By Arthur Zaczkiewicz
For publicly traded home goods retailers and vendors, 2008 will likely go down as a year they’d like to forget.
Of the 35 companies tracked by HFN, just four firms posted gains to the value of its stock while 31 saw valuations plunge to new lows. Meanwhile, analysts don’t see stock valuations improving anytime soon, even as several recent mini-rallies bolstered shares.
For the year, the top retail gainers include Family Dollar Stores Inc., Walmart Stores Inc. and BJ’s Wholesale Club Inc., which showed increases for 2008 of 39.2, 19.5 and 15 percent, respectively. The top-gaining vendor was Helen of Troy Limited, which watched its stock rise 15.2 percent for the year.
Most companies, however, experienced dismal declines. On the retailer side, 14 of the 22 companies tracked had declines of more than 20 percent for the year. Of the 13 vendors tracked, all of the 12 decliners showed drops greater than 20 percent. Of the larger cap stocks, Macy’s, J.C. Penney, Target Corp. and Best Buy experienced declines of 58.6, 52.7, 30.3 and 45.1 percent, respectively.
Shares of Edward Lampert’s Sears Holdings Corp., a stock that traded near $200 two years ago, plummeted over 62 percent in 2008 to $38.87.
The leading decliners on the retail and vendor sides were Pier 1 Imports and Libbey Inc., which both shed over 90 percent of their value.
For the year, the S&P Retail Index fell 32 percent, which compares to a decline of over 33 percent for the Dow Jones Industrial Average. Of the Dow components, Walmart and fast-food chain McDonald’s were the lone gainers for the year.
It is important to note that employment, the housing market and consumer spending (and sentiment) as well as stability in the financial markets were some of the key drivers of stock valuations in the sector. Improvements to these economic catalysts are not expected until much later in 2009 if at all, analysts said.
Simultaneously, the private capital markets (private equity, hedge and venture capital investments) have also stalled. Analysts and private-equity experts anticipate some money from the private capital markets to enter the sector, but don’t expect any big deals to take public companies private, they said. So for now, the CEOs of public companies in the home goods vendor and retailer sector will have to deal with depressed stock valuations.
Alan Sellitti, audit partner and regional business line leader for BDO Seidman LLP, said retailers and vendors need to sharpen their skills at reducing costs and controlling their balance sheets in 2009. “We expect the macro retail environment to remain extremely promotional throughout the year,” Sellitti explained. “And that’s not good. Margins are under pressure, so you will continue to see retailers pushing back on their suppliers.”
The key word in 2008 was volatility, which was triggered by concerns of a global recession. In the holiday shopping season of 2007, there were a handful of retailers—most notably Macy’s and Walmart Stores—who had seen the writing on the wall and warned that shoppers were feeling pinched. As the first quarter of 2008 wrapped up, several other large retailers were warning of slowed consumer spending, too. Mall traffic began to decline, but it wasn’t until the summer—when fuel prices soared—that economists rang the warning bell.
Consumers got spooked and so did Wall Street. Spending declined, but there were a few retailers such as Walmart that were prepared. The world’s largest retailer was in the midst of repositioning itself on the merchandise front as well as polishing its low-price mantra when the recession hit.
As the 2008 holiday shopping season approached, which accounts for nearly 40 percent of annual sales for most retailers, equity analysts urged clients to sit tight. It would be the worst holiday season in four decades. And they were right. According to MasterCard Advisors SpendingPulse, retail sales of home goods declined nearly 23 percent during the holiday season.
Through the gloom, though, Walmart shined. In November, Todd Slater, retail analyst at Lazard Capital Markets, pegged Walmart with a “buy” rating. The revised rating came out as gas prices declined by $1. Slater saw this as a good sign for Walmart as shoppers who had been pulling back would resume their spending at the retailer.
From here, retailers and vendors face strong headwinds. Marc Blazer, president of Overture Acquisitions Corp., a private-equity investment firm, said the consumer mind-set would likely be reset by the recession with the home furnishings sector benefiting from a frugal, stay-put mentality. However, a recovery will take time.
“It is not inconceivable that when the economy recovers, homeowners will spend some part of their discretionary income on home improvement,” Blazer said. “Over the last decade, an improving economic outlook—and consumer confidence—often translated in homeowners ‘trading up’ to larger homes. I feel that similar to those who endured the Great Depression, consumer behavior of those who survived this economic downturn will be much more frugal, and therefore more likely to invest in home improvement rather than home replacement.”
Meanwhile, Blazer and Sellitti both expect more retail and vendor bankruptcies in the coming months. “There will be a gradual upswing in the market,” Sellitti said, “but the retail [landscape] will not be the same as it was. There are more Chapter 11s in store, I think.”
Blazer added that, “Unfortunately, I expect that a significant percentage of companies in private-equity portfolios, that were acquired with enormous leverage, will see defaults, bankruptcies and eventual liquidations. I think you’ll find that acutely in companies and private-equity firms with large exposure to real estate, including department stores and those with significant presence in shopping malls.”
Still, there will be players in the market who will reposition themselves to take advantage of slowed spending. Analysts see discounters such as Walmart continuing to gain share while better-operated dollar stores connect to consumers’ growing, thrifty habits.
For stock valuations, a return of consumer confidence and spending is critical. But this hinges on employment, real wages and the housing market.
On the manufacturing side, production and output is low. The Institute for Supply Management said recently that its manufacturing index has dropped to its lowest level in nearly three decades. In China, original-equipment manufacturers and other suppliers face “overcapacity,” which means there are too many factories and not enough demand for goods.
“Unfortunately, I do not see any macro catalysts that would drive retail and consumer stocks as an asset class to the multiples we’ve enjoyed over the last few years,” Blazer said. “I do believe there is a bottom in valuations in sight, as investors feel a bit more confident to shift some of their cash to equities, but that is a more broad of a thesis than just pertaining to retail stocks. But they too will benefit from fund inflows into equities. That being said, I do not expect a return to bull markets in 2009 as the macro outlook remains dismal, but I expect some of the volatility we’ve seen over the last few months to moderate if equity buyers begin to surface.”
