SLIM GROWTH FOR MOST IN ’95

Byline: Thomas J. Ryan

NEW YORK — While 1995 is expected to be another boom year for Wal-Mart Stores and Target, other discounters can look forward to smaller growth rates and further consolidations.
That’s the view of the discount sector from Wall Street analysts, who are closely watching for changes in Wal-Mart’s apparel offerings, improvements in Kmart’s business through turnaround efforts, and continued pricing competitiveness from department stores.
Among the smaller regional discounters, Caldor Corp. and Hills Department Stores are expected to add about 10 percent to their respective store bases, analysts said. However Bradlees Inc., Venture Stores and Shopko Stores are planning to open fewer new stores this year than in 1994. Expansion plans for 1995 include:
Wal-Mart: 100 discount stores, 100 supercenters, between 50 and 60 international units, and 10 Sam’s Clubs.
Target: 60 to 70 new stores, including entries into Cleveland and Akron, Ohio. Two supercenters.
Kmart: 25 Super Kmart units, which include a grocery store, but a significant number of closings of underperforming discount stores is expected. l Caldor: 17 units.
Hills Department Stores: 15 stores.
Bradlees Inc. four to six stores.
Venture Stores and Shopko Stores Inc. about five units each.
Ames Department Stores: three to six stores.
Michael Exstein, an analyst at PaineWebber, said he expects to see a “wave of consolidation” among regional chains.
Regarding Kmart, he said, “I think this is certainly the year one way or the other. Either they will put in place a strategy that will begin the turnaround or something more radical happens.”
Thomas A. Filandro, an analyst at Gerard Klauer Mattison, said Kmart continues to fight an image of poor quality, even though its made strides in women’s apparel in the Nineties.
“Quality wise, the apparel offerings are quite good, but it seems that women would opt to tell their age and weight before they said they bought apparel at Kmart,” he said.
Analysts said cash gained from the sale of non-core businesses gives Kmart greater flexibility in attempting its turnaround. Analysts expect Kmart’s earnings to drop to 90 to 99 cents in 1994 against a depressed $1.15 in 1993. Estimates for 1995 range from $1.15 to $1.25.
Wal-Mart’s big challenge in 1995, analysts said, is to turn around Sam’s Club, which posted negative same-store results in 1994, and build its women’s business.
Wal-Mart, with 2,102 discount stores, is expected to earn about $1.16 a share in the current fiscal year against a $1.02 in 1993. Estimates for 1995 range from $1.33 to $1.40.
Thomas Tashjian, an analyst at First Manhattan, said he believes the apparel playing field for discounters “is going to be dictated by how aggressive Wal-Mart decides to become” and whether it introduces another layer of apparel by adding more to its brand-name selection.
“This might make it a lot more difficult for the regional discounters,” he said.
Wal-Mart has improved the appearance and quality of its apparel, but analysts said they don’t expect the retailer to allocate much more floor space to apparel.
“They’ll continue to drive the business very much through the use of consumables and hard lines,” Exstein said. “They’re just hoping that once they get you in with those things you buy some more apparel.”
Target, a division of Dayton Hudson Corp., is expected to begin moving further into the Northeast in the next few years and has plans to open about 12 stores in the Washington/Baltimore area.
“They’re going to come into big department store territory now and in the next couple of years,” said Exstein of PaineWebber.
George Strachan of Goldman Sachs said a key to Target’s success is that it has not allowed apparel to become “the dominant part” of their operation. Target’s strengths, said analysts, are domestics, private label offerings, customer service, store layout and fashion apparel.
“They are very much in the commodity business and certainly in the home fashions business,” Strachan said.
In the Northeast, Caldor and Bradlees will continue to battle each other, but analysts believe Bradlees has some catching up to do.
“Caldor has done a terrific job of managing growth and improving the look of the stores, but it didn’t pay off last year,” Exstein said. Caldor is expected to earn $2.70 to $2.75 a share in 1994 versus $2.50 in 1993, and estimates are about $3.15 to $3.20 for 1995.
Bradlees should earn about $1.30 in 1994, down from a depressed $1.38. Wall Street looks for $1.60 in 1995, but much depends on the direction new management takes the company. Mark A. Cohen, former chief executive of Lazarus, was named chairman and ceo of Bradlees in December.
Hills Department Stores Inc., which emerged from bankruptcy in October 1993, should net $2.23 a share in 1994 against $2 in 1993, according to Janet Mangano, at Burnham Securities. She estimates $2.95 for 1995.
Mangano said Hills should benefit from sound control over expenses and leverage gained from the additional stores as well as good customer service. Venture has been stung by Target’s entry into the Chicago market, though analysts said Venture’s expansion into Texas has gone well. Mangano said Venture has good expense controls and has been able to compete well with Wal-Mart, but it is having problems adjusting to new competitors such as category killers, supercenters and other discounters. Analysts expect Venture’s earnings to plunge to $1.50 in 1994 from $2.43 a year earlier. For 1995, Wall Street expects Venture to earn $1.65. Shopko embarked on a remodeling and remerchandising program, dubbed Vision 2000, in 1991 that included an increased emphasis on apparel. Unfortunately, a weak apparel climate has continued to pressure margins.
“I think it’s fair to say that whatever they’ve picked up in apparel has been more than offset by what they’ve lost in hard lines,” said Goldman’s Strachan. “So far Vision 2000 is unproven.”
All discounters — even Wal-Mart and Target — found their margins under pressure in 1994 due to weak apparel sales. Weather was partly to blame for slack apparel sales, but discounters were also affected by the heavy markdowns at department stores and off-pricers.
More seasonable weather would help apparel sales, analysts say, but a projected slowdown in consumer spending will make gains difficult in 1995.
“You had J.C. Penney and the department stores promoting like there’s no tomorrow and when it comes to gift giving, would you rather give a box from a department store or a box from a regional discounter?” asked Exstein of PaineWebber.
— Fairchild News Service

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