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Financial Meltdown Might Shrink Fashion
Financial Meltdown Might Shrink Fashion
by Evan Clark with contributions from Alexandra Steigrad Liza Casabona
Posted Monday October 13, 2008
From WWD Issue 10/13/2008
Photo By: Courtesy Photo
Lane Bryant parent Charming Shoppes was among the many retailers cutting earnings guidance
last week.
Chaos in the credit and equity markets has put a hold on consolidation activity in the fashion
industry for the time being, but the hiatus might not last long.
Ultralow stock prices, tight credit markets and weakening consumer demand could eventually
lead to a new round of consolidation among buyers and sellers, and ultimately an even smaller
fashion industry where the number of corporate players shrinks further and the big get even
bigger.
If fashion is going to go on a renewed consolidation kick, though, it will have to wait until the
stock markets calm.
Investors continued to panic Friday, selling shares with abandon and then turning on a dime to
push stocks up as credit and economic fears gripped the now-schizophrenic financial markets.
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The week was one of the worst on Wall Street and in global markets in decades, and investors
anxiously wondered when the bottom would come. The Dow Jones Industrial Average briefly fell
below 7,900 in early trading Friday but closed at 8,451.19, off 128 points, or 1.5 percent. In the
last hour of trading for the week the index rose more than 650 points before easing back into a
small decline.
The Standard & Poor’s Retail Index slid another 0.9 percent, or 2.5 points, on Friday to 274.38,
following a record 7.9 percent plunge Thursday. Worldwide indices were also down.
Retailers are still trying to gauge how the roiling financial waters will impact consumers, who are
gripping their pocketbooks closer than ever, according to the wave of weak September sales
reported last week. Macy’s Inc., Charming Shoppes Inc. and New York & Company Inc. all
lowered earnings guidance on Friday — in Macy’s case by a whopping 40 cents at the low end
and 35 cents at the upper end. Shares of Macy’s dropped 13.4 percent to $9.92 and Charming
Shoppes’ stock fell 21.9 percent to $2.85. New York & Co., which issued its profit warning after
the closing bell, was up 8.2 percent to $7.25.
The trio joined the growing list of retailers that have cut back on projections recently including
J.C. Penney Co. Inc., Nordstrom Inc., Saks Inc., Pacific Sunwear of California Inc., American
Eagle Outfitters Inc., Abercrombie & Fitch Co., Mothers Work Inc., Kohl’s Corp., The TJX Cos.
Inc., Ross Stores Inc. and Stein Mart Inc.
The whirlwind of bad news has overtaken the industry with previously unimagined speed.
“What’s scaring people is just the pace of this virus,” Dean Hillier, a partner at consultancy A.T.
Kearney, said. “It’s just so damn fast and that’s got people a bit jittery. Retailers can be pretty
nimble, but this is going to test their ability to dance. They need to be good at their game, there’s
no question about it. This is not an environment for the weak. The weak will either get swallowed
up or they will just collapse outright.”
For retailers and vendors under almost unbearable pressure from investors to keep growing, the
credit crunch, sinking stock markets and weak consumer spending might all be pointing in the
same direction: consolidation.
“On the one hand, your income statement is challenged; on the other hand your balance sheet is
challenged,” Marc Cooper, managing director and partner at Peter J. Solomon Co., said. “If you
want to be one of the survivors, if you want to be one of the growers, you’re going to have to
consolidate. You’re going to have to either acquire or merge.”
For now, the rampant uncertainty on Wall Street has pushed the pause button on consolidation,
but Cooper said it could start back up as soon as the market calms.
Prime candidates for consolidation lie among already challenged vendors as well as the shrinking
department store sector.
“Could a Liz [Claiborne Inc.] and Jones [Apparel Group] merge? Maybe,” Cooper said. “There’s
no reason why you couldn’t have consolidation along those lines and you will. If you look at the
top 15 wholesalers, my guess is there will be fewer by the end of next year. Across the board, it
will be a consolidating landscape.”
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Still, retailers could be cautious or unable to come up with the necessary funds when it comes to
buying another chain.
“There’s just not going to be many retailers with a balance sheet that can be acquisitive if it’s not
going to be immediately accretive,” Joel Bines, a director at AlixPartners, said.
Whether industry consolidation switches into high gear, it’s not at all clear the consumer will be
there for stores and brands as they struggle through the downturn.
“There’s no prospect of a return to year-over-year increases the way we used to know them
because the consumer is not going to have credit card access the way they used to have it,”
Emanuel Weintraub, president of the consulting firm that bears his name, said.
“This is not 1929. This is not 1987. It is something unto itself,” Weintraub added, citing previous
market crashes. “Ninety-four percent of Americans are working. They’re getting salaries, but
they’re scared out of their britches.”
The same might be said for retailers, which are seeing the market sink faster than a rock in water
— and far below their already bleak forecasts of only a few months ago.
Macy’s on Friday cut its 2008 earnings guidance to $1.35 to $1.50 a diluted share, excluding
one-time consolidation costs and impairment charges. The retailer, which operates the Macy’s
and Bloomingdale’s chains, had earlier revised guidance to profits of $1.70 to $1.85 from a range
of $1.85 to $2.15.
The firm said its same-store sales fell 5.8 percent for August and September combined and could
be down 3 to 6 percent for the fall season.
Macy’s said it continued to be financially healthy, with $740 million in cash and cash equivalents
on hand and a $2 billion bank credit agreement. “We are continuing to manage our business well
in this tough economic environment, while simultaneously offering customers exciting fashion
product and great value,” said Terry Lundgren, chairman, president and chief executive officer.
“We expect this will result in sales performance that continues to outpace key competitors, as we
have done throughout the year-to-date period.”
Women’s plus-size apparel retailer Charming Shoppes said its third-quarter sales were thus far
“considerably lower than planned.”
The Bensalem, Pa.-based company more than tripled its third-quarter loss estimate, to a range of
35 to 37 cents a share on revenue of $535 million to $545 million, from previous guidance of a
loss of 9 to 11 cents a share on revenue of $560 million to $570 million.
Analysts polled by Yahoo Finance expected a loss of 10 cents a share on revenue of $561.1
million.
The company said it is taking “very strong actions” on its inventory position, particularly at its
Fashion Bug brand. This includes accelerating markdowns, in order to clear out fall merchandise,
which, according to the company, will allow it to improve on its performance during fiscal 2010.
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Specialty apparel retailer New York & Co. lowered its third-quarter guidance to a loss of $4.5
million to $7 million, or 8 to 12 cents a diluted share, due to a 10.6 percent decline in thirdquarter comps that, according to the company, was “significantly lower” than expected.
After dizzying swings in the Dow and Standard & Poor’s Retail Index, analysts weighed in with an
assortment of downgrades, new valuations and, sometimes, conflicting opinions.
On Friday, J.P. Morgan retail analyst Brian Tunick sent out a cheeky note, titled “Atoning for Our
Overly Optimistic 2009 Earnings Estimates,” which detailed a David Letterman-style top-10 list
of the analyst’s revised estimates for select retailers.
Tunick, who cut 2009 EPS estimates by 43 percent to $3.08 from $5.36 for Abercrombie & Fitch,
said the teen retailer is “getting more than its denim destroyed.”
Abercrombie said it expects third-quarter earnings in a range of 74 to 76 cents a share, which it
said would mean it would fall short of its earlier second-half EPS projection of $3.40 to $3.45 a
share. The firm said it will continue its international growth opportunities and avoid promotional
pricing,” a strategy that the company believes will help it emerge “stronger than ever.”
Despite reporting a weak 14 percent decline in same-store sales, Abercrombie was upgraded
Friday by Citi Investment Research analyst Kimberly Greenberger, who raised her rating to
“hold” from “sell.”
“We do not see a near-term catalyst to move the stock in either direction as weak fundamentals
(sales and margin declines) are likely well understood and discounted in Abercrombie shares at
this price,” she said.
After days of overall market declines, some retailers managed to gain ground on Friday. Among
them were Dillard’s Inc., up 17.7 percent to $10; Tiffany & Co., 16.6 percent to $28.76; The
Bon-Ton Stores Inc., 7.6 percent to $2.12; Aéropostale Inc., 7.2 percent to $25.91 and Sears
Holdings Corp., 5.4 percent to $70.92. Some vendors were also made up lost ground, such as
G-III Apparel Group Ltd., up 9.1 percent to $14.93; VF Corp., 8.9 percent to $62.90; Jones
Apparel Group, 8.4 percent to $13.83, and Polo Ralph Lauren Corp., 4.2 percent to $49.55.
Charles McMillion, president and chief economist, MBG Information Services, sees the days
ahead as a distinctly new era.
“History has shown that economic difficulty can bring people together or it can set them against
one another,” he said. “The next several years will be quite difficult economically, but what it
‘looks like’ will depend largely on the policy and cultural choices we make.”
And some are able to still muster optimism.
“The credit market is having a crisis, the economy’s not,” Richard Yamarone, chief economist,
Argus Research Corp., said. “But if you tell the people every night that there is an economic crisis
out there, then their confidence gets shattered.”
Consumer confidence surveys are likely to reflect that for a long time, and if consumers start to
legitimately believe their jobs are in jeopardy they will curtail spending, he said.
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The unemployment rate, which held steady at 6.1 percent in September and August, is still too
low to indicate a broader economic crisis, Yamarone said. The tipping point would be if or when
that figure moved into double-digit territory.
Yamarone did predict that Christmas will come, although it might not be very merry.
“Consumers are definitely spooked, and perhaps they have a right to be, but Christmas is
Christmas,” he said. “Junior will get his train set and people will be shopping.”
Copyright ©2008 Fairchild Fashion Group. All rights reserved.