Byline: Evan Clark

NEW YORK — Retail issues took a beating Monday after several broadline firms saw sales shortfalls last week and equity downgrades signaled what analysts believe could be the sector’s cyclical slowing.
The Standard & Poor’s retail index dropped 15.08, or 1.6 percent, to end the day at 939.26. The Dow Jones Industrial Average slid 41.24, or 0.4 percent, to close at 10,362.70. The S&P 500 dropped 1.31, or 0.1 percent, to close at 1,146.38.
However, the Nasdaq ran counter to trend and rose 17.27, or 0.9 percent, to close at 1,862.62.
In its weekly sales update, Federated Department Stores Inc. noted: “The fourth week of March was not as strong as we had hoped.”
Consequently, comparable-store sales for the month, which consists of five weeks, are “most likely to be slightly below the bottom end of our expected range of flat to down 1 percent.”
Shares of Federated retreated $1.54, or 3.8 percent, to close at $39.31.
The Easter holiday this past weekend fell into April last year, moving those sales up a month on the fiscal calendar.
On a recorded call, a Wal-Mart Stores Inc. spokesman said sales for the week were below plan, but still on track for an 8 to 10 percent increase for the month. The firm’s flagship division is expected to post a slightly higher 9 to 11 percent uptick. By contrast, April comps are projected to be up in the low-single digits.
“The winter storms [in the Midwest] and unseasonable weather in the first half of the week clearly impacted sales,” said the spokesman. Geographically, sales in the Northeast and Midwest were strongest. He added that the Wal-Mart division’s “apparel areas had a good week led by Easter-driven purchases in the boys’ and girls’ categories.”
Shares of Wal-Mart, a Dow component, slid $1.74, or 2.8 percent, to close at $59.56.
J.C. Penney Co. Inc. also noted that sales through the fourth week of the month were “slightly below” its planned high-single-digit increase. Stronger categories included home, children’s and the long-beleaguered men’s. Catalog sales for the week improved over the previous week, but trended toward a decline of more than 20 percent for the month.
Investors cut back on shares of Penney’s, dropping them 72 cents, or 3.5 percent, to $19.99.
Additionally, Sears, Roebuck & Co. reported its comps fell below its initial projections of a low-single-digit decline. Shares of Sears likewise shrank $1.02, or 2 percent, to $50.25.
In a research note, Merrill Lynch equity analyst Daniel Barry noted: “Cyclically, we are close to the point in time when the recovery of total corporate profits should exceed the recovery in retailing profits, causing a rotation of investment funds from retailing to manufacturing stocks.”
Accordingly, he reduced his rating on several retailers, including Federated (to “neutral” from “strong buy”), Wal-Mart and Target Corp. (to “buy” from “strong buy”), The May Department Stores Co. (to “neutral” from “buy”) and Dillard’s Inc. (to “sell” from “neutral”).
Shares of Target fell 27 cents, or 0.6 percent, to close at $42.85, while Dillard’s dropped 64 cents, or 2.7 percent, to close at $23.22. May Co.’s stock rose 16 cents, or 0.5 percent, to $35.01.
Specialty retailers finishing lower for the day included Charlotte Russe (down $2.11 to $23.83); The Limited Inc. (98 cents to $16.92); American Eagle Outfitters (60 cents to $24.17); Bebe (69 cents to $20.36), and Wet Seal (56 cents to $34.33).
April and May, noted Barry, could be tough on the retail sector on both a relative and absolute basis. Factors he sees contributing to this softness include seasonal weakness, possible upside surprises from manufacturing firms, depressed April sales due to the Easter calendar shift, the tendency of portfolio managers not to sell strong acting groups until the beginning of the next quarter in order to lock in performance and a possible increase in interest rates.
“While retailing stocks [for the rest of the year] may no longer lead the market, they should be carried along with it, assuming the stock market is higher at yearend, as we expect,” said Barry. The Merrill Lynch Strategy Group is projecting a 5 percent increase in the S&P 500 at the end of the year.
The types of stocks that should fare well for the rest of the year, said Barry, are those with “small capitalization, fundamental turnarounds and special situations.”
He added: “J.C. Penney may be the fundamental turnaround of the decade, with all three divisions — department stores, drugstores and catalog — showing clear signs of recovery.”
While not quite as bullish on Penney’s, A.G. Edwards equity analyst Robert Buchanan, in a research note, agreed: “We’re late in a period of out-performance by the retailing stocks dating back to Sept. 11.” He noted that same-store sales in the sector rose from 2 to 3 percent last summer to the current 4 to 5 percent. Over the next couple of quarters, he said, sales should settle “back down to a more sustainable rate of growth in the 3 to 4 percent area, what with stimuli as provided by the Federal Reserve and other sources having by then already ‘worked their magic.”‘
Buchanan, though, lowered his rating on Penney’s to “buy” from “strong buy,” citing investor uncertainty and a preference for lower-cost providers.
“On a go-forward basis, we believe such situations as Kohl’s will be able to maintain powerful forward momentum based in part on their ability to drop down on price and gain market share — continuing to post high returns on sales and invested capital,” he said.
Kohl’s finished the day off 73 cents, or 1 percent, at $70.42.
Penney’s, however, is still grappling with questions concerning a class-action lawsuit claiming the Eckerd division overcharged some of its customers. Buchanan said: “We dare say it may be a while before total investor confidence on this front is restored.
“Then, too, with a recent groundswell in consumer spending surely aiding Penney’s core business of the department stores in the here and now, several months from now, we could envision a reduced pace of growth once consumer spending growth stops rising.”

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