Housing Crisis Spreads to Retail Department Stores

When home builders’ stocks plunged in 2006, Wall Street was confident that the problems would not spill over into the larger economy. Exhibit A? Department store stocks rose steadily despite the housing woes.

Not this time around.

Housing stocks have fallen again - and this time department store stocks have marched down with them.

Since April, when investors voiced optimism that the housing slide had been contained, shares of the country’s biggest department store chains have fallen by about 30 percent.

With the sagging prices, investors are predicting that consumers will severely cut back on spending this holiday season.

The gloom is spread evenly across the industry: Shares of J.C. Penney are down by 33 percent, Macy’s by 28 percent, Kohl’s by 29 percent and Sears by 29 percent.

Robert Barbera, the chief economist of ITG, said that “the conventional wisdom of a year ago was that we would have a soft landing in housing.” But today, he said, “the stock market message is a hard landing for housing, with clear damage to consumer discretionary spending.”

In interviews, retail executives conceded that the slumping housing market is taking its toll. “We are in the window-covering business and you don’t cover windows in houses you don’t build,” said Myron Ullman, chief executive of J.C. Penney.

But they remain at least somewhat upbeat, complaining that investors are lumping them together when they should not.

“I believe in the fourth quarter people will continue to buy,” said Terry Lundgren, chief executive of Macy’s.

Over at Saks, the view is that the housing credit crunch is somebody else’s problem. “The underlying strength in the luxury market is there,” said Stephen Sadove, the chief executive. “That consumer is driven more by confidence in the stock market than in the housing market.”

Investors appear less certain that Saks will suffer. Its shares are off just 9 percent since April 20.

Still, other higher-priced department stores, which have been largely immune to housing market troubles over the past several years, have seen their stocks plunge this year. Nordstrom is down by almost a third.

Economic slowdowns traditionally hurt stores catering to a less affluent customer base, such as Wal-Mart and Target. But, in a reversal, those discount chains have not done as poorly as department stores.

“The problems have crept up the consumer food chain,” said Bill Dreher, an analyst at Deutsche Bank Securities.

So what is different about the housing market slump of 2007?

The accompanying charts show that in 2006, when housing troubles first became apparent, shares in home builders plunged, but department store shares held their value. The charts show the 26-week change in prices of Standard & Poor’s 500 home-building index and its department store index.

In 2006, when the home-building stocks plunged, the rest of the market, including department stores, kept rising, and the home builders recovered in late 2006.

But this year, with the credit crunch taking hold during the summer, housing stocks have fallen again, and so have department store stocks.

The overall stock market has held up fairly well. The S&P 500 set a record high this month, and since has lost only a small part of its value. That performance, however, may reflect better upon the health of America’s companies rather than its economy. A rising share of the profits are from foreign operations; domestic earnings remain weak for many companies.

Those who think that Americans are likely to reduce their consumption spending point to two related factors. First, in recent years the amount of home equity loans rose by as much as $180 billion a year, with much of the money going to consumption. New loans of that variety are much harder to get now, with banks having tightened credit standards and home values falling in many areas.

Second, the wealth effect of seeing that a house had risen in value helped to encourage spending, even if the money did not come directly from a mortgage loan. Now there may be a reverse wealth effect, as worries about home values lead to a reluctance to spend.

If consumers do cut back, it stands to reason that department stores such as Macy’s and Nordstrom might lose market share to lower-priced outlets. That may explain the smaller declines in shares of those chains.

Housing woes spill over to department stores
by Floyd Norris