Byline: Thomas J. Ryan
NEW YORK — Don’t expect a recovery in retail and apparel stocks until the second half of 2001.
That’s the view of most Wall Street analysts in the aftermath of a forgetful year for most fashion stocks. Of course, 2000 will go down as the year the dot-com bubble burst, as witnessed by the 39.3 percent tumble in the technology-heavy Nasdaq Composite Index. The Dow Jones Industrial Average was down 6.1 percent. But 2000 was also a year that investors pulled away from discounters and specialty stores, two of the hottest consumer sectors throughout the Nineties.
On the WWD Stock Market Index, retail stocks were down 19.9 percent, with specialty stores tumbling 32 percent and discounters off 23.1 percent. Most apparel and textile mill stocks continued to be largely ignored by investors as well.
Things aren’t expected to get easier so soon because the same investor concerns — an economic slowdown, higher energy prices, lackluster fashion trends and the bearish stock market — are expected to remain at least through the first half.
“Consumer confidence figures are down. The signs from the economy are not particularly favorable, so that doesn’t bode well for retail sales,” said Joe Grillo, broadlines analyst at Deutsche Banc Alex.Brown.
However, Grillo and some other analysts believe some “value-investors” may look at retail stocks early in 2001 because prices appear to have bottomed out.
Another impetus for stocks is the prospects of interest rate cuts by the Federal Reserve Bank, possibly as early as January, that should eventually stimulate consumer spending.
“Retail stocks historically perform well when rates are coming down,” said Grillo.
While the retail stocks sector was one of the first to be sold off when the economy began to show signs of deceleration in the second quarter of 2000, it also is expected to be one of the first sectors to bounce back, Grillo said. He also said retail stocks typically perform better in the first half of the year rather than the second half. Still, Grillo only has one stock with a “buy” rating: Kohl’s.
Most analysts believe a turnaround in retail stocks won’t happen until the second half, particularly as retailers have a tough time beating last year’s strong results through the first quarter.
Goldman Sachs broadlines analyst George Strachan said retail stocks could rally in early 2001 on anticipated interest rate cuts and as investors rotate out of other sectors that are seeing their fundamentals erode worse.
“Such a rally could be short-lived, however; although the retail sector may appear relatively less unattractive than other more cyclical groups, lack of pent-up demand and weak consumer balance sheets provide a shaky foundation for sustained ‘early-cycle’ performance,” said Strachan.
Even more pessimistic was Robert Buchanan at A.G. Edwards, who said the downward pressure on retail stock performance may likely extend into the second half, dependent on if the economy strengthens and the direction of oil prices.
“I’m bracing for the worst,” said Buchanan, who has had a “negative” rating on the retail group for most of 2000.
He believes that given the U.S.’s long expansion, it might take “very aggressive cuts” to stimulate the economy back into growth mode. In particular, Buchanan is concerned about sky-high consumer debt levels.
“It’s grown to a point where it is a massive problem and the magnitude of the situation may prolong the slowdown,” Buchanan said. “People really owe a lot of money.”
Todd Slater at Lazard Freres said apparel vendor stocks — which have been depressed for about three years and are trading near historically low multiples — will likely continue to underperform in the near term.
“Their revenues are tied to their customers and by and large their customers are not healthy and will likely be in a deceleration growth period in the first half of 2001. It will be a tough first half of the year, then it gets easier,” said Slater. “We believe the most well positioned are the ones that are the most diverse both in product assortment and channels that it sells into, which we think will mitigate some of the risks.”
Joe Teklits at Ferris Baker Watts said there needs to be a resurgence in what he sees as the “current malaise” in many core department store brands to lift the overall stocks in the apparel sector. But he said the emergence of a clear trend, such as fashion denim, could help ignite apparel spending.