RETAIL STOCKS TAKE A BEATING
NEW YORK — Goldman Sachs added insult to injury Wednesday, turning bearish on retail stocks on a day when the market was heading south anyway.
Before it was over, the Dow Jones Industrial Average lost 251 points, or 2.3 percent, to finish at 10,480.13.
But concerns about weakening consumer spending led to downgrades of a good portion of the retail sector.
“Less well-positioned, more cyclical retailers, including many department stores, may fall short of investor expectations in 2000,” George Strachan wrote in a research note while downgrading issues including Wal-Mart, Kohl’s, Tiffany, Neiman Marcus, TJX Cos., and Abercrombie & Fitch. Strachan pointed to a weak macro outlook for real wage growth, housing turnovers and installment credit growth, which he predicted would cause an overall spending slowdown in the second half and into 2001.
Vendors felt the sting as well. Goldman also downgraded Polo Ralph Lauren, in which it has a stake, to “market outperform” from “recommended.” On Monday, Banc of America Securities moved its rating on apparel stocks to “neutral” and downgraded Liz Claiborne and Jones Apparel Group.
Strachan noted that many of the stocks of these companies have already been discounted to record low levels relative to the market, but he sees no catalyst to get them moving.
“Rapid deterioration of our leading indicators of real personal consumption expenditures suggests, however, that spending growth will slow in the second half even as cost pressures continue to build for many retailers,” Strachan wrote in the note. Strachan recommended that investors consider moving into more defensive supermarket or drug store stocks in anticipation of slower discretionary spending growth.
Among those facing Goldman’s axe, Wal-Mart, Kohl’s, Target, Tiffany and Costco were all cut to “market outperform” from “recommended.” The investment firm reduced ratings on Federated, May, Neiman Marcus, TJX and Ross Stores to “market perform” from “market outperform.” Abercrombie & Fitch was slashed two grades to “market perform” from “recommended.”
But rival firm Donaldson Lufkin & Jenrette immediately refuted the report, telling investors to remain cautious but use the stock downgrades on growth retailers as buying opportunities. “We remain committed to retail. If you do not succeed, try again. Give it an hour and buy,” Gary Balter, DLJ analyst, noted. Balter recommended that investors buy companies with accelerated earnings such as Circuit City, Best Buy and Staples at all times and others on dips such as Wednesday’s.
“Goldman Sachs turned cool on the retail sector and it spread like the Asian flu through retail stocks, particularly apparel,” said Isaac Lagnado, president of Tactical Retail Solutions. “I don’t see why Limited should be worth 11 percent less today than yesterday. The Goldman report is way overdone.”
The Limited declined comment, but its stock finished down 5 1/2 to 44 1/2, while Intimate Brands, in which The Limited has an 84 percent stake, gave back about 8 percent of its value, finishing down 3 3/8 to 38 15/16. Both announced plans for two-for-one stock splits after the markets closed on Tuesday.
Some other analysts, Lagnado added, “see consumer spending and auto sales still hot, home buying still bubbling along despite higher rates, and the consumer remaining pretty confident and with an open pocketbook. We do not see huge inflation fears impacting retail, and employment, most importantly, will remain strong. Consumer spending should be robust through the fourth quarter, because employment is strong. That’s far more important than the wealth effect.”
Still, some significant events are coming up in the next few days, including government employment numbers and possible actions by the Fed. Also, the weeks before Mother’s Day are telling, particularly for retailers selling jewelry, dresses, accessories, fragrances and cosmetics.
Credit Suisse First Boston on Wednesday said its “underweight recommendation” on broadline stocks remains unchanged, and said its “favorite stocks” are those that have opportunities to drive market share and margins, increase return on invested capital, and are least exposed to rising interest rates. Credit Suisse said that from an economic standpoint, changes in interest rates are “the single most important indicator that correlates with retail stock performance,” noting that since interest rates began rising last year, the group has underperformed the overall market by 10 percent. However, Credit Suisse noted that, historically, interest rates by themselves have never caused more than a 20 percent correction in the group.
Credit Suisse said stocks “least exposed to interest rate moves” include off-price retailers such as TJX and Ross Stores and dollar stores such as Family Dollar and Dollar General.
Since the latest round of economic data released last week indicated wage inflation was on the rise, the retail sector, which is typically hard hit in a rising interest-rate environment, has been extremely volatile. As interest rate fears have heightened over the last several months, the Standard and Poor’s retail index has experienced a 12.8 percent decline so far this year. The index was down 5.8 percent Wednesday.
Goldman Sach’s downgrades came a day before most retailers are expected to report that most retailers’ April sales results are expected to be in line or slightly below plan, with many hampered by unseasonably cold weather, especially in the East and midwest.
Merrill Lynch expects its broadlines same-store sale index for April to be up between 5.5 percent and 6.5 percent, bolstered by a late Easter this year, below a 7 to 8 percent plan. Salomon Smith Barney predicts its broadlines to be up 6.9 percent versus its 8.3 percent expectation. Most analysts blamed the cold weather for weak apparel sales, though Salomon’s Richard L. Church noted: “It is difficult to wrap a neat theme around April sales, given the ‘noise’ factor in the month. Stock market volatility, concerns about fashion being off target, and unseasonable weather may have each played a role in the weakness in apparel for the month.”
Among those expected to miss plan are May, Kmart, Federated and Sears. Those coming in line are Wal-Mart, Kohl’s, J.C. Penney and Target.
Margaret Magor, at Goldman Sachs, said she lowered Polo’s rating largely due to an impending slowdown in consumer spending, weather-related below-plan sales trends at department stores in March and April that may lead to unplanned markdowns, recent negative same-store sales at its outlet locations, and inventory problems at Club Monaco. “The lack of near term visibility combined with the prospect of a cyclical slowdown in consumer spending has prompted us to turn a bit more cautious on Polo,” Magor wrote in a report. Goldman owns 23.1 percent of the outstanding shares of Polo on a fully diluted basis. Polo closed down 1/4 at 16 9/16.
On Monday, Susan Silverstein, an analyst at Banc of America Securities, cut her investment outlook on apparel stocks to “neutral,” and lowered Liz Claiborne and Jones Apparel Group, its two “buy” ratings, to “market performer.”
Wet Seal’s shares fell 3 1/4 to 15 after it said first-quarter earnings would decline about 50 percent, to between 16 and 18 cents a share, well below consensus estimates of 23 cents a share. Same-store sales were down 4.7 percent in the first quarter.
The Gap’s stock dropped 4.5 percent, down 1 3/4 to 37 1+4. Pacific Sunwear of California, which relinquished nearly a quarter of its market value on Tuesday after reporting that it missed its April sales plan, declined an additional 6 percent Wednesday, concluding the day with a drop of 1 9/16 to 24 15/16. The stock, downgraded to “buy” from “strong buy” by U.S. Bancorp Piper Jaffray, had briefly traded at above 35 earlier in the week.
In relative terms, the department stores had a fairly good day. Federated was down 5/8 to 34 11/16; May dropped 5/8 to 27 3/16; and Saks pulled back 3/8 to 11 5/8. However, Dillard’s was down 5.5 percent, off 13/16 to 14; J.C. Penney lost 4 percent, down 11/16 to 15 7/8; and Sears declined 6.7 percent, down 2 5/8 to 36 7/16.
Among others absorbing major hits were Nordstrom, down 2 7/16 to end at 26 13/16; Neiman Marcus got hit hard, losing 2 1/2 to close at 24 1/2, and Tiffany dropped 4 7/16 to 68 9/16.
Concern about middle- and working-class consumers took a particular toll on mid-tier and mass merchants. Kohl’s, fresh off a recent stock split and successful entry into the Northeast, was down 3 13/16, or 7.4 percent, to 48. Wal-Mart declined 7.3 percent, leveling off at 53 7/16 at the day’s close. Kmart was down more than 3.5 percent, losing 5/16 to land at 8 + for the day. Target was down 7.5 percent, closing off 5 1/8 to 63 3/4. Among the off-pricers, TJX was down 1 3/16 to 17 7/8 while Ross was down 1 3/8 to 19 5/8.