Gap, Charming Shoppes show mixed views on retail results; Pharma Resources gains 2.25

By Ronda Fears

Nashville, Sept. 29 - Retailers don't report earnings for another month but convertible players are already forming views about some of the names in that sector, traders said. Gap Inc. moved lower while Charming Shoppes Inc. gained on more confidence in discount names.

"The signs look more positive for discount-type retailers and specialty stores," said one convert dealer.

"Gap fits as a specialty store and lots of people like the name, but the convert is just too rich," the trader said, adding that there has been a consistent flow in Charming Shoppes for the past week or two.

Charming Shoppes' 4.75% convertible due 2012 gained 1.5 points to 92.625 bid, 93.625 offered with the stock up 20c, or 3.51%, to $5.90

Gap's 5.75% due 2009 lost 1.75 points to 127 bid, 127.5 offered as the stock closed off 36c, or 2.01%, to $17.51.

Virtually all retailers' fiscal years end Jan. 31, so they are not among the fray of earnings reports that will begin soon after the third quarter ends this week. Gap and Charming Shoppes both are scheduled to report earnings Nov. 3.

In any event, traders said most of the positioning that is related to upcoming earnings was made last week or earlier. Many onlookers, by the way, expect that there will be more earnings misses than upside surprises.

Several drug and biotech issues continue to lose ground, mostly on valuation concerns as the sector in general has richened considerably, traders said. Amgen Inc. was one loser mentioned from that group Monday.

Pharmaceutical Resources Inc., however, continued to climb. The company already announced that the greenshoe on its new deal has been exercised, bringing the total amount to $200 million.

The new 2.875%, up 35% issue added another 2.25 points to 107.25 bid, 107.75 offered. The stock soared $3.08, or 4.81%, to $67.15.

Without a strong new issue market, some players expect the market to richen up a bit but there are skeptics as well, particularly when it comes to the credit side of the convertible story.

"I think spreads will hold or maybe even get a little better [tighter]," said the head convertible trader at one of the big shops.

"We're still seeing some pretty good moves, like 25 basis points or so, and that's decent in this market."

A buyside trader, however, said faith in the credit markets is shaken by the extreme volatility going on and added that tolerance for risk is very low right now.

"I just don't see anybody making bold statements in the market right now," the buyside trader said.

"There is so much volatility in the credit markets that it really shakes your confidence. What I see is maybe people taking a step back, looking to get more defensive, if anything.

"We're seeing more live markets for zeros, investment grade issues, stuff like that. And that tells me that risk tolerance is pretty low."

A nice slate of new issues would help alleviate anxiety about the market's performance, or at least divert attention, but lots of sellside analysts would like to see new issues remain slow so the market could find more rational valuations.

Now that it's four weeks after Labor Day and still new deals have not picked up sharply, expectations for issuance also have waned considerably.

"I expect a moderate uptick in new issues for fourth quarter," said one sellside desk analyst.

"But I don't see a catalyst for really strong new issuance."

Trading volume is expected to rise if new issues remain slow, but Monday was a typical Monday with just modest flow. There was plenty of business, dealers said, but nothing spectacular or any real stand-out situations.

Several other retail names were active in addition to Gap and Charming Shoppes. Kohl's Corp. and Costco Wholesale Corp. - both discount chains - were each slightly higher.

CKE Restaurants Inc. was active but it was sideways trading with the new 4% convert ending virtually unchanged at 103.25 bid, 103.75 offered. The stock closed off 6c, or 0.91%, to $6.53.

Flextronics International Ltd. also continued to bounce back from the slam it took in the wake of the nearly $1 billion jury award last week that stemmed from a $2 million contract dispute with Beckman Coulter Inc. The 1% convertible due 2010 was seen up another 4 points Monday and the stock added back some 6%.

MeriStar Hospitality Corp. Inc. shrugged off a Standard & Poor's downgrade to its senior debt to CCC+ and the 9.5% convert was quoted at 115.25 bid, 116.25 offered while the stock rose 15c, or 2.16%, to $7.10.

S&P said the downgrade to MeriStar senior paper reflects a more disadvantageous position of the unsecured debtholders given the transfer of four hotels to an unrestricted subsidiary as security for a new $101 million CMBS facility.

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