ANALYSTS: YULE MAY FLOP

NEW YORK--It could be a dreary Christmas for discounters.
That's the word from Wall Street analysts who say discounters' profits have been drained by weak apparel sales, and that these retailers have lost some of the edge they've maintained over the competition in the past.
According to the analysts, apparel sales at discounters continue to be sluggish due to:
Increased competition from department stores, which are lowering prices; from middle-market chains such as Sears Roebuck & Co. and J.C. Penney Co., which continue to show strength, and from off-pricers, which are promoting heavily.
Shoppers still showing more of an appetite for durable goods.
Unseasonably warm weather throughout the country that has stunted sales of cold-weather apparel this fall.
"The biggest challenge the discount industry faces is how to improve the apparel business," said Wayne Hood, at Prudential Securities, noting that apparel carries high margins and a bigger impact on the bottom line.
Discounters that place less emphasis on apparel, such as Wal-Mart Stores Inc. and Dollar General Inc., are expected to continue to perform strongly this Christmas season. Target, a division of Dayton Hudson Corp., and Caldor Corp. are expected to do well on strength in hard lines, and better than average performances in apparel.
Discounters with a higher mix in apparel--Bradlees Inc., Venture Stores Inc., Kmart Corp., Family Dollar Inc., Hills Stores Inc. and Ames Department Stores Inc.--would probably continue to suffer disappointing sales, analysts said.
Janet Mangano, at Burnham Securities, said a burst of cold weather could ignite apparel sales enough to save Christmas. But a more likely scenario is discounters using markdowns to clear winter goods.
"Consumers seem to be shopping at the time of need rather than close to the time of need," she said.
George Strachan, at Goldman Sachs, said he saw no sign of improvement in apparel, but said most discounters should show earnings gains in the fourth quarter, mainly because extensive markdowns last Christmas crushed margins.
"Inventories this year are going to be managed a little more carefully," he said. "We shouldn't see as much clearance activity as we did a year ago, and that should help everybody."
Thomas H. Tashjian, at First Manhattan, said department stores have lowered prices by cutting costs and speeding inventory turns, leaving discount stores with less of an edge on price.
He said he expected regional discounters such as Bradlees and Venture Stores to have a "fair but not great holiday season in apparel."
"I think there's an awful lot of competition and they're behind the eight ball," he said.
Jack D. Seibald, at Morgan Stanley, said he believed discounters were planning more conservatively this year, but even though pricing pressures should ease, it would be durables that drove sales.
"At this point, I don't know how you can justify an upswing in apparel," Seibald said. "One week or one month does not make a trend. The trend we've seen for some time is underperformance in apparel."
Discounters have seen their strongest sales in consumables, seasonal merchandise, toys, housewares, small appliances and furniture, sporting goods, automotive products, horticulture, home furnishings and jewelry. In soft lines, children's apparel and commodities such as underwear and hosiery have shown some strength.
The standout players among discounters have been Wal-Mart, Target and Dollar General. Target continues to be the strongest chain of Dayton Hudson Corp., and analysts roundly agree that the upscale discounter is the best merchandiser of apparel among the discount players.
"I think that Target is sending a clear fashion message out to the marketplace and getting this message across a lot better than other retailers are doing in the industry," Hood of Prudential Securities said. "I think they're executing at the store level better than they ever have been in the company's history."
Strachan of Goldman Sachs said Target had benefited over the last couple of years from an increased emphasis on its everyday-low-pricing strategy. Overall, Dayton Hudson is expected to show a 6 to 8 percent gain in profits in the fourth quarter.
Wal-Mart has led the discount industry this year, with year-to-date sales ahead 10.4 percent, though the chain has generally had soft apparel sales, particularly this fall.
Hood said Wal-Mart had "dramatically increased" its in-stock position in the last few years, abetting sales gains.
Wal-Mart's earnings are expected to rise about 27 percent in the fourth quarter, helped by strong hard lines sales at the core discount stores, improvement at Sam's Club and a possible profit from its Woolco units in Canada.
Analysts expect Wal-Mart to work to build its apparel business. Soft lines represent only 27 percent of sales versus a 38 percent average for the discount industry.
"I don't think you will see them move as fashion-forward as Target across the chain, but they clearly would like to do a better job in apparel," Hood said.
Tashjian said Wal-Mart was looking to add "another layer of apparel" with slightly higher quality and prices, but was not looking for results until Christmas 1996. Wal-Mart, as reported, is trying to add more national brands to its apparel selection.
Dollar General's earnings are expected to rise about 32 percent in the fourth quarter, helped by strong sales of consumables and seasonal merchandise, a successful import program and sharp pricing. Soft lines represent about 35 percent of Dollar General's sales.
Caldor's earnings are expected to climb about 14 percent. Strachan said Caldor had the best apparel sales among regional chains, although hard goods had slightly outpaced apparel.
He said Caldor should benefit from better inventory planning, a quicker response to pricing trends, its lean cost structure, good execution in stores and a strong performance by new stores.
Kmart is expected to earn 67 cents against a depressed 53 cents a year earlier. Tashjian noted that Kmart planned to spend a lot of money on advertising and had increased the number of pages in its circular, but customers continued to selectively buy advertised sale merchandise and lower-margin commodity items.
Bradlees and Venture are both expected to show modest profit gains, held back by weak apparel sales.
Strachan suspects part of Bradlee's weaker sales momentum reflects poor execution in the stores and management turmoil.

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