INVESTORS’ FEAR OF INTEREST HIKES TAKES HEAVY TOLL ON RETAIL ISSUES

Byline: Thomas J. Ryan

NEW YORK — It wasn’t exactly Black Friday, but it was more than dark enough for Wall Street’s tastes.
Retail and luxury issues were routed, as fears that higher interest rates would chill consumer spending led to a freefall in U.S. stocks.
Among the hardest hit were Gucci Group, tumbling 14 to 73 1/4; Tiffany & Co., off 9 7/16 to 63 9/16; and LVMH Moet Hennessey Louis Vuitton, sinking 4 15/16 to 78 1/16, as investors worried that the “wealth effect” that lifted high-end sales over the last year had vanished.
Retailers saw hits across the board with big declines at Kohl’s Corp, 9 7/16 to 91 5/8; Lands’ End, 7 to 50 5/8; Wal-Mart, 5 1/16 to 55; Intimate Brands, 4 1/2 to 37; Nordstrom, 4 1/16 to 29 1/2; Gap, 2 13/16 to 38 7/8; Target, 2 5/16 to 68 5/16; and Limited, 2 11/16 to 44 3/16. Vendors fared better, but some didn’t escape bruisings. Among the decliners were Kenneth Cole Productions, down 4 to 38 1/8; Estee Lauder Cos., 4 15/16 to 47; Tommy Hilfiger, 1 1/16 to 7 13/16; Jones Apparel Group, 1 3/4 to 30; and Donna Karan, 11/16 to 6 5/8.
The Dow Jones Industrial Average lost 617.78, or 5.7 percent, to 10,305.77 on Friday, and was off 7.2 percent for the week. The Nasdaq fell 355.49, or 9.7 percent, to 3,321.29, and was off 25.3 percent on the week as the wrath against technology issues continued.
Stocks fell after the Labor Department said the Consumer Price Index rose 0.7 percent in March, the fastest pace in more than five years, and more than the 0.5 percent expected. The signs of accelerating inflation suggest the Federal Reserve may raise short-term rates more than the expected quarter point when policy-makers meet May 16. The central bank has raised rates by a quarter point five times since June.
The rate hikes are intended to slow the economy and hence consumer spending, and several Wall Street experts see spending moderating.
“There’s definitely going to be an impact on consumer spending, particularly due to the ‘wealth effect,”‘ said Jeffrey P. Klinefelter, an analyst at U.S. Bancorp. “As the market goes higher there’s a perception that a greater amount of your income is disposable, so the market’s decline will clearly impact overall spending. And apparel is not excluded from that.”
Peter J. Solomon, who heads the investment firm bearing his name, said a continued market descent would be a factor in slower consumer spending, but Friday’s falloff will be more significant if it preludes a general downturn that leads to massive layoffs, particularly for those in the “New Economy.”
“If you get a significant market decline over a period of time, it’s definitely going to hurt consumer confidence. There is also a high level of consumer debt, and the question is whether that’s tied to the market,” said Solomon. “But overall it was pretty inevitable. We were in a excessive bubble, with people making some seriously bad investment decisions.”
As expected, e-commerce players lost major ground Friday, with Alloy Online down 1 3/8 to 12; Iturf, 1 1/32 to 5 1/16; Drugstore.com, 2 1/16 to 6 3/8; Styleclick.com, 1 3/32 to 7 15/16; Snowball.com, 1 3/8 to 5 5/8; and The Knot, 3/4 to 4 7/8.
The e-commerce shakeout will cause a rethinking of Internet strategies. “The rules of the game have obviously changed,” said Robertson Stephens e-commerce analyst Lauren Cooks Levitan. “Investors are no longer buying the ‘land grab’ theory, which focused on building a brand and customer base at any cost. The new rules are more defensive in nature: Demand profits and customer retention, not just customer growth.”
Gilbert Harrison, chairman of the Financo investment firm, said it’s “too early” to tell how consumers will respond. “It really depends on how poor people think they are.” But he said higher-priced items such as cars, houses and luxury items typically are first hurt if consumers pull in purse strings.
Harrison said the weak stock market has already caused some merger deals to fall apart because banks don’t want to lend money.
“Pricing has definitely adjusted itself,” said Harrison. “It’s not only with e-commerce and Internet, but in all levels of retailing. I think the stock market is overreacting and there are some tremendous buying opportunities.”
One possible plus is that many investors finally lost some of their lust for Internet issues and may start to put money into depressed apparel and retail stocks. “We’ve been waiting for investors to broaden out their interests, because so much money was going towards technology and taking funds away from other industries, such as apparel,” said Lorraine Miller, at SunTrust Equitable Securities.
“Old economy” stocks have bounced back recently as technology issues have floundered, but Miller said the “sudden pullback” in technologies lately will likely keep many investors on the sidelines. “People are looking for the market to settle down a little bit,” Miller said.
Taking big hits Friday were Hot Topic, 4 1/8 to 29 13/16; Gadzooks, 4 3/16 to 16 5/16; Pacific Sunwear, 3 11/16 to 32 3/8; Ann Taylor, 3 3/4 to 21 15/16; Zale, 3 11/16 to 41; Talbots, 3 to 49 3/8; and American Eagle, 2 5/8 to 25 3/4. Among major chains, Federated slid 1 15/16 to 37 11/16; May, 1 1/4 to 28 5/8; Ross, 1 1/8 to 22 5/8; TJX, 1 5/16 to 19 3/4; and Neiman Marcus, 1 9/16 to 26. Vendor drops included Avon, 2 7/8 to 33; Columbia Sportswear, 1 1/4 to 21 3/4; and Quiksilver, 1 13/16 to 17 13/16.