MODERATE GROWTH SEEN FOR RETAILERS

Byline: Melanie Kletter

NEW YORK — Will retailers be able to match this year’s performance in 2000? Probably not, say Wall Street analysts. They’re predicting retail sales will soften after the millennium partying is over and the economy begins to show signs of a slowdown.
“We see a picture of moderating growth heading into 2000,” said John Morris, Gerard Klauer Mattison. “Retailers are also going to be paddling upstream against potential rising freight and shipping costs. In terms of the larger picture, it is no longer a rising tide lifting all boats.”
“The economy continues to grow, but the rate of gain will probably slow somewhat,” added Jeffrey Edelman, at PaineWebber.
However, Dorothy Lakner, at CIBC World Markets, stressed that consumer fundamentals were still in place and that a retail slowdown might not come anytime in the near future.
“Given the incredible strength in consumer confidence and judging by mall traffic, it seems like consumers are really out to spend,” Lakner observed.
The more modest growth scenario could prove to be a boon to discounters, off-pricers and value-priced department stores, such as Kohl’s Corp., as consumers hunt aggressively for lower prices. Still, specialty stores, which have had a stellar 1999, with a few exceptions, are expected to turn in another strong year.
Federated Department Stores and May Department Stores are distancing themselves from the pack of department store chains as clear-cut winners with expected strong earnings and sales gains, according to analysts.
Predicting the fate of retail is difficult, considering most chains showed vigorous sales and earnings gains through the third quarter and have shown considerable strength throughout 1999 due to high consumer confidence and aging baby boomers, who are spending with gusto. Profits for a group of 30 major chains grew an average 39.6 percent. Results were skewed by Sears, which had a loss after one-time charges in the year-ago period. Excluding Sears, earnings still gained 29.3 percent. Sales for the group jumped 12.3 percent.
There were robust, double-digit profit gains at many companies, including Wal-Mart, Dayton Hudson, Federated, Neiman Marcus Group, Gap, Abercrombie & Fitch and Ann Taylor.
However, apparel sales were noticeably sluggish for many, particularly for department store chains, in the third quarter, due to warmer weather and more interest in other categories. The apparel funk has continued in the fourth quarter. In addition, same-store sales — a leading index of a retailer’s health — began to moderate in the second week of September and ran on or below plan for many chains through October and into November, although sales ended on a positive note following the Thanksgiving holiday, according to LJR Redbook. The burst in the fourth week of the month enabled many chains to improve monthly sales, but sales of cold-weather apparel did not accelerate and many retailers failed to meet plans, analysts said.
Sales are being driven by accessories, home goods, electronics, gifts and millennium-related goods ranging from tabletop items to formal eveningwear.
Many retailers have planned sales and inventories much leaner heading into the fourth quarter, analysts said, to reduce the risk of margin-eroding markdowns and intensified promoting.
Discounters should fare the best, particularly Wal-Mart, Target and Kmart, since they court value shoppers and provide the most resistance to an economic slowdown due to the breadth of their offerings and sharp prices.
Jeff Feiner, at Lehman Bros., expects Federated to make $1.95 a share in the fourth quarter against $1.88 last year, and $3.53 for the year against $3.06. For 2000, he predicts earnings of $3.87 a share.
Feiner and other analysts said the new Federated Direct division, comprising of Fingerhut, Macy’s By Mail and macys.com, is an opportunity to improve sales and earnings.
“Macy’s and Bloomingdale’s are among the very few nationally recognized names that are not currently being fully leveraged,” Feiner noted. “The Fingerhut is a significant initiative through which Federated will begin to maximize the value in Macy’s and Bloomingdale’s franchises both domestically and internationally via nonstore retailing opportunities.”
Other chains conduct e-commerce — including Nordstrom, Wal-Mart, Dayton Hudson and Sears, Roebuck — although sales through this channel remain incremental for most retailers.
Among other large chains, Feiner foresees Kohl’s Corp. earnings 69 cents a share for the fourth quarter against 58 cents last year. For the year, Kohl’s should net $1.52 against $1.18.
Feiner said his favorable outlook for Kohl’s was based on the company’s accelerated expansion into the Northeast through the recent acquisition of 33 former Caldor stores in the New York metropolitan region, and a feeling that Kohl’s will achieve earnings and sales growth of 20 percent.
May is expected to earn $1.44 against $1.31 for the fourth quarter, and $2.59 against $2.30 for the year, according to Feiner. Growth is expected to come from an aggressive five-year, $3.6 billion expansion plan to open nearly 100 stores, remodel and expand 100 existing stores, modernize distribution centers and improve systems. May has met or exceeded Wall Street earnings estimates for the past 16 quarters, but showed signs of slippage in the third quarter. Confidence is still strong on Wall Street, however.
Feiner expects Dillard’s to net $1.28, against $1.12 in the quarter and $2.58 against $2.56 for the year.
Gains should be more moderate at Sears and Penney’s. Both have struggled to meet sales plans all year. Sears should net $1.48 in the fourth quarter, against $1.47 last year, and $3.40 for the year, against $3.32, according to Thomas Tashjian, analyst at Banc of America Securities. In 2000, earnings should be $3.65. J.C. Penney is likely to earn 92 cents a share, from 72 cents, and $2.15 for the year against $2.14.
Specialty stores are on solid footing for the most part and should continue to see good gains in 2000, analysts said. They’ve outperformed department stores in 1999, with particularly impressive results from Ann Taylor, Talbots, American Eagle Outfitters and Abercrombie & Fitch.
CIBC’s Lakner said Talbots was particularly healthy; the chain has had good, full-price selling all fall and keeps inventories lean. The Limited’s apparel turnaround efforts have taken root, with robust same-store sales gains for much of 1999. The Limited is expected to earn $1.23 against $1.02 in the fourth quarter, according to analyst Marcia Aaron, Deutsche Banc.Alex Brown. Talbots should see earnings rise to 38 cents from 26 cents in the fourth quarter and $1.74 against $1.15 for the year.
On the other hand, Gap Stores division has slowed, and the jury is out on whether the division will recapture momentum. Analysts still expect good growth from the Gap in the fourth quarter and for the year, with other divisions performing well.
“While we believe Gap needs to look younger during the back-to-school selling season, the company has gone too far this year,” noted Aaron. “Its merchandising and marketing efforts are turning away older consumers.”
Nonetheless, Gap’s fourth-quarter profits should hit 45 cents against 35 cents last year, and full-year profits are expected to rise to $1.24 from 91 cents, according to Aaron. She cited gains from store openings and good results from Banana Republic and Old Navy. In 2000, Gap should see profits of $1.52.
In the discount sector, Wal-Mart should net 42 cents a share against 35 cents for the quarter and $1.27 against 99 cents for the year, according to Feiner. Kmart is expected to generate profits of 74 cents against 65 cents and $1.23 against $1.03.
Saks Inc. should see profits of $1.13 against 97 cents in the fourth quarter and $1.80 against $1.63, as the chain continues to integrate and benefit from its varied holdings. In 2000, Saks should earn $2.15. Neiman Marcus, which has invested recently to improve systems and distribution facilities, is expected to earn 70 cents in its second quarter against 62 cents last year and $2.41 against $1.90, according to Feiner.

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