WALL ST. ANALYSTS: FAIR WEATHER AHEAD FOR RETAIL
Byline: Catherine Curan
NEW YORK — The retailing climate right now is as good as it gets.
That’s the assessment of Wall Street analysts, who said key macro-economic indicators point to a healthy selling season for the rest of the year.
Prudential Securities’ John Morris said the four major factors he examines — unemployment, real disposable income, housing turnover and inflation — are all favorable. Borrowing a phrase from Federal Reserve chairman Alan Greenspan, Morris said, “It’s a ‘virtuous cycle’ of positive momentum for retail.”
Other analysts agreed the backdrop is rosy, and apparel retailers with the right merchandise who convey a clear message to consumers should build on the strong first quarter and gain momentum as the year unfolds.
“All signs point to a good retail year,” said Joseph Ronning, Brown Bros. Harriman, citing high consumer confidence and April and May sales results that beat expectations. “I don’t want to say two months make a trend,” he said, “but it’s mighty encouraging for the balance of the year.”
In a WWD survey of 30 apparel retailers, first-quarter profits were up 26.1 percent, and stellar performances were turned in across the spectrum, from Wal-Mart to Gap Inc., Kohl’s Corp. and Stage Stores. Sales were up 6.3 percent. (See chart, this page.)
“There has been greater interest in fashion in the last few months, particularly when the weather was conducive to shopping,” said Walter Loeb of Loeb Associates. He expects a good fashion season this fall, noting retailers’ inventory levels are in good shape because spring sales took off early in the season.
Ronning said he expects the specialty and discount chains to outperform, department stores, but noted department stores have had strong sales of home merchandise, from towels to furniture, and some stores have told him they’ve seen a pickup in moderate apparel.
“In the past, better had been the best-performing part of women’s,” said Ronning, adding, “Maybe the moderate shopper has come back to department stores.” He said bridge appears to be picking up as well.
Ronning expects Federated Department Stores to earn $3 a share this year, against $2.58, while May Department Stores should earn $3.45 against $3.11, and Dayton Hudson, $1.93 against $1.64.
Loeb said department stores have done a great job cutting back on promotional sales and he expects that trend to continue. He noted they can do more full-price sales of fashion merchandise by “being right and being early. The more you promote, the more you’re digging your own grave.”
He said Federated is making progress in this area, particularly at Bloomingdale’s. Loeb added he expects a “change in momentum at May Co. with the new management,” including Eugene Kahn, who became chief executive and president after David C. Farrell’s retirement last month. “May continues to be promotional, but there’s an overlay of regular-priced fashion,” said Loeb. He expects Federated and May to do well this year.
As for J.C. Penney and Sears, Loeb said the “Softer Side of Sears” campaign was the blueprint for the current spate of image campaigns by retailers. “It still drives home the fact that Sears is a different company than it once was,” and Loeb believes the campaign continues to help Sears draw traffic from other stores, including rival Penney’s.
However, he said he expects Penney’s to benefit from the leadership of its new management, including John Cody, president and chief operating officer of J.C. Penney stores, merchandising, marketing and catalog.
Ronning expects Sears to earn $3.45 a share, against $3.27, hampered by lower earnings from its credit card operation.
Specialty stores are likely to continue posting strong results. Tom Filandro of Gerard Klauer Mattison said the current fashion cycle continues to be driven by strength in bottoms, such as khakis and cargo pants. He said the casual youth market, made up of teens and twentysomethings, continues to focus on brands.
“The brands that are winning in bottoms are those that will win in this fashion cycle, and it shows no signs of letting up,” said Filandro.
He likes the outlook for Gap, including the Gap stores and Old Navy, American Eagle Outfitters, Abercrombie & Fitch and the Limited’s Express chain. “The winners in the marketplace will continue to be those who take the aggressive, gorilla approach to marketing their brands,” Filandro said, adding that when a dominant chain like the Gap steps up marketing efforts, it drives overall traffic to the malls.
Filandro estimates Gap will earn $1.77 a share for the year against $1.30; Abercrombie, $1.44 against 94 cents, and American Eagle, $1.49 against 82 cents.
Prudential’s Morris said the Limited’s women’s divisions have begun to show signs of improvement and have significant potential. “We believe the worst is over for the women’s division,” he said, now that underperforming stores have been closed and new merchandise and design teams are in place. He expects $1.50 a share for the year, against $1.23.
Jennifer Black, analyst at Black & Co., believes Ann Taylor has a better selection of core merchandise and creative advertising that should fuel sales growth. She sees potential for a dramatic turnaround in the second half, and expects $1.11 a share for the year against 46 cents.
Another turnaround is expected at Talbots; projections are at around 80 cents against a depressed 18 cents.
Prudential’s Morris said he likes Neiman Marcus’s fashion magalog, The Book, and new magalog, Entree, as well as its Galleries of Neiman Marcus spinoff featuring gifts and fine jewelry store, slated to make its debut this fall. Morris expects Neiman’s to earn $2.11 a share for the fiscal year ending in July, and $2.41 for the following year, against $2.01. Another top upscale chain, Saks Holdings, is forecast to earn $1.10 a share against 87 cents.
Michael Exstein, analyst at Credit Suisse First Boston Corp., said Nordstrom has a strong franchise and good potential to improve its margins, and should earn $2.80 a share for the year against $2.40.
Lehman Bros.’ analyst Jeffrey Feiner is looking for strong results from Wal-Mart and Kmart.
In a recent research note, Feiner said he recently raised his full-year estimate for Wal-Mart by 3 cents to $1.83 a share against $1.56, after the stronger-than-expected first quarter.
He looks for Wal-Mart to benefit from strong momentum at its supercenters and a larger percentage of apparel in the merchandise mix, which helps lift margins.
Feiner said Kmart is fully focused on its core customer, and more rollouts of the Big Kmart format — 1,181 stores are to be converted by yearend — should boost same-store sales. He expects Kmart to earn 98 cents a share for the year against 68 cents.