Concerns About Rising Cotton Costs Weighing On Retailer Stocks

Fears that retailers may have a tougher time than thought with rising cotton prices are reverberating throughout the group and causing a mass sell-off Friday in apparel stocks.

Gap Inc. (GPS), the largest U.S. apparel-specific retailer by sales, spurred the alarm late Thursday by saying raw-material costs are rising faster than expected and that the company will be unable to fully counter them with price increases.

The comments are apparently felt to be more than Gap-specific, even though the retailer has its own problems.

Until now, as retailers posted first quarter earnings, there hasn't been much drama around cotton costs. Many retailers have acknowledged that cotton prices would be rising, but that they expected to be able to pass along a good share of the higher costs to customers.

If this isn't the case, it becomes more complicated for retailers because their customers are already struggling with rising gas and food prices as well as still-high unemployment.

Gap was the largest decliner in the Standard & Poor's 500 Index Friday, recently down 17.3% to $19.26. Teen retailer Aeropostale Inc. (ARO), which gave an extremely weak second-quarter view late Thursday, also saw a large loss, with shares off 18% to $17.52.

Other retailers selling off Friday included teen retailers American Eagle Outfitters Inc. (AEO), down 7.4% to $13.54, and Abercrombie & Fitch Co. (ANF), off 3.4% at $73. Meanwhile, shares of department stores also declined, with J.C. Penney Co. (JCP) sliding 4.2% to $36.38 and Macy's Inc. (M) off 2.7% to $28.70.

Overall, retailers' stocks had been faring well until recently, outpacing the broader market. The S&P 500 Retail Index had risen nearly 12% over two months through the middle of May, doubling the gain in the main S&P 500 during that period. Friday, though, the retail index was down 1.5%, while the S&P 500 was off 0.7%.

-By Caitlin Nish, Dow Jones Newswires; 212-416-2076; caitlin.nish@dowjones.com

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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