The New Year's Blahs: Retail Shares Decline On Downbeat Outlook

It's a new year, but the same old stock market story.

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McShane expects apparel vendors to face many of the same challenges in 2008 as they did in 2007, but on a larger scale. Vendors face ongoing pressure from department stores as the channel reassesses brand assortments with a focus on private label while pushing back aggressively on markdown allowances. As a result, McShane said traditional moderate brands such as Liz Claiborne and Phillips-Van Heusen are most at risk.

While consumer spending is likely to slow in the first quarter of 2008, Steve Wieting, Citi's economist, expects it to bounce back in the second half of the year.

"Our management team recently asserted that the U.S. consumer remains 'resilient' during the current period of economic uncertainty, but is being more selective about brands, quality and value," McShane said. "Indeed, we expect [apparel] companies with stronger brand portfolios, diversified selling channels and well-market value propositions to outperform in 2008."

Nike, Polo Ralph Lauren and VF Corp. are McShane's top picks.

Of the top performers for 2007, Deckers Outdoor, maker of Teva and Ugg shoes, took the lead spot with a 158.6 percent surge in share price. Despite sluggish footwear sales this holiday, Ugg continued to post solid sales at full price.

Gaiam, an eco-friendly retailer of home goods and fitness apparel, took the second place spot by gaining 116.96 percent for the year — proving there is potential in the green market. And, although not included in the WWD stock list for 2007, Lululemon's stock has soared more than 69 percent since its July 2007 initial public offering.

Other top gainers included premium denim maker True Religion with a 39.5 percent jump in shares, and Aéropostale and J. Crew, which grew 28.8 percent and 25.1 percent, respectively, for the year.

True Religion evolved into a "stock to watch" in late 2007 following softening sales in the high-end denim space. Analysts see the company's lifestyle positioning as a strong positive as other brands' sales slow. Another stock to keep an eye on is Aéropostale.

"Aéropostale has been a real success story, even more so than Abercrombie & Fitch," said Craig Johnson, president of Consumer Growth Partners, a consulting and research firm. "And Aéropostale has moved in such a diametrically opposite direction than American Eagle. I hear all of the teens say American Eagle is 'so over.'"
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