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Clothes Retailers: The Worse for Wear

By Sam Stovall Investors have marked up shares of apparel retailers this year, even in the midst of yet another decline in the overall market. Year-to-date through Dec. 2, the S&P Retail Apparel Index rose 7.9%, vs. a 17.8% decline in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600). And that has helped the group land on the list of industries with top Standard & Poor's Relative Strength rankings.

S&P analyst Tuna Amobi remains neutral on apparel chains in the near term, however. He believes high-end clothes stores will continue to be hurt by consumers' tendency to buy goods closer to need -- and to wait for sales, rather than paying full price. Off-price and discount merchants are likely to continue to increase their share of apparel retailing.

MIXED RETURNS. Amobi says retailers' results for the first half of 2002 were a mixed bag, and the important back-to-school season was hurt by unseasonably warm weather. With six fewer shopping days in the 2002 holiday season, vs. 2001, he expects clothing stores to be more aggressive in their promotions. Based on the relatively high traffic during the first weekend of the holiday shopping season, preliminary signs are in line with his expectations.

Key to the chains' near-term prospects is the mood of U.S. consumers. Based on recent reports, they continue to be concerned about deteriorating labor-market conditions and job security, with the Conference Board's monthly confidence index recently plunging to a nine-year low in October -- although it edged up slightly in November. This promises to further slow near-term spending on clothes.

Retailers have responded to the difficult environment. Many have pruned inventory levels through order cancellations, deferrals, or increased promotional activity. Amobi is encouraged by the West Coast dockworkers' tentative six-year pact with shippers, which should help to ease supply pressures for the group. But with inventories significantly pared down from year-ago levels, he remains cautious on the holiday outlook, as retailers (and distributors) resorted to expensive air freight as a contingency measure. Despite efforts to clear backlogs, the fourth quarter could be further pressured by the markdown of delayed or carryover inventories.

Longer term, the analyst says, the demographic underpinnings for clothing sales are weak. An older population will likely be less interested in the latest fashion trends. Aging baby boomers are more likely to focus on other priorities, such as saving for retirement and paying tuition and health-care costs. These expenditures will likely garner a greater share of household disposable income.

MUCH RESTRUCTURING. As the excess of U.S. retail square footage persists, chains are trying to offset it by improving their sourcing of merchandise, cutting back on expansion plans, closing underperforming units, and investing in cost-cutting technology. Amobi thinks this should benefit outfits with superior management, strong consumer franchises, and moderate debt levels. Retailers' results should gain from consolidation and curtailed expansion, so the analyst's long-term outlook remains more favorable.

Amobi's top pick in the group? He likes Chico's FAS (CHS), a seller of private-label women's casual clothing. Amobi has assigned the stock S&P's highest investment ranking, 5 STARS (buy).

S&P Relative Strength Rankings

These industries carry 12-month relative strength rankings of "5" as of November 29, 2002 -- meaning they're in the top 10% of the 116 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.


Largest Company (Market Cap.)


Apparel Retail/Consumer Discretionary

Chico's FAS (CHS)


Apparel, Accessories & Luxury Goods/Consumer Discretionary

Quiksilver (ZQK)


Brewers/Consumer Staples

Anheuser-Busch (BUD)


Consumer Electronics/Consumer Discretionary

Harman International (HAR)

Not Ranked

Fertilizers & Agricultural Chemicals /Materials

IMC Global (IGL)


Home Furnishings/Consumer Discretionary

Mohawk Industries (MHK)


Homebuilding/Consumer Discretionary

KB Home (KBH)


Housewares & Specialties/Consumer Discretionary

Newell Rubbermaid (NWL)


Metal & Glass Containers/Materials

Pactiv (PTV)


Photographic Products/Consumer Discretionary

Eastman Kodak (EK)



Yellow Corp. (YELL)


*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's

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