Wall Street Pain Expected to Spread to Luxury Retailers

With New York City at the epicenter of America’s woes, troubles on Wall Street may spread uptown to Fifth and Madison Avenues as the important holiday season nears.

Saks Inc. (SKS) and Tiffany & Co. (TIF) may be among the luxury retailers hit worst given that their flagship stores on Fifth Ave. account for 20% and 10% of total sales, respectively. But others linked to high-end spending such as Coach Inc. (COH), Nordstrom Inc. (JWN) and Polo Ralph Lauren Corp. (RL) could also be shrunk in the dryer.

Even Saks chairman and CEO, Steve Sadove, has pointed out that equity markets are the most important leading indicator of spending at his stores, according to Goldman Sachs analyst Adrianne Shapira.

While Saks and Tiffany’s flagship stores have outperformed the companies’ already weakened store base as a result of tourism, the dampened worldwide wealth effect, a stronger U.S. dollar and the end of the holiday period may only compound the negative impact from slowing domestic demand going forward, she said in a research note.

Ms. Shapira cut her 2008 earnings per share [EPS] estimate for Saks by $0.03 to $0.16 as a result of higher-than-expected inventories heading into the second half of the year. Her forecasts were already below consensus and she has a $10 price target on the stock. Ms. Shapira also considers Saks the most vulnerable retailer to the ongoing financial sector disruption as a result of its concentration in the New York area.

As for Tiffany, while its global diversification and lack of markdown or inventory risk may mitigate some EPS pressure, the ongoing banking crisis is expected to have a ripple effect beyond its flagship location. Ms. Shapira noted that it has another eight stores in the New York region and its U.K. business, with a Bond Street store in London that could be hit by weak markets there, accounts for 4% of sales.

The analyst cut her third quarter EPS estimate by a penny to $0.31 and has a $48 price target on Tiffany shares.

Comments

[User 263610:]

TIF @ 48? yeah right.

2008 Sep 30 12:57 PM

[Chapter 11:]

Oh, The pain!
The market keeps dropping.
Make it stop!
Thanks a lot, to all of you who took out loans you could not afford and the banks that approved them.
You have created this death spiral !

2008 Oct 05 06:58 PM