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NEW YORK — Military victory in Iraq hasn’t yet brought shoppers into stores, but hopes are high that it will trigger a series of events that will spell the beginning of economic recovery.
Results at retail last week failed to deliver the late-Easter boost many had hoped for, reinforcing the sense that any improvements in sales results are likely to take place during the second half.
Smith Barney Citigroup analyst Deborah Weinswig indicated on Monday that broadline retailers won’t be getting much short-term solace from their stock prices either. The analyst downgraded the sector to “underweight” from “marketweight” Monday based on a tenuous risk-reward proposition, a lack of earnings drivers and the seasonality of retail stocks. Sales this month, she said, may come up short and pressure the broadline sector.
Yet, even with retail still lacking in velocity, several economists see signs of hope for later in the year. A pickup in the employment market could be spurred by increased capital expenditures and hiring now that the uncertainties of war have passed. That would put more dollars into the hands of consumers and, in turn, into retailers’ dieting cash registers.
Higher oil prices, stock market fluctuations, flagging confidence and a lack of job security have also kept consumers’ wallets sealed, but they could be poised to reverse course.
Moody’s Investors Service economist John Lonski, noted, “The disappointing pace of retail sales reminds us there was more weighing on consumer spending than Iraq-related uncertainties. Without the return of employment growth it will be nearly impossible to realize a faster rate of consumer spending growth.”
Nonfarm payroll employment declined by 108,000 in March, while the unemployment rate stood unchanged at 5.8 percent, according to the U.S. Department of Labor. Employment last month continued to decline in manufacturing, retail trade and transportation.
Lonski noted it’s possible that employment will decline for the third straight month in April, but pick up some in May.
April, with the benefit of a later Easter this year, was expected to carry the load of March’s holiday-deprived shortfall, but reports from major stores on Monday indicated it hasn’t been able to so far. Excuses also are harder to come by than they were last month as the impact of the war and the so-called “CNN effect” diminish.
After two weeks, Wal-Mart Stores Inc. said its U.S. comparable-store sales for April were tracking near the low end of its projections of a 5 to 7 percent rise, while Easter sales were only “OK.” Federated Department Stores Inc. continued to expect a 2 to 3 percent April comp decrease.
J.C. Penney Co. Inc., which reported on the third week of its fiscal month, said sales in its department stores improved over the weekend, though April continued to trend below the planned low-single-digit comp drop.
Moody’s Lonski noted that, since many businesses limited capital spending while the war played itself out, retailers should watch to see if companies start hitting their checkbooks again, which could spur employment growth. The stock market, he noted, has been stabilizing, a trend that, if it continued, would also embolden corporate spending.
Also, consumer confidence, which is still down against the previous 12 months, picked up in early April, he said.
“We’re going to find that certain segments of retailing that are going to depend on air travel are probably going to suffer,” noted Lonski, since Americans still feel nervous about flying with the threat of terrorist strikes remaining.
“Easter was disappointing,” observed retail consultant Walter Loeb. “The whole spring season was disappointing. The stock market continues to upset people and reduce their spending; unemployment still looms in people’s minds.”
Loeb, however, is looking for economic indicators to improve as gasoline prices drop and capital spending and hiring pick up later on: “There will be more trust in the future and the need to get out — people will want to get out and shop more.”
William Blair & Co. analyst Ellen Schlossberg, noted, “At the end of the day, when we start seeing sales come out for April, we’ll find that aside from one key driver, which is weather, those retailers that post the strongest numbers will be those that have the most compelling merchandise, the most differentiated merchandise or those that are doing something dramatically different from last year that would impact year-over-year comps.”
Gap Inc. is one company, she said, that could come out on top on the April sales register since it’s up against easier comparisons and has improved its merchandise at both its Gap and Old Navy divisions.
In the broadline sector, Citigroup’s Weinswig, in a research note, said companies are still too bullish while factoring in a recovery in the second half of this year. “Although ‘easy’ year-over-year sales comparisons exist for the broadline retailers in the back half of 2003, an ‘easy comp’ does not necessarily translate into same-store sales strength,” she said.
Weinswig also noted broadline retail stocks have thus far in 2003 outperformed the market, though the uptick was experienced primarily among high-quality names with higher market capitalizations, such as Wal-Mart, Target Corp. and Kohl’s Corp.
On the flip side, department stores continue to face longer-term obstacles and continue to be in a state of secular decline as the discounters pick up apparel market share.
Price deflation continues to be one of the department stores’ highest hurdles. “Deflation will have the greatest negative impact on the department stores, as the discounters’ superior sourcing capabilities result in the sourcing of higher-quality product at lower prices and continue to increase competition for the moderate customer,” said Weinswig.
The Consumer Price Index for apparel has trended down for several years and declined 3.5 percent year-over-year as of March, she noted. “We do not expect apparel deflation to abate, especially as China’s accession to the World Trade Organization approaches in 2005 and China’s share of U.S. apparel imports continues to expand,” noted the analyst.