FASHION SURVIVES MARKET WRECKAGE
Byline: Jennifer Weitzman
NEW YORK — Sustained selling pressure Wednesday produced the second calamitous day of the week on Wall Street, but analysts said that retail and apparel stocks may already be crawling back from their own low points.
Industry issues were largely unaffected as the Dow Jones Industrial Average dropped below the psychological feel-good barrier of 10,000 for the first time in five months and investors grew more weary about the global reach of the economic slowdown and the health of Japanese and some European banks. In all but a few instances, declines among apparel and retail stocks were limited to a few percentage points.
But U.S. commerce at large was less fortunate. The pace of business here appeared to decelerate further as a number of corporations issued fresh profit warnings and a new report of weak retail sales dragged shares lower.
On a day that saw the Dow drop more than 200 points in its first half-hour of trading, the index finished at 9972.57, off 318.23, or 3.1 percent. The Nasdaq’s decline was proportionately smaller — down 42.69, or 2.1 percent, to 1972.09.
Still, a number of industry analysts are holding out hope for the second half that, as technology stocks implode, investors will soon view retail and apparel stocks as a safe haven. In addition to an easing of comparisons from last year, they note that, while the sector is usually the first hit at the onset of an economic slowdown, it is also among the first to recover when interest rates and taxes are slashed, impacting consumers’ spending in a positive way.
Todd Slater with Lazard Freres said “early cycle” companies, like retailers, get a pass on Wall Street because analysts know they will lead the recovery: “Investors need to own them early since you buy when they are cheap and hated, and you sell when everyone loves them.”
He said that he is raising his rating on retailers, including Gap, Intimate Brands and Whitehall Jewelers, on top of his already elevated rating on Jones and Kellwood.
He also said that with the group’s stocks “closer to their 52-week lows than their high, this group historically outperforms in a meaningful way following three consecutive rate cuts.” In addition, he said the group has pulled back 23 percent over the past month, providing an attractive entry point.
“Three is a charm,” he said, adding that the one-two-three punch of interest rate, tax and now price reductions should provide a powerful incentive for consumers to spend.
Harry Ikenson, senior retail analyst with J.P. Morgan, said that while the interest rate cuts in January caused an overall retail rally, retail stock prices would become increasingly more dependent on performance fundamentals, resulting in more selective growth. He said he saw opportunities with Talbots and Bebe.
According to one wire report, billionaire investor Warren Buffett sold 950,000 shares of stock in one of Slater’s selections, Jones Apparel. Quoting a Securities and Exchange Commission filing, the report said Buffett sold shares throughout February at prices ranging from $39.28 to $39.80. The divested shares were directly owned by Government Employees Insurance Co., or GEICO, a wholly owned subsidiary of Buffett’s investment company, Berkshire Hathaway. At the end of February, Buffett indirectly held about 15 million shares of Jones, or 12.3 percent of its 122 million shares outstanding. Jones’s stock ended the day at $37.04, down 93 cents on the NYSE.
Among other issues, Wal-Mart dropped 3.3 percent to $47.20 Tuesday while Shopko was down 7.9 percent to $8. Liz Claiborne gave back 4 percent to close at $46.69 while LVMH Moet Hennessy Louis Vuitton sacrificed 4.1 percent to close at $10.31. Reebok dropped 9.6 percent to close at $23.
However, some analysts said they are not holding their breaths for improvement any time soon. They say that while the group benefits from any interest rate and tax cuts, there is roughly a six- to 18-month lag time for consumers to feel the impact in their wallets.
Steven Kernkraut, with Bear, Stearns, said recently retail stock performance has not been “chopped liver” as retailers continue to outperform the market. Since Thanksgiving, he said, retail stocks have outperformed the market by 20 percent and department stores by 45 to 50 percent. Still, he said the tough economic times and retailers’ weak fundamentals will make it difficult for these issues to soar in the next three to six months.
“The current slowdown in the economy could eventually lead to a recession, as the continuous series of troubled corporate announcements on top of market woes whittle away at consumer confidence, never good news for retailers.”
Arthur Hogan, chief market analyst for Jefferies & Co., said he anticipates a price recovery in the second half. Having said that, however, he noted that the damage was so severe in the broad market that investors need to do a lot of heavy lifting to get back.
He said compared to the downturn in 1987, when the Dow fell by 20 percent in a single day, this market loses points by the hour. In addition he said this market has more of a lack of buyers and not panic sellers since there has not been one catastrophic day. “There is no real urgency to get back into this market,” Hogan said, adding that he is recommending Abercrombie & Fitch and Ann Taylor.
Legg Mason’s Sally Wallick agreed, saying she is “somewhat optimistic” about retail stocks, especially since she is expecting another interest rate cut.
But the bad news on Wall Street didn’t stop Mackey McDonald from getting his moment in the spotlight. The chairman and chief executive officer of VF Corp. rang the closing bell at the NYSE, where the firm announced that its Wrangler brand had signed on as the title sponsor of the National Rodeo Finals.
“I won’t take responsibility for everything that happened in the market today,” said McDonald, saying that he hoped that while VF was “ringing the bell on a tough day for the market, we hope to be signaling a period of turnaround.”
VF’s stock wasn’t spared the pains of the day. It closed down $1.14, to reach $34.14.