New York (Reuters) - Retail stocks fell on Wednesday as a lackluster holiday shopping season and shrinking U.S. factory production stoked fears of a recession, analysts said.Investors had been closely tracking the progress of the season, worrying that consumers would pare spending with rising food and fuel costs.
Early returns from retailers' most important time of year depressed the market.
The Dow Jones U.S Retailers Index (.DJUSRT) fell 1.97 percent, while the Standard & Poor's Retailing Industry Group index (.GSPMS) slid 2.1 percent.
BJ's Wholesale Club Inc (BJ.N) was one of the biggest drags on the sector, plunging as much as 12 percent after JP Morgan downgraded it due to valuation and concerns that December sales at its stores open at least a year may be below plan.
"Retailers had one of the worse indexes for the year and they're going to be worse this year," said Howard Davidowitz, chairman of New York-based retail consulting firm Davidowitz & Associates Inc.
Lowered expectations from companies like Target Corp (TGT.N), Office Depot Inc (ODP.N) and Sears Holdings Corp (SHLD.O) -- which are fighting to stave off eroding sales -- are a harbinger of things to come for the beleaguered sector, Davidowitz said.
"What you've got is a retail recession. Earnings are going to be horrendous .... Investors are taking a step back and I think they're right," he added.
BJ's stock fell as low as $29.72, before closing $4.00 weaker at $29.83. Target slid 49 cents to $49.51 and Office Depot dropped 40 cents to $13.51, both on the New York Stock Exchange. Sears rose 95 cents to $103 on Nasdaq.
The weekly report on chain store sales, meanwhile, pointed to weak post-holiday bargain hunting.
Chain-store sales fell 0.2 percent in the latest week, according to the International Council of Shopping Centers, while data from Redbook Research pointed to a 0.7 percent decrease.
Stifel Nicolas analyst Richard Jaffe wrote in a December 26 research note that all signs pointed to a lackluster holiday shopping season.
"A late surge by customers and deep discounting by retailers were unable to sufficiently drive Christmas sales, likely resulting in a sales and earnings shortfall," he wrote.
"A lack of a compelling fashion -- particularly in the women's sector and a cautious consumer contributed to weak holiday sales."
Retail stocks were also hurt by data showing U.S. manufacturing taking a sharp turn for the worse last month, said Mark Coffelt, chairman of Empiric Funds in Austin, Texas.
"The purchasing manufacturing index is down. The conclusion that people are reaching is that the holiday season is weak," he said, adding that 90 percent of the short positions his firm holds is in retail stocks.
The Institute for Supply management's index plunged to 47.7 last month, its weakest since April 2003. A reading below 50 points to contraction.
"The net result of a slowing economy is it's going to hurt earnings," Coffelt said. "The consumer is going to have to spend less."
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