Byline: Evan Clark

NEW YORK — Retailers missed out on many of the stock benefits of a decade-long economic boom but, considering the condition of their bottom lines, they’re faring decently in the downturn.
Combining the nine-month results of 20 top retailers surveyed by WWD, earnings dropped by 3 percent compared with a year ago, while sales rose 7 percent. Excluding Wal-Mart Stores, retailing’s 800-pound guerrilla, earnings for the group plunged 15 percent on only a 2 percent uptick in sales. Even the exclusion of a litany of charges and one-time items still leaves a sobering retail picture.
Yet, retail shares have managed to hold their own. While investors haven’t particularly punished the sector for the sour performance of retail companies, neither have they let retailers off the hook. Looking at closing share prices on Nov. 2, the last trading day of the third quarter, versus comparable prior-year figures, 12 of the 20 retailers were down, with every specialty store turning in a negative performance. The largest declines among the specialty stores were from Gap, The Limited and Talbots.
A broader view, though, shows that retail issues on a whole, while down slightly, vastly outperformed the overall market. The Standard & Poor’s Retail Index during the period lost only 4.96 points, or 0.6 percent of its value, standing at 814.90 on Nov. 2. The S&P 500, one of the broadest measures of the stock market and a common benchmark, contracted 341.12 points, or 23.9 percent, to 1,087.20 during the 12 months .
Retail issues generally have mirrored the Federal Reserve’s easing of interest rates and the expectation of a second-half recovery that never came, but was expected to be led by the early-cycle retail stocks.
Shari Schwartzman Eberts, a J.P. Morgan Securities equity analyst who follows broadline issues, noted: “The macroeconomic outlook has been a big driver of the stocks this year.”
Looking past the stock anomaly following the Sept. 11 terrorist attacks, Eberts noted that “most of the retail stocks have been stuck in a trading range since last year.” She owed this to the economic uncertainty that has defined 2001, noting that stocks appeared to be anticipating a recovery half of the time, while expecting declines the rest of the time.
ABN AMRO equity analyst Christine Kilton Augustine pointed out that shares of retailers have “had a massive run since September.” Another macroeconomic factor contributing to that run, she said, were lower fuel prices that helped relax the consumer.
“Especially, I think energy prices are something that translate directly” to the consumer, she said. A drop in gasoline prices for car-loving Americans quickly becomes money in the consumer’s pocket, while cheaper home heating oil does the same, albeit more slowly.
Still, of retailers, Augustine noted: “The one fundamental that appears to really be better is inventory levels,” especially leading into the fourth quarter. “If a retailer has done a good job on inventories, they have even less risk.”
During holiday, retail shares may pull back some, as they have in the past few years, as investors get jittery during the long shopping season between Thanksgiving and Christmas, noted Augustine.
After that, “we’re heading into the seasonally strongest quarter for retail stocks,” in which the analyst said she expects them to continue to outperform the overall market, as they have historically done.
Beyond the first quarter, she noted that “it’s anybody’s guess.” Clearly, though, retail issues could benefit from another expected “second-half bounce” in 2002, since they are usually among the first stocks to recover after a downturn.
Eberts predicted: “Over the next six-plus months, the economic uncertainty is likely to continue and the stocks are going to continue to bounce back and forth in their range until we see a clear picture emerge.
“We’ve never seen an economic situation progress like this,” she noted. “Typically, a recession is led by the consumer, and this time the consumer has been the last thing to soften.”
Given the uncertainty and an oddball economic cycle, retail stocks may not perform as expected. “The consumer-orientated fundamentals could really lag the rest of the economy,” she said.
Retail consultant Walter Loeb noted: “The first half of 2002 will be difficult as consumers will only buy basic necessities and consumables.”
However, he’s looking for “an upswing of consumer spending in the second half of 2002, pushing retail earnings up slightly.”
Investors could then buy into possible growth. “Already we’re seeing it,” said Loeb, “and we’ll see it even more strongly next year.”

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