December 30, 2008
Glum & Glummer
Amid Downturn, Investors Seek Bargains In Retail
By James Covert
Like cost-conscious shoppers, investors have begun to pore through heaps of marked-down retail
stocks in search of bargains.
Shares of high-priced chains like Saks, Nordstrom and J. Crew have dropped sharply during the
past year as the recession has sapped demand for suits, dresses and cashmere sweaters at these
chains.
But while those markdowns may look enticing, most value-minded investors are still looking to
assess whether retail stocks have still more room to fall. In the coming weeks, they'll keep a close
eye on the profit picture for the crucial fourth quarter, and whether clearance sales will be more
costly for retailers than anticipated.
"There are some pockets of opportunity emerging out there," said Eric Marshall of Hodges Capital
Management in Dallas. "But when you're buying these stocks that have fallen 75 and 80 percent,
it's difficult to know whether you're right in the near term."
Indeed, Wall Street got a shock last week when MasterCard's SpendingPulse unit said retail sales
plunged 5.5 percent and 8 percent in November and December, respectively - far worse than the
flat results analysts expected.
This year's grim news has kept investors away from retail stocks - particularly those with heavy
debt loads that are vulnerable to the credit market.
This month, Macy's shares rose after the chain successfully renegotiated its credit lines, despite
terms that some investors found onerous.
Meanwhile, worries have persisted about the prospects for debt-laden department stores like
Saks, Dillard's and Bon-Ton.
In 2009, most economists think housing prices will continue to stumble, the credit markets will
remain clogged and unemployment will continue to march upward.
But some are holding out hopes for improvement toward the end of next year.
A key clue will be whether retailers continue to lower their already dismal profit
forecasts in the coming weeks, and whether they continue to be stuck with mounds of
unwanted inventory, said Tom Chin, managing director at Telsey Advisory Group, a
research firm focused on the retail sector.
"If you think the economy will pick up in the back half of 2009 or early 2010, you'll
probably want to start looking at retail stocks in the spring," Chin said.
Chin likes hard-hit names like J. Crew and Lululemon, which both retain plenty of
growth potential. Department stores like J.C. Penney and Kohl's also will weather the
crisis and snag customers from fallen rivals, he said.
Marshall of Hodges Capital likes retailers such as watch-seller Fossil and men's clothier Jos. A.
Bank.
Both chains are facing slowing sales and profits, Marshall admitted, but both have healthy cash
flows and balance sheets, he said.