Apparel Stock Dress Down - and other related observations

By Dr. Duru written for One-Twenty

September 3, 2007

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August was filled with so much drama yet I found so little time to write about it. Such is life with a real job and a family that take priority over Dr. Duru's favorite hobby! Anyway, it was probably a good thing because for all the drama and ups and down of August, the overall market barely budged at all. You could have skipped town for August and come back thinking nothing happened. When I last wrote on Aug 15th, I suggested a big bounce was coming. Indeed, the bounce came right on schedule the following day. Back then, I suggested that the subsequent rally should probably be sold. My opinion still stands for the short-term, especially given the heavy amount of institutional selling I see everytime I check the stats on individual stocks (for example, see the heavy selling in Nordstrom). But over the longer-term, one must still give the market credit (and the Fed seems likely to give it just that). The monthly chart of the S&P 500 below shows that the multi-year bull run is still chugging right along. In fact, the bulls could even argue that the retest of the year's low was successful and has finally set the stage for the next phase of the bull run. That huge reversal in August may represent the final capitulation of all the institutions that have been selling stocks like nobody's business this summer.

Monthly chart of S&P 500

Note how volume surged this summer after suffering a small, but steady decline every month since January? I hope to the high heavens that people stop talking about the summer "lull" and how Wall Street goes to vacation or goes to sleep during the summer. Traders will trade whenever necessary.

So given that August was a deceptively volatile month, it helps to look at those sectors and/or stocks that did not survive August with flatline performance. I talk plenty about homebuilders and will save that for another day. I talk plenty about Google (GOOG), but it was flatline for the month too - after giving a nice headfake of a breakout before it made the plunge with the rest of the market. And finally, some momentum stocks like RIMM and CHL have already launched from the August disaster to new all-time highs. My attention this time goes to the retail stocks.

The RTH is the ETF for the retail sector. It ended August flat too. However, this index is dominated by the giant retailers of the land like Wal-Mart (WMT) and Home Depot (HD). HD had a dramatic plunge but ended August flat. WMT is teetering on 7-year lows. But underneath the covers are some "real" stinkers. In particular, many apparel stocks were crushed in August. Specialty women's apparel stocks seemed hurt the most, but several department stores were trampled as well. In many of these cases, August marked the most dramatic point of declines that have lasted all of this year and beyond. These stocks hit my radar screen in a big way after Liz Claiborne (LIZ) got slammed in historic fashion on an earnings warning back in May for a 19% one-day loss. The CEO appeared on Fast Money that evening to defend his company, and I was convinced that the selling was overdone. I managed to time a nice bounce in the last half of May, but I bailed after the stock spiked up to start June. Ever since then, I have watched these apparel stocks more closely. In August I marveled at the severe implosions in companies like Coldwater Creek (CWTR), Chico's Fas (CHS), Citi Trends (CTRN) and Christopher & Banks (CBK).

I am posting below my list of August and year-to-date performance for these retail disasters. I am purposely picking out the bad apples, but given the brand names involved, it is hard to dismiss these as "company-specific" problems. (We do have some relative stars like CROX, ANF, JCG, and sportings goods like CAB, DKS, and DECK). The list is sorted by August performance, and I threw in a few stocks who survived August but are still down on the year.

Stock Aug price change 2007 price change
CWTR -36.8% -49.3%
CTRN -33.9% -45.2%
NWY -32.3% -49.5%
DDS -20.6% -32.1%
CBK -19.0% -35.3%
CHS -17.5% -22.8%
SKS -12.6% -9.3%
M -12.1% -16.8%
CHRS -8.5% -33.2%
PIR -5.2% 3.9%
LTD -4.1% -20.0%
LIZ -2.8% -21.4%
COH -2.0% 3.7%
BEBE 0.6% -29.5%
JCP 1.1% -11.1%
JWN 1.1% -2.5%
SHLD 4.9% -14.5%

I will throw in a bonus retailer, non-apparel: Sharper Image (SHRP) looks like it is finally going to give up the ghost after clinging to life support for so long on that Ionic Breeze controversy. SHRP fell 35% in August.

So, what's going on - are women in particular pulling in the purse strings? Is the entire family budget to follow? The Bureau of Economic Analysis recently reported that personal savings as a percentage of disposal personal income was 0.7% in July and 0.5% in June. In fact, these numbers have been positive every month of this year. These savings rates seem small but they may represent an important turn-around: the annual rates have been in persistent decline since the mid-80s until finally going negative in the past two years. As the housing recession deepens, it seems that consumers may finally be getting the message to save. The flip side of this story could be even slower economic growth in the U.S. The precipitous 2-month drop in 10-year treasury yields back toward 2-year lows may also portend slower economic growth ahead. And note this drop occured right on the heels of a "scare" in yields as they hit 5-year highs!

One of my final tells might be Best Buy (BBY), the representative king of consumer discretionary spending. It is currently scraping above 2-year lows and has been sliding downward for almost a year. BBY is one earnings warning away from filling an old gap in 2005 and re-entering the top portion of a wide trading range that lasted from 1999 to 2005. Earnings will next be announced on September 18. The Fed will be announcing its next interest rate decision on that day (you KNOW I have been itching to write about the recent Fed madness!) - and folks have argued adamantly on all sides of the recent interest rate debates. Two days later, Goldman Sachs (GS) will tell us just how much the recent credit crunch as compressed its business. All this occurs during September's options expiration week. Can you spell "M-O-R-E D-R-A-M-A"?

Stay tuned, and be careful out there!

© DR. DURU®, 2007