Overheard On Wall Street: Slipping Retail Prompts Holiday Fears

Holiday shoppers 2014
Holiday shoppers inside Macy's in New York.
Getty Images.

Investors who placed their bets on footwear-and-apparel companies have been feeling the heat this week.

With the Dow Jones Industrial Average dropping more than 150 points in midday trading Friday and the S&P 500 and the Nasdaq Composite Index well into the red, evidence of retail’s drag has spread across the market.

Many of footwear’s heavy hitters started Q3 with lower-than-expected earnings — a trend market watchers attributed to unseasonably warm weather, currency pressures and inventory/supply-chain issues — but department stores and apparel companies have also reported slides.

Now, insiders say an all-around retail slowdown is in full effect.

Tumbling sales and profit at Macy’s — revealed in the firm’s Q3 earnings release this week — further dampened investor sentiment. And while Nordstrom had become a Wall Street darling among department stores in Q2, the firm added its name to the list of retailers announcing disappointing earnings this week. Nordstrom’s shares plunged to a 52-week low of $50.43 following Thursday’s earnings release.

After delivering mid-single-digit comp increases for the past four quarters, Nordstrom experienced a sharp decline in traffic beginning in August that persisted throughout the quarter and drove softness across channels and categories,” wrote Nomura Securities International Inc. analyst Robert Drbul. “We expect these trends to continue in the holiday season with traffic yet to regain the lost traction.”

Although J.C. Penney Co. Inc. narrowed its losses and improved its sales and comps in Q3, Drbul  suggests that an uptick in promotional spending for the holidays could offset potential gains.

Similarly, looking ahead to the holiday season, Cowen & Co. analyst Oliver Chen also noted that “promotional pain” is likely to drag down retailers. Meanwhile, consumers’ lack of interest in visiting shopping malls and/or spending on apparel, in particular, is likely to continue, Chen added.

In the wake of retail’s challenged outlook, Susquehanna Financial LLLP analyst Christopher Svezia reduced price targets across his coverage area, which includes Dick’s Sporting Goods, DSW Inc. and Shoe Carnival.

While we believe the athletic footwear and apparel segment will fare better than other consumer discretionary categories, it’s prudent to take a more conservative view given potential for weaker traffic and sales trends related to unfavorable weather and potential effects from heightened promotions at other retailers, which could negatively impact margins,” Svezia wrote on Nov. 12.