubles. This week, investors began with concerns that the official reading of how well European banks would fare in the event of a financial crisis was overly optimistic.

Although most retail stocks were in retreat, shares of Liz Claiborne Inc. gained 4.7 percent to $5.38 — the strongest increase of the 169 stocks tracked by WWD — on a Bloomberg News report that the company is in the process of trying to sell its ailing Mexx unit. Divesting Mexx would give Claiborne a slimmer profile and a stronger focus on its Juicy Couture, Lucky Brand and Kate Spade brands. A spokeswoman for Claiborne declined comment.

Overall, retail stocks are in a bit of a holding pattern that might well persist until stores report monthly same-store sales results Aug. 4 and then second-quarter earnings results later in the month.

“You’ve got a little bit of a slow-summer phenomenon here,” said Erika Maschmeyer, an analyst at Robert W. Baird & Co.

When investors do tune back in for second-quarter results next month, Maschmeyer said they’ll be looking for back-to-school game plans and readings on the competitive environment and price increases.

“Sourcing costs are going to continue to be an issue even though cotton [costs have] come down,” she said. “We still have to deal with higher costs in the back end of the year.”

Even though low-end consumers, in particular, find themselves besieged by high unemployment, a weak housing market and higher food prices, Maschmeyer said middle and higher-end consumers who account for most of the spending have been “chugging along.”

• Moody’s Downgrades Sears: Debt watchdog Moody’s Investors Service downgraded Sears Holdings Corp.’s corporate family rating to “Ba3” from “Ba2,” leaving the company’s rating three notches into the “junk bond” range. The outlook on the rating is negative.

“The company has seen persistent declines in consolidated revenues over the past few years as well as pressure on operating margins which we believe have resulted from erosion in market share,” Moody’s said in its downgrade. “The negative rating outlook primarily reflects uncertainties around the company’s ability to arrest recent declines in sales and operating margins.”

Shares of Sears dipped 0.7 percent to $73.70.

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