WALL STREET PREVIEW: RETAIL HOLIDAY SEASON SHOULD BE HUMDINGER

Byline: Catherine Curan

NEW YORK — They bombed last Christmas, but now retailers are poised for what’s expected to be a strong 1997 holiday selling season marked by 4 to 7 percent same-store sales gains.
That’s the good word from Wall Street analysts who, in interviews last week, said a combination of positive economic factors — consumer confidence, low unemployment and third-quarter momentum — as well as a pent-up demand for apparel and tight inventory and tight inventory and expense controls, should produce healthy yearend profit gains. In addition, there are 27 shopping days between Thanksgiving and Christmas, compared with 26 last year. Several analysts said department stores are apt to perform slightly better than specialty chains and discounters because they have been pushing the power brands that have been resonating with consumers.
But the third quarter is gaining momentum across the industry, after a good start in August for stores.
“I think this Christmas will certainly be in the top three of the last 10 or 11 years or so,” said Robert F. Buchanan, analyst at NatWest Securities. He cited “exciting products,” strong growth in consumer buying power and a stock market that is creating wealth. Fashion has made a “welcome departure from the gaudy color palette of the first half,” Buchanan said. “Bright orange and green are a thing of the past, and the classic autumn color palette seems to be a hit.”
Walter Loeb, of Loeb Associates, said he is looking for a 6 to 7 percent same-store sales Christmas gain from department stores, with discounters and specialty stores posting a slightly smaller gain, about 5 percent.
“I believe the comparison with last year will not be so tough that they can’t do well,” Loeb said. He sees tight inventory control and the extra day in the selling season aiding results.
Thomas H. Tashjian, analyst at Montgomery Securities, San Francisco, said he expects a strong Christmas across the board. Tashjian pointed to several trends in the economy that should help holiday selling. He noted 2 percent more people are working, overtime pay is up about 1 percent and the average manufacturing hourly wage is up 3 1/2 percent. All of these factors mean there is a 6 or 7 percent increase in spending power over last year. What’s more, there is some evidence that credit is loosening as opposed to last year, when credit was tightening on concerns of increased personal bankruptcy filings.
“A good economy plus borrowing power and high confidence equals a good Christmas,” Tashjian said. “We get a year like this every so often where all the stars are lined up,” he added.
Edward Weller of Robertson Stephens said retailers that have survived bankruptcies and consolidations should benefit from the demise of thousands of other stores over the past few years.
Jay Meltzer of LJR/Redbook Research, while somewhat more cautious, still expressed optimism about the second half of the year. He expects a respectable showing this Christmas, but forecasts the growth rate for sales will slow from the pace this summer.
Asked why he thinks growth will decelerate, Meltzer said: “We were churning along at an unsustainable pace. Everything that could go right did go right. The weather was almost perfect nationwide, there was latent demand, and the women’s business came back to life after lagging for a few years.”
However, Meltzer said that if retailers remain cautious and resist the temptation to load up with too much merchandise, the current healthy inventory-to-sales ratio should continue leading to more full-price sales and fewer promotions.
Maura Hunter Byrne of J.P. Morgan Securities said the strong August results, healthy consumer spending levels and new ad campaigns make her optimistic about the second half. She said Talbots has launched an ad blitz that will continue through the fall season, along with promotional events in stores and fashion shows. Ann Taylor has also stepped up its advertising.
For most retailers, the second quarter was strong. However, in WWD’s survey of 61 apparel retailers, profits declined 13 percent mainly because of special charges at two mammoth retailers, Sears and Woolworth’s. Sears’ bottom line was dented by a $320 million after-tax charge for reaffirmation of consumer bankruptcy debts, while Woolworth’s lost $181 million in the latest quarter from shutting down its five-and-dime chain.
Sales for the group rose 11 percent.
Analysts are expecting strong full-year performances from Federated Department Stores, May Co., Dillard’s Inc., Dayton Hudson and Kohl’s. They say department stores are taking share from specialty stores by expanding designer in-store shops and offering a greater selection of brands.
Federated should earn 36 cents for the third quarter against 31 cents on continuing operations, and $2.57 for the year, on a fully diluted basis, against $2.08 from operations last year.
Analysts also like the hands-on leadership style of James M. Zimmerman, chairman and chief executive officer. “I like his focus on the business as it currently is,” said Buchanan.
At Federated, moderately favorable comps, stable margins and lower selling, general and administrative expenses are helping earnings rise faster than sales, Meltzer said.
May Co. continues to perform on or above plan and should earn $3.15 against $2.82 fully diluted, and 50 cents for the quarter against 44 cents. Lord & Taylor is a strong contributor, having identified a niche centering on dresses, Buchanan said. The division is seen as less dowdy than it was two or three years ago in the women’s area.
For Dillard’s, Tashjian expects 41 cents for the quarter, against 38 cents a year ago, and $2.40 for the year against $2.09. Analysts said Dillard’s is driving sales more effectively now that it has moved away from an everyday-low-price strategy. The company’s shift toward bringing private label product development in-house over the last six to 12 months is also viewed as a positive.
Dayton Hudson should earn 61 cents a share against 45 cents fully diluted and $3.29 for the year, against $2.35. Kohl’s should earn $1.75 for the year against $1.39.
Sears is expected to earn $3.60 before special items, against $3.12 a year ago. Analysts expect Sears to benefit from improved presentation in women’s sportswear, crediting the efforts of Robert Mettler, president of merchandising for Sears.
Meltzer expects J.C. Penney to earn $3.35 against $3.17, but points out the increase is almost entirely due to the surge in drugstore contribution from Eckerd Drugstores acquired in December 1996. “It’s not really an apparel story. They haven’t found their way in apparel yet,” he said. Meltzer said he is optimistic about Penney’s deal to market the Crazy Horse line manufactured by Liz Claiborne, but noted growth has flattened for the Arizona brand and Levi’s seems to be slowing.
Analysts cited Stage Stores as a success story with plenty of growth opportunity, offering brands in small-town locations in such states as Kentucky and Oklahoma where there are fewer malls compared with other states. Tashjian expects earnings per share of $1.25 for the year for Stage against 88 cents a year ago.
Analysts are also looking for good results from Ross Stores, which started fall on solid footing and has done well across geographic regions. Morgan’s Byrne estimates 45 cents a share for the third quarter, against 32 cents last year, and $2.25 for 1997 against $1.57 fully diluted.
Ann Taylor and Talbots have been struggling, and Byrne said September will reveal whether they were faltering because of the wrong merchandise. Byrne expects Talbots will earn 56 cents for the third quarter, against 60 cents, and $1.23 for the year, against $1.92.
There is an unusually wide range of estimates for Ann Taylor, said Byrne, who expects 10 cents for the third quarter, against 21 cents a year ago, and 63 cents for the year against 53 cents fully diluted. According to First Call, as of Sept. 17, the range of third-quarter estimates runs from a loss of 1 cent, estimated by Robertson Stephens and C.S. First Boston, to a profit of 28 cents, estimated by Schroder Securities. Byrne attributed the wide range to Ann Taylor’s failure to make its August sales plan and lack of new guidance to analysts afterward.
For Gap, Byrne expects 61 cents for the quarter, against 48 cents a year ago, and $1.92 for the year, against $1.60.
The Limited Inc. is expected to earn $1.20 to $1.25 for the year against $1.12, and 16 cents for the quarter, against 15 cents. Earnings will get a strong boost from the Intimate Brands and Abercrombie & Fitch units.
Among better specialty stores, analysts are looking for healthy results from Nordstom and Neiman Marcus Group.
Citing better management and a stronger fashion mix, analysts expect Nordstrom to earn at least 46 cents against 36 cents for the third quarter, and $2.45 for the year against $1.78.
Neiman Marcus has invested heavily in its stores over the past five years, which analysts say is crucial for the designer customer, who responds well to that ambience. Neiman’s should earn 71 cents in the quarter against 62 cents, and $2.06 for the year against $1.80 from continuing operations.
Meltzer expects Saks to earn 87 cents a share for the year, against 75 cents a year ago, and 28 cents for the third quarter, against 25 cents.
He expects Kmart to earn 4 cents a share for the third quarter, against 2 cents, and 65 cents for the year on continuing operations, against 48 cents.
Wal-Mart is doing well in children’s wear and commodities, but still hasn’t “found the touch” in women’s apparel, said Meltzer. Wal-Mart should earn 35 cents for the quarter against 30 cents, and $1.53 for the year against $1.33.

Footnotes
1) Latest quarter includes a $35 million accounting gain, a $91 million after-tax gain on the sale of Advantis and a $320 million after-tax charge for reaffirmation of bankruptcy debts. Latest six months also includes a $74 million accounting gain and a $36 million charge for the sale of Sears Mexico.
2) Year-ago quarter includes $11 million gain from discontinued operations. Year-ago half includes a $9 million gain from discontinued operations and a $61 million loss on disposal of discontinued operations
3) Acquired Eckerd Drug chain in Dec. 1996. Latest quarter includes charges of $17 million for amortizing goodwill and $25 million for consolidations. The half includes a $58 million amortization charge and $27 million for consolidation.
4) Reflects an $11 million after-tax charge in latest quarter and a $32 million charge in latest half for debt redemption.
5) Latest quarter includes a $38.7 million after-tax charge for debt refinancing. Year-ago quarter includes a charge of $29.1 million for inventory valuation adjustments and $69.8 million for integration costs. Year-ago half includes charges of $65.7 million for inventory valuation adjustments and $110.9 million for integration costs.
6) Latest half includes a $4 million after-tax charge for early extinguishment of debt and year-ago half includes an $11 million gain on discontinued operations.
7) Year-ago quarter includes a $2.4 million after-tax gain on discontinued operations, and year-ago half includes a $9.4 million after-tax gain.
8) Losses from discontinued operations totaled $207 million in the latest quarter, $4 million in the year-ago quarter, $223 million in the latest half and $11 million in the year-ago half.
9) Year-ago half includes a $1.5 million charge for early extinguishment of debt.
10) Latest quarter revenues include a gain of $19.7 million on the sale of receivables.
11) Year-ago half includes a $12 million charge for write-down of assets.
12) Includes charges of $1.6 million in the latest quarter, $1.5 million in the year-ago quarter, $3.1 million in the latest half, and $4.3 million in the year-ago half for merger, integration and restructuring costs. Latest quarter reflects a $1.1 million after-tax charge for debt extinguishment.Year-ago half also includes a $2.3 million loss on long-lived assets.
13) Results reflect an initial public offering in May 1996. Includes charges of $3.3 million in the year-ago quarter and $3.4 million in the latest half for early extinguishment of debt.
14) Year-ago periods include a $2 million after-tax charge for early extinguishment of debt, and year-ago half includes a pretax charge of $11.7 million for write-down of assets. Tax adjustments caused a $3.8 million charge in the latest quarter and an $8 million charge in the latest half.
15) Latest quarter includes a $63.9 million charge for the sale and closure of 20 stores. Latest half reflects a $3.9 million charge for prepayment of debt.
16) Results reflect an IPO in Feb.1997 and the acquisition of Chadwick’s in Dec. 1996.
17) Reflects charges of $3.6 million in latest quarter and $4.2 million in latest six months for computer upgrades. Year-ago half includes a gain of $12.1 million on the sale of securities.
18) Results reflect an IPO in Oct. 1996. Latest periods include a $17.4 million debt extinguishment charge.
19) Latest half included a $4.7 million special gain.
20) Latest quarter includes a $173,000 charge for repayment of debt.
21) Year-ago quarter includes a $2.8 million write down of underperforming assets.
22) Loss in the latest half includes a $446,000 charge for early extinguishment of debt.
23) Results reflect an IPO in May 1996. Loss in the latest half includes a $1 million charge for pre-opening expenses for new stores, while year-ago half included expenses of $400,000.
24) Results reflect an initial public offering in Sept. 1996.
25) Today’s Man is operating in Chapter 11. 26) Results for the 1996 half reflect a $4 million gain related to the acquisition of Steinbach in Aug. 1996.
27) Includes interest income $345,000 in latest quarter and $555,000 in latest half. Year-ago includes interest charges of $297,000 in the quarter and $675,000 in the half. 28)Year-ago periods include a $295,000 special gain.
29) Results reflect an initial public offering in Dec. 1996.

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