Apparel vendors comprised one group that largely outperformed the markets last year and might do so again this year.
"Because they had less inventory, they enjoyed higher gross margins" and the favor of investors, said Wells Fargo Securities analyst Jennifer Black. Inventory discipline also helped them maintain margins in their own stores and limit their need to sell to off-price outlets.
Suppliers could repeat that trick in 2003, but retailers are in a different boat. "The market is overstored in every channel of distribution," said Black. "We think it’s really going to be a stock picker’s market for the retailers."
Retail stocks generally peak early in the economic up cycle and then start to drop, partially in anticipation of rising interest rates. So retail issues started to rally in 2000 when concerns about the economy were growing among investors and lower interest rates were seen on the horizon. And drop interest rates did: 11 times in 2001 and once in November last year, leaving the federal funds interest rate at 1.25 percent, its lowest level in more than four decades.
Retail shares may be in some kind of limbo for a while, but S&P’s Wyss asserted that, going forward, "The overall economic picture is not that muddy. We’ve gotten out of reverse, but we’re still only in second gear."
Wedbush Morgan Securities analyst Elizabeth Pierce noted, "I don’t think we can make a macro call in this environment. It boils down to the company."
Pierce, who covers specialty retail issues, said investors for now would focus on fourth-quarter earnings that will begin to trickle in next month. She’s not looking for significant across-the-board profit misses, though. There will be some slight revisions, she said, but not a "massive slaughter."
Part of this stems from the West Coast dock lockout — a lemon from which the industry managed to make a little bit of lemonade when anticipated sales levels didn’t materialize. With inventory exposure limited and Wall Street’s expectations reduced, the lockout "probably made it so that it’s not going to be quite the disappointing bottom line that it might have been," Pierce stated.