From the Depths, Retail Stocks Look for Air
Robert D. Hershey Jr. N. Y. Times News Service, THE JOURNAL RECORD
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 further.
"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. …