Consumer stocks fell Thursday as investors worried that the economy, which had been showing some signs of life, may be making a U-turn.
Investors were already growing more cautious about purveyors of consumer goods after Americans slowed their spending in April and May, and a government report showed that job creation by private companies in May grew at the slowest pace since the start of the year. But this week, concerns about the economy switched into high gear amid bleak housing figures that signaled a renewed housing slump that may threaten the broader economy.
The reports, on top of cautious outlooks from department stores like Macy's Inc. and J.C. Penney Co. in mid-May, and more recently Bed Bath & Beyond Inc. and athletic shoe and apparel maker Nike Inc. were unwelcome news for investors who had grown more optimistic about a solid recovery. Investors had pushed retailers' stocks up after blowout retail sales in February and March, a month that saw the biggest revenue gain since March 1999.
"The odds have definitely increased for a double-dip recession," said Ken Perkins, president of research firm RetailMetrics. "If you wound back the clock a few months ago, it looked like a robust recovery was under way led by an uptick in consumer spending. But that has clearly petered out."
J.C. Penney, Bed, Bath & Beyond, Macy's and Red Lobster and Olive Garden owner Darden Restaurants Inc. were among the top decliners in the Standard & Poor's 500 index — each falling at least 5 percent. Other consumer stocks such as discounter Wal-Mart Stores Inc., Target Corp. and low-priced Kohl's Corp. logged more modest declines.
The sell-off comes as U.S. retailers head into the critical back-to-school shopping season. Faced with tight credit and an unemployment rate hovering just below 10 percent, shoppers are expected to be cautious, and some analysts believe that their financial circumstances could worsen in coming months as unemployment stays high and if home prices head down after stabilizing for the past year.
"We had a bit of a spike (in spending), but it's not sustainable," said Janney Capital Markets analyst David Strasser who on Thursday cut his full-year earnings estimates for 16 companies including Wal-Mart Stores and consumer electronics leader Best Buy Co. After studying the financial models of the companies he said he realized that the acceleration built in was not realistic. "I think back-to-school is going to be tough."
Strasser and other industry trackers believe that there may be no bottom for retail stock prices. Strasser even fears that stores may have too much inventory in the back half of the year, which could hurt profit margins if stores were forced to increase discounting more than planned to get rid of unwanted merchandise.
Strasser also lowered his earnings predictions for home improvement retailers Home Depot Inc. and Lowe's Cos. partly on the belief that sales of big ticket items have slowed more recently. He noted that Lowe's and Best Buy both reported higher inventories in anticipation of a need to fuel revenue in the second half — a strategy that could backfire. Other stores that focus on the home could suffer from volatility in the housing market, Joan Storms, an analyst at Wedbush Securities wrote in a report published Thursday. She still recommends that investors buy the stock, but doesn't think it will rise as much as she previously predicted.
Richard Hastings, macro and consumer strategist with Global Hunter Securities, worries that the significant weakness in consumer stocks could indicate "deeper troubles for the broader stock market." Starting in June 23, 2008, retail stocks were declining faster than the S&P 500, and significantly declined below the index on July 15, 2008, a few months before the overall market tumbled to historic lows.
"We believe there has to be more selling before a sustainable rally," Hastings said.
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