Retail Roars in March, Especially Luxe

NEW YORK — Easier year-over-year comparisons along with ongoing demand for luxury goods allowed retailers to deliver robust same-store sales for March.

As a result, comps at high-end department store chains shattered analysts’ expectations. Moderate department stores weren’t left out of the mix, either, as lower inventories and full-priced selling had most besting expectations.

In turn, the Goldman Sachs Retail Comparable-Store Sales Index showed a 6.8 percent gain in March, which compares with a 7 percent increase in February.

Of the retailers tracked by WWD, the specialty store segment showed an average comp sales gain of 6.2 percent, down from February’s 10.4 increase, while department stores and mass merchants were neck and neck with gains of 8 percent and 8.2 percent, respectively. In February, department stores averaged a 7.9 percent gain while mass merchants posted a 6.3 percent increase.

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Janet Hoffman, a partner with Accenture’s retail practice, said this is an exciting time at retail. “We absolutely had some breakthrough results.”

In particular, Hoffman said she was impressed with the high-end results, noting the strong increases at Neiman Marcus Group, which gained 25.7 percent, and Nordstrom’s, which gained 15.9 percent. “Quite frankly, I have been tracking this professionally for five years and I haven’t seen a 25 percent comp increase,” Hoffman said.

Hoffman said she believes the real contributor to the success at luxury is the customer focus and scientific approach those companies have toward their business operations. “[Those retailers] are very rigorous in their customer-centric approach and have been over the past year to 18 months,” Hoffman said.

Asked if she thought the increased hostilities in Iraq would deter luxury customers from their spending habits, Hoffman said she didn’t think the recent events would have a significant impact, adding that she expects to see sales over the next several months to continue to be strong.

Hoffman also noted the sharp sales gains at department stores in March. She said March results were a change for the positive for the sector, adding that retailers such as Federated Department Stores, May Department Stores and J.C. Penney showed good growth. “Was March a lucky stick? Or are department stores beginning to get control of the consumer and their products?” Hoffman wondered.

In a research report, Smith Barney retail analyst Deborah Weinswig described department stores as “the stars” of the retail group for the month. Weinswig noted that lower inventories made consumers more willing to pay full price for certain items. “We also believe that the resurgence of career apparel [for both men and women] provided a lift to the average transaction size,” continued Weinswig.

The lone disappointment in the department store category was Kohl’s, which posted a small decline after management had projected an increase of between 2 and 4 percent. A.G. Edwards analyst Robert Buchanan said in a research report that the results were “an anemic showing and a bad omen.” Edwards downgraded the stock to “hold.” Buchanan’s report finished questioning “management’s incessant optimism with regard to near-term results.”

For the mass retailers, results were once again significantly improved, with Wal-Mart and Target posting results at the high-end of, or better than, management’s guidance. However, apparel sales contributed little to higher comps. Wal-Mart counted food, electronics and paper goods among its strongest sellers while at Target, entertainment, stationery, shoes and toys led the way.

Overall, Hoffman and other analysts said the improved economy is driving consumers to spend, noting the recent decline in unemployment and the continued strength in home sales are some telltale signs of the better conditions.

As expected, spring fashion at specialty blossomed in March.

“Everyone did better, everyone just about raised guidance,” Dorothy Lakner, a specialty retail analyst with CIBC World Markets, said, noting the results look as strong as they were in February, which is especially pleasing since March is a more important month in terms of volume.

Helping to drive sales at specialty is the differentiated fashion in stores as well as color, especially pinks, yellows and lime greens.

“All of a sudden people want it [color] and are willing to spend,” Lakner said.

In addition to the strong color trends, consumers are buying into skirts and dresses, which are a new spring trend this year, compared with past spring flings with capri and cropped pants.

Overall, The Gap and Pacific Sunwear continued to deliver solid results on top of strong results in March of 2003.

At Gap Inc., Lakner described Old Navy’s performance as “unbelievable,” as the more value-oriented division of Gap Inc. delivered an 11 percent comp gain this March, on top of a 17 percent comp last March. Lakner said Banana Republic was a standout. “They are just ahead with so much color and fashion.”

Pacific Sunwear told Wall Street that Carl W. Womack, senior vice president and chief financial officer, would retire later this year. Womack “plans to remain in his current role with the company until his successor has been selected and retained in order to ensure a smooth transition,” the firm said in a statement.

Kimberly Greenberger, a specialty retailer analyst with Lehman Brothers, said the numbers were better than both estimates and consensus, pretty much across the board. However, she noted there was a slight deceleration in sales in March from February, partly due to the blizzard impact in February 2003. According to her index of 37 specialty stores, sales grew 7.2 percent in March, down from 9.3 percent in February.

“The overall numbers were fantastic, with upside on both the sales line and earnings, helped by a terrific margin performance,” Greenberger said. “Consumers clearly have more cash to spend with the tax cuts and refunds they are getting this spring, fueling consumer optimism.”

Also helping retailers to report improved year-over-year results in March, especially during week three of the month, was the start of the Iraqi war on March 19 when consumers spent most of their time in front of the television and not at the mall.

Greenberger said Hot Topic and Abercrombie & Fitch came in softer than expected. She said Hot Topic’s numbers were driven by softness in its women’s division, reflecting weak results in women’s bottoms and tanks. She noted A&F’s numbers reflected the firm’s lack of advertising for its spring clearance event, which was also smaller than last year’s.

The teen scene remains strong, Greenberger said, as more teens are finding more jobs available this year compared to last year, putting more money in their wallets and putting them in a better position to spend on the new fashion trends like skirts, feminine clothing and anything with color.

J.P. Morgan analyst Brian J. Tunick offered a glass-half-empty view of the month’s results in his March comparable-store sales preview. “Looking at the upcoming comparisons, we wonder whether these will be the best comps that we see all year, and if investors begin to reduce some of their retail exposure,” said Tunick.

On top of tougher comparison going forward, said Tunick, retailers and their customers will be faced with a tougher macroeconomic environment in the second half of the year. “The threat of rising interest rates after a very strong jobs report and the lack of additional tax cuts could put a damper on sentiment,” said Tunick.