Instead of hanging tinsel at the mall this year, retailers may be moved to drape their storefronts in black crepe paper.
Pretty much every sector of the market has gotten thrashed lately, the culprits being tumult in the Middle East, the continued high price of oil and worries about weaker earnings growth. But retailers have had it the worst. On Thursday, the
S&P Retail Index
fell 7.7% after
warned that third-quarter earnings won't meet expectations. After recovering a modest 2.2% on Friday, the index is still down almost 30% for the year and is at its lowest level since November 1998.
Investors may have simply looked around and concluded that there's just precious little quality left to which they can flee, considering the string of disappointments from big-cap names like
and now Home Depot. What's more, there appears to be little chance of a reversal until next year. And all this misery at a time when retailers should be licking their chops at the prospect of holiday shopping!
The Big Red Machine
"The whole sector has been decimated," says Brian Gilmartin, portfolio manager with
Trinity Asset Management
, who participated in the Home Depot selloff Thursday. "This feels a whole lot like October of 1990." Back then, of course, trouble in the Mideast -- which eventually erupted into a full-fledged war -- caused an erosion of consumer confidence. The
S&P 500 Index
fell 15% between May and October of that year. A similar mess now could produce a similar effect, says Gilmartin.
Consumer spending has been the engine behind retailers' sales growth this year, even in the face of tough comparisons with last year. Though warnings from companies like
and upscale home goods retailer
suggest that demand has fallen off lately, consumers are still spending at a decent enough pace to produce at least tepid holiday sales growth.
But if they get spooked by the precipitous decline in the value of their brokerage accounts or by the unrest in the Mideast -- well, let's not think about that. "It could be the right hook that does the sector in," says Gilmartin.
The Cost Side
Unfortunately, there's little good news on the cost side of things, either. Higher oil prices mean higher transportation and freight costs -- that was one of the factors cited by Williams-Sonoma. Also, the job market remains tight, with average hourly earnings edging up to $13.83 last month. "Every single retailer I talk to says retail wage pressures continue to be intense," says Emme Kozloff, a retail analyst with
Specialty retailers face the additional woes of oversupply. As
noted back in July, teen specialty stores are continuing to open new stores at a remarkable pace. Gap, which this summer had to slash prices to attract buyers and clear out a glut of goods, still says it sees an unsatisfied demand for khakis out there and plans to keep opening new stores. At the recent
Robertson Stephens Consumer Conference
in New York,
Chairman and CEO Greg Weaver said that never before had he seen such a promotional summer at the mall, with pants and shirts marked down to a fraction of full price. (Nevertheless, he still sees his own chain increasing square footage by about 30% in 2001.)
Dead to Me
One East Coast hedge fund manager says specialty retailing is dead for this year. With all these negative factors, "Just tell me what the upside is," the hedgie asks. "We're really telling investors that if they're short-term minded and looking to the fourth quarter as the great white hope, they're going to be disappointed," says Kozloff. She's sticking to defensive names
and Costco, both of which she rates a buy. (Her firm doesn't do underwriting.)
Not everyone has given up on retailing. Gilmartin is hanging onto his Wal-Mart shares, though he's not expecting big things in the near term. Steve Schwartz, research director at hedge fund
, says that because retailers will soon start to face easier same-store sales comparisons, it's time to "get long by Christmas." Turmoil? "People panic, and that creates opportunity," he says. Steve Monticelli, president of
agrees. "I've been buying
retailers for the last five or 10 days." His favorite: the aforementioned Williams-Sonoma, which he thinks is extremely well-positioned for the longer term and will soon resume strong earnings growth.
While the overall sector may perk up in 2001 as more and more companies -- including the Gap -- face easier comps, for now things look pretty dismal, says Kozloff. And the holiday quarter, which never looked very merry to begin with, looks even less so.