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Rough Road Predicted for Retail in '08

From Wall Street's perspective, the retail sector is not the place to be in 2008, as analysts predict a recession or at the least a deeply softened economy.

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Jeff Black of Lehman Brothers said Urban Outfitters is expected to perform well in 2008

Jeff Black of Lehman Brothers said Urban Outfitters is expected to perform well in 2008.

Photo By WWD Staff

From Wall Street's perspective, the retail sector is not the place to be in 2008, as analysts predict a recession or at the least a deeply softened economy.

"We believe the U.S. will fall into a recession or get pretty darn close in the first half of 2008," said Jeff Black, senior vice president at Lehman Brothers. "The current earnings slowdown mirrors the lead-up to the [2001] recession, with growth declining against easy comparisons."

Analysts are expecting most companies to lower earnings estimates during February and March quarterly conference calls.

In the fourth quarter of 2007, concerns over a weak housing market, higher gas prices and softer consumer spending caused many retailers to issue a cautious outlook for fiscal 2007 as well as the first half of 2008, noted Kate McShane, retail analyst at Citi Investment Research, in a research report.

As a result, current, deflated stock prices reflect weak sales numbers and the anticipation of December same-store sales and fourth-quarter earnings results. Retailers and vendors have set new 52-week lows over the past two months.

"It's like [stocks] are being taken out back and shot," said Steven Sheldon, director of SMS Capital Management. "It's unbelievable how cheap stocks are getting right down to the places that are usually resilient, such as pharmacies."

Disappointing job growth and a rising unemployment rate sent the Dow Jones Industrial Average down 1.96 percent to 12,800.18 and the S&P Retail Index fell 3.89 percent to 378.86.

Even teen retailers, which were believed to be immune to higher energy and food costs, a weak labor market and the subprime mortgage crisis, are seen as facing top-line growth challenges. Black expects Abercrombie & Fitch Co. and American Eagle Outfitters Inc. to experience operating margin erosion in 2008.

And while luxury retailers should fare better than most, sales in the sector will also be more moderate than in the past, said Roz Wells, chief economist at the National Retail Federation.

And apparel vendors will also face many of the same retail challenges in 2008, but on a much larger scale, McShane predicted.

"We are keeping an especially close eye on vendor-retailer relationships, many of which appear to be progressively strained as both sides seek to gain an edge on margins under top-line pressure," she wrote, adding that retailers have the upper hand.
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