DISCOUNTERS ’96: ROAD STILL ROUGH
Byline: Thomas J. Ryan
NEW YORK — It looks like another tough year for discounters.
Many regional players are trying desperately to stay in business, Wal-Mart is focusing on building its supercenter format, Target is moving East and Kmart is hoping for signs of a revival.
Analysts expect continued consolidation and store closings in 1996, primarily among the regional chains.
And that might be the good news.
“When you boil it down, you look at two people [Wal-Mart and Target] who are growing, and the rest of them are stagnant or closing stores,” said Philip W. Abbenhaus, an analyst at Stifel Nicolaus & Co. in St. Louis. “How do you compete with these guys is the theme song of everybody in the industry.”
“A year from now we’ll probably be talking about the consolidation of several regional discount chains, and we’ll be looking at a smaller group of conventional discounters in 1997,” added Thomas H. Tashjian of Montgomery Securities.
Last year witnessed the bankruptcy of three regional discounters: Bradlees, Caldor Corp. and Jamesway Corp. Jamesway decided to liquidate; the other two chains are reorganizing.
Even Wal-Mart, the nation’s largest retailer, is slowing the growth of its core discount store chain because it is nearing maturity. Instead, Wal-Mart will focus on building its supercenter business and expanding internationally, analysts said. The retailer’s expansion plan calls for adding 28 million square feet in 1996, down from 34 million in 1995.
Wal-Mart is expected to hit volume of slightly less than $100 billion when it reports yearend results for 1995. As reported, however, Moody’s Investors Service has put $8.6 billion of Wal-Mart’s debt under review for a possible downgrade, citing its sluggish growth rate.
Wayne Hood, an analyst at Prudential Securities, said Wal-Mart’s earnings growth is coming from operating margin expansion in its supercenters and improvement in its international business. He called the supercenters Wal-Mart’s “growth vehicle of the next decade.”
Wal-Mart expects to open 110 supercenters this year — including 95 relocations or expansions of existing stores — and 75 discount stores.
Richard L. Church of Smith Barney also thinks Wal-Mart’s supercenter concept “will work well for them in the long term,” and expects the company to expand that concept “fairly quickly.”
Target, the discount division of Dayton Hudson Corp., continues to have strong potential for growth, with about 700 stores compared with 2,000 units for the core Wal-Mart discount chain. Church said Wal-Mart and Target have been able to compete side by side, pointing out that Target has “carved out a niche” for itself by focusing on visual presentation and soft lines.
Target expects to open 65 to 75 stores in 1996, including its first units in Maryland and Virginia.
Wall Street said Kmart has the spring season to prove itself. “The cat only has nine lives and Kmart’s used eight of them,” Hood said.
He said the spring season will be the first time Kmart’s new merchandising team will be in place, and that further restructuring by the company will be announced only after these changes are evaluated.
Church forecast a “long, long struggle” for Kmart, primarily, he says, because it has insufficient capital to fix its stores and expand its supercenter concept. “Retailers never disappear, they just gradually fade away,” Church said.
Kmart was handed over to a new management team that has failed so far to convince Wall Street that a turnaround is anywhere near imminent.
For regional chains, profitability is the key issue.
Hills Stores Co., Rose’s Stores Inc., Ames Department Stores Inc., and Pamida Holdings Inc. were in the red for the nine months, and Venture Stores has begun a $42 million repositioning program to emphasize higher-margin apparel categories.
On a positive note, Wall Street expects discounters to continue to outpace department stores and apparel specialty stores in same-store sales growth, as consumers react favorably to the format. Their emphasis on value and continued demand for basic apparel should give the discounters an edge, analysts said. In addition, discounters generally put less emphasis on apparel, a category expected to continue to be under pressure in 1996.
Hood of Prudential Securities noted that while “they still could do a lot better,” discounters in general are doing a better job in store operations, sorting merchandise down to size, color and, in some cases, local demographics to avoid out-of-stock situations.
“We are a country of immigrants, and that’s means there’s a need for a lot of different choices,” Hood said.
Nonetheless, margins at discounters will continue to be squeezed as players fight for market share.
Church of Smith Barney said Kmart is “fighting tooth and nail to get back its business, and that should make it tough on everyone.” That, combined with consolidations and massive realignments at several chains “should make it a very competitive marketplace in 1996,” he said.
Howard Eilenberg, at Johnson Redbook Service, said many discounters’ margins have been under pressure because the budget-to-moderate apparel area “has been just so competitive.” He also said many discounters just can’t compete with Wal-Mart.
“It’s the lowest-price guy that is taking all the marbles, and Wal-Mart does that the best ” Eilenberg said.
Abbenhaus said many regional discounters that have been trying to emphasize apparel in order to differentiate themselves have been hurt by price reductions at Kohl’s, Penney’s and Sears. He said these moderately priced department store chains have a huge edge by being able to gain national brands.
Still, analysts said, regional chains must differentiate from Wal-Mart and Target to survive.
“If they try to compete against Wal-Mart on price, they’re probably going to lose. If they compete against Target on the basis of merchandise assortment and visual presentation, they are probably going to lose,” said Abbenhaus.
“As long as you can be distinctive, you can survive,” added Jonathon P. Bratz of Fahnestock & Co.
Bratz said Duckwall Alco Stores Inc. has found success by focusing on rural areas, and it has paid off with earnings more than doubling in the nine months. Pamida also is trying to compete in markets where Wal-Mart doesn’t, but continues to struggle with a heavy debt load.
The East is packed with regional chains, including Ames, Bradlees, Caldor and Hills, as well as Kmart, and analysts expect some acquisitions or mergers to occur. Church suspects Hills might make an acquisition or merge in order to gain greater economies of scale.
Tashjian also expects Shopko Stores Inc. to make an acquisition, noting that the company has found success with its Vision 2000 concept focusing on higher-margin product. This has helped it generate free cash, and acquisitions are part of its long-term growth strategy, he said.
Dollar General and Family Dollar Stores cater to low-income markets and are in smaller towns where a Wal-Mart and Target wouldn’t compete. Family Dollar and Fred’s Inc. both adopted everyday low-pricing strategies, but Wall Street is waiting to see if the strategy proves successful. — Fairchild News Service