NEW YORK — Retail stocks took a dive Tuesday after Target lowered its July sales forecast, raising concerns among jittery investors about the industry’s performance in the second half.

Among the biggest losers were American Eagle Outfitters, down 5.95 percent; Aéropostale, off 5.22 percent, and Abercrombie & Fitch, which fell 4.78 percent. Wal-Mart, trading near its 52-week low, rallied to close 0.35 percent higher.

The declines came after Target trimmed its projected range of July same-store sales to 3 to 4 percent, from 4 to 6 percent, amid concerns that higher fuel prices and other factors will restrict consumer spending. The discounter’s shares dropped 4.25 percent.

In addition, the Inter­national Council of Shopping Centers cut its July same-store sales outlook for the industry to about 2.5 percent from 3 to 3.5 percent.

Wholesale prices for all domestically produced goods advanced 0.5 percent in June from May, according to the Labor Department’s Producer Price Index, rising more than the 0.3 percent predicted. Wholesale prices for U.S.-made women’s and girls’ apparel fell a seasonally adjusted 0.4 percent.

After Target issued its revision, several Wall Street analysts expressed concerns about same-store sales softening in the second half, while noting that retailers generally have performed well this year and remain fundamentally healthy. The less-than-robust June sales may already reflect the real and psychological effects of higher gas prices and interest rates, a cooler housing market, the Middle East crisis and the threat of terrorism.

“Target has a lot to do with what happened to the stocks today,” said Kim Picciola, equity analyst at Morningstar. “There’s a dark cloud hanging over retail stocks right now, and enough jitters in the market about consumer spending, so Target’s downward revision of July comps contributed to and sparked the sell-off. I think it’s an overreaction. While consumer spending may be slowing, it’s not falling off a cliff.”

Still, July isn’t the best month to gauge consumer spending, since it is when retailers move away from summer goods and start displaying back-to-school and fall merchandise. Most are deep into b-t-s by the end of the month.

“Some of the sell-offs today [Tuesday] are probably overreactions,” said Howard Tubin, an analyst at RBC Capital Markets. “I don’t believe the fundamentals of the business are bad enough to result in a sell-off this violent.”

This story first appeared in the July 19, 2006 issue of WWD. Subscribe Today.

Investors are awaiting congressional testimony today from Federal Reserve chairman Ben Bernanke, which may offer hints about another increase in the central bank’s two-year campaign of raising interest rates, as well as the direction of consumer spending.

“He may give some indication that the Fed is all but finished with its current series of rate hikes and if that is the case, chances are that share prices will move higher across the board,” said John Lonski, chief economist at Moody’s Investors Service.

Robert Buchanan, retail industry group leader at A.G. Edwards & Sons, said, “Same-stores sales are in the process of slowing” to the 1 to 2 percent range, from 3 to 4 percent over the last five quarters. A.G. Edwards on Tuesday downgraded its retailing group of 32 stocks, from “even weight” to “underweight,” and simultaneously downgraded Target, J.C. Penney, A&F and Best Buy.

Along with fuel costs, interest rates and housing, Buchanan noted that last year the federal government implemented rules raising the minimum monthly credit card payment requirement. “A lot of people are already maxed out on their monthly payment…so many people live month-to-month and just can’t borrow anymore,” Buchanan said.

Target did not provide an explanation for its revised forecast. However, Buchanan said, “Their out-of-stock problem is getting worse. I see out-of-stocks frequently in men’s sportswear, men’s furnishings, sporting goods, girls 7 to 16, women’s active and beauty.”

Still, with fashion and apparel retailers, “each drives their own business,” Tubin said. “I think these guys can and will continue to do well despite rising gasoline prices. We know that the customer continues to respond to attractive merchandise despite higher gas prices.” However, “interest rates going up contributes to the cooling off in the housing market, so to the extent that people thought they had a lot of value in their homes, it will slow down their shopping.”

Mark Miller, analyst at William Blair & Co., noted that investors may be hypersensitive to even slight changes in consumer spending. “There’s a broad expectation that consumer spending will be slowing from a drag from higher gas prices and the housing market, so Target’s update feeds a broader concern. The market was like dried timber waiting for a match,” Miller said.

Retail Stock Swoon
Company
Change
American Eagle
-5.95%
Aéropostale
-5.22%
Abercrombie & Fitch
-4.78%
Target
-4.25%
Nordstrom
-3.58%
J.C. Penney
-3.49%
Federated Dept. Stores
-3.42%
Kohl’s
-3.16%
Ralph Lauren
-2.86%
Coach
-2.40%
Source: Yahoo Finance

With contributions from Liza Casabona, New York, and Evan Clark, Washington

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