NEW YORK — As economists fretted over the possibility of rising inflation after the Federal Reserve raised the Federal Fund rate last week, investors spent last Thursday and Friday taking profits, which dragged down stock prices across most sectors last week. The Dow Jones Industrial Average ended up shedding over 240 points in two days.

For the week, the WWD Composite Stock Index fell 2.8 percent to 1,102.38 while the broader Standard & Poor’s 500 lost 2.6 percent to 1,291.24.

As the markets tumbled, Citigroup issued an optimistic report on consumer spending. A team of analysts said consumers are stable. “Housing excesses and high oil prices have been dark clouds over the U.S. consumer in recent months and have become easy targets for those who want to justify a more bearish stance on retail stocks,” the report stated. “However, we believe the U.S. consumer remains on more solid footing than many investors believe.”

The reported predicted that after a 5.5 percent “surge in real consumer spending in the first quarter of 2006, a mild slowdown in consumer spending seems likely in the near future. However, we are not expecting a hard landing, just a moderation to roughly 3 percent real growth over the balance of 2006.”

On the retail earnings front, the moderate channel seemed to have the Midas touch last week as J.C. Penney Co. Inc. and Kohl’s Corp. either beat Wall Street analysts’ or their own earnings estimates.

J.C. Penney’s results were driven by a strong performance in private label business as well as jewelry and men’s wear. Profits rose 22.1 percent for the first quarter.

Management said containing overhead costs boosted quarterly profits, although women’s apparel was soft. Sales gained 2.5 percent and comps rose 1.3 percent, for the 12th consecutive quarter of same-store sales gains.

Myron “Mike” Ullman 3rd, chairman and chief executive officer, said during a conference call with Wall Street analysts that the retailer is “competing effectively in the malls, and particularly taking on new growth in the off-mall concept, with 28 stores this year and 50 in the following years.”

This story first appeared in the May 15, 2006 issue of WWD. Subscribe Today.

Goldman Sachs analyst Adrianne Shapira noted in a research report that Penney’s “strong 80-basis-point gross margin expansion drove the quarter’s upside.”

“While there remains further gross margin opportunity, markdown pressures from a lagging women’s business could temper the upside over the next several quarters,” Shapira said.

Kohl’s first quarter “was solid,” Shapira said in a separate report. On Thursday, the retailer posted net income that leapt 34.1 percent, to $167.2 million, or 48 cents per diluted share, from $124.7 million, or 36 cents, in the same period last year on a sales gain of 16.1 percent, to $3.2 billion from $2.7 billion.

Same-store sales rose 6.9 percent during the quarter. The gross margin rate jumped to 36.1 percent from 35.8 percent in the prior year’s quarter. Shapira said Kohl’s 48-cent earnings per share was 2 cents ahead of her estimate, and “should be enough to keep the stock moving on the heels of its year-to-date 32 percent gain.”

“Upside was driven by better-than-expected expense control based on an above plan 6.9 percent comp,” the analyst said. “A 2.1 percent increase in the number of transactions was a notable improvement from recent trends and was impressive, given weaker industry traffic.”

In the financial services sector, UCC Capital Corp. was nominated by the M&A Advisor for the Financing Deal of the Year — Debt & Equity for its work on Rampage, while president and ceo Robert W. D’Loren was nominated as M&A Professional of the Year.

All the winners will be formally announced in Chicago in mid-June. UCC was the M&A Advisor’s 2005 Deal of the Year for the Joe Boxer financing, and D’Loren was named Deal Maker of the Year.

In the private equity circles, private equity firm Circle Peak Capital earlier this month acquired three U.S. Luxury optical retailing chains — Lunettes LLC, Morgenthal Frederics Opticians Inc. and Optical Fashion Center Inc. — and will operate the consolidated group as Luxury Optical Holdings Co.

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