What with a climb in interest rates, poor weather and a hangover
from Year 2000 computer problems, retailers' stocks have been about
as popular as last year's fashions. The question is whether they are
distressed merchandise or a legitimate bargain.
Since mid-April, the Standard & Poor's retail stores composite
index has tumbled 20 percent -- a decline that analysts attribute
mainly to market recognition that, sooner or later, the Federal
Reserve always gets its way. And the Fed's chairman, Alan Greenspan,
wants consumers to stop spending so much, lest inflation heats up.
"You can't have six rate hikes without people feeling nervous"
about a diminished impetus to shop, said Carole Cranmer, a retail
analyst at Josephthal & Co.
But analysts are divided. Some say retail stocks have probably
hit bottom, while others, like Ursula Moran of Sanford Bernstein,
advise patience, predicting that prices will be marked down still
"When the Fed wins, it means that spending decelerates," Moran
said. "But history suggests we're not out of the woods yet." She
noted that it took about a year for retail stock prices to turn
higher after the Fed ended its last round of rate increases in 1995.
And while the Fed passed up a chance to raise rates last week, it is
not yet certain that it is through for this round. Still, income and
job growth are stronger than they were in 1995, and store executives
have quickly learned to harness technology to prevent too much
inventory buildup, long a major vulnerability of the industry.
"There still appears to be the ability to spend," said Susan M.
Sterne, proprietor of Economic Analysis Associates, which studies
consumer behavior. "I think people are too negative on the stocks;
they're running away from them too fast."
With some notable exceptions, the stock prices show the damage:
Wal-Mart, the world's biggest retailer, is 27 percent below its New
Year's Eve high of $70.25. Among others, Federated Department Stores
is down 45 percent this year, Gap 42 percent, Circuit City 40
percent, Saks 31 percent, Home Depot 26 percent and Lands' End 24
percent. And Gottschalks, a West Coast chain, trades at just six
times earnings, in contrast to an industry average of 28.
"It was a very weak spring season" for merchants, Sterne said.
The expected business surge from Y2K has not occurred this year, she
noted, although it helped produce a fabulous final 1999 quarter.
Many companies missed their profit and revenue targets in the
second quarter, and others, including Wal-Mart and Target, warned of
shortfalls in the current one. …