NEW YORK — So far, it’s better than good.
Although the WWD Composite Stock Index was down at the midyear mark, it made a significant recovery as the bulls charged into the retail sector in the second quarter. As a result, the index showed a loss of just 2.1 percent by the end of the first half.
Even as the index was outpaced by the 7.5 percent increase in the broader, S&P 500, individual company stock performances within the WWD index showed impressive gains as investors took profits and viewed some stocks as having greater upward potential.
The top performers during the first half included Wet Seal Inc., which gained 232.2 percent, Burlington Coat Factory Warehouse, which rose 94.8 percent, and Retail Ventures, which climbed 90.8 percent.
Of the 88 companies that comprise the WWD Composite Stock Index, 60 had gains in the first half. And 90 percent of those gainers showed increases above 5 percent, while 60 percent had gains above 20 percent.
Still, share prices faced some challenges during the first half. Same-store sales, a key metric closely followed by Wall Street, were dragged down by more difficult year-over-year comparisons as well as lousy weather, analysts and retailers said.
On the vendor side, recent consolidation in the retail sector sent investors fleeing from shares of companies thought to be hurt by the mergers of Federated Department Stores and May Department Stores as well as Sears and Kmart.
Rising fuel prices also weighed heavily on investment decisions. As the price of crude oil reached and surpassed $55 a barrel, investors withdrew from the retail and consumer sectors.
But they came back, lured into red-hot companies such as True Religion Apparel, Chico’s FAS and Abercrombie & Fitch. Each of these stocks jumped, moving 71, 53.2, and 48.4 percent, respectively.
Wall Street also approved of the progress made at Revlon Inc., which watched its shares rise 29.5 percent by the end of the second half.
The other notable valuation surges were in the high-end sector. Shares of Nordstrom, Neiman Marcus and Coach rose 46.5, 38.1 and 21.9 percent, respectively.
Regarding the back half of 2005, the outlook is bullish. A recent report from equity analysts at A.G. Edwards said “in light of favorable outlook for same-store sales growth relative to industrial production growth, we’re upgrading the [stocks tracked by the analysts] to ‘overweight’ [from ‘even-weight’].”
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The analysts said they expect to see a 12 percent growth in retailers’ earnings, which is expected to outrun an 8 percent earnings growth rate for the S&P 500.
“Earnings growth deceleration [last year, earnings advanced 18 percent for retailers and 21 percent for the S&P 500] has by now, we believe, been largely discounted by investors,” the analysts said in their report. “That earnings growth deceleration had, until now, given us pause on the group.”
The analysts explained that this growth in relative retail profits is in contrast to “decelerating industrial production growth, which we use as a proxy for the nonconsumer side of the economy. Such deceleration is typical for the late stage of an economic cycle, as we are arguably in right now.”
Top picks from the analysts include J.C. Penney, Nordstrom, Best Buy and A&F. But there are some bears out there.
In a report from Deloitte Research, a rising tax burden along with softening home prices will pressure consumer spending.
“The improvement in tax revenues points to a stronger economy, but puts a lid on consumer spending growth,” said Carl Steidtmann, chief economist of Deloitte Research.
“Likewise, the dramatic slowdown in home-price appreciation in recent months should reduce concern over a housing bubble, but weakens one of the most important drivers of consumer spending,” said Steidtmann.
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