ANALYSTS CAUTION RETAILERS: RISE IN INTEREST RATE COULD CHILL YULE

Byline: Carol Emert

WASHINGTON — Rising interest rates could put a damper on holiday shopping and leave overly optimistic retailers with too much stock, say industry analysts.
“Because last year was a great Christmas, some retailers feel they missed out on some sales because they didn’t have enough merchandise, but now they’re reacting [by building inventories] when the economy is slowing,” said Rosalind Wells, a retail consultant with Management Horizons, Columbus, Ohio.
“They would be better off to be more conservative,” Wells said, particularly because the Federal Reserve is almost certain to raise short-term interest rates again next week.
Rising interest rates are expected to hit consumers especially hard this holiday season because of the current high levels of consumer installment debt, including credit card debt, mortgages and auto financing, said Janet Mangano, retail analyst with Burnham Securities, New York.
In addition, growth in installment credit is far exceeding gains in consumer income, Mangano said. In September, the last month for which government data was available, consumers had racked up about 15 percent more installment debt than in September 1993, she said.
Mangano cited Ann Taylor, New York, as an example of a company that might be overstocked. Inventories at the retailer were 66 percent higher on Oct. 29 than on Oct. 30 of last year, totalling $104 million compared to $63 million, she said. Inventories per square foot rose 31 percent over that period.
“Now, granted, they have a lot of new product lines and new stores, new accessories and things, but when I hear numbers like that I get a little frightened,” Mangano said.
Ann Taylor’s investor relations liaison, Jocelyn Barandiaran, said, “We think that our inventories are appropriate for our planned level of business.”
Despite their warnings about overstocking, analysts predicted improved apparel sales during the rest of the year, propelled by softening demand for big-ticket items such as furniture and autos, and by a growing need for apparel after a long lackluster period.
Christmas apparel sales gains are projected at between 4 and 5 percent this holiday season compared to a 3 percent increase last Christmas.
“What’s in favor of the retailers in the very, very near term is that the consumer dollar, which is stretched so much, can buy a lot of clothing at very reasonable prices,” Mangano said.
Robert Buchanan, a retail analyst at NatWest Securities, New York, was more optimistic about Christmas, noting that higher interest rates will boost consumers’ income from interest on investments, “so in the short-term, it might help.”
However, “at some point [rate increases are] going to catch up with everybody and break the economy and break consumer spending, so it would be wise as a retailer to have an ear to the ground,” Buchanan said.
While interest rates generally put a damper on construction spending, financially strapped companies will suffer more than their healthy counterparts because they are less likely to have cash on hand, and loan terms are generally less favorable, Mangano said.
“Ann Taylor, The Gap and The Limited can afford [to add new stores] because of the strength of their balance sheets, but stores not doing as well will be forced to close marginal properties,” she said.
Warren Harsigan, senior vice president, finance, of The Gap, said his company has not altered its plans to open more than 250 stores next year.
“We’re not borrowing to do that, we’re using operating cash flow,” he said. “We have over $400 million in cash and investments at this point.”
Margie Brandfon, director of public relations for Talbots, Hingham, Mass., said that for her company, rising interest rates are having virtually no effect. “Nothing is changing, not inventory plans or manufacturing plans and certainly not our capital expenditures. We’re still planning to open 65 stores next year.”
Rising interest rates even can be an advantage for ailing retailers, if they refinanced their debt before rates started going up. Federated Department Stores, Cincinnati, which is merging with R. H. Macy & Co., New York, a company under Chapter 11 bankruptcy protection, is in this boat.
“Our debt is all fixed-rate or 100 percent capped at a floating rate, and we also have insurance to protect from this kind of thing,” said Federated’s Carol Sanger, vice president, corporate communications and external affairs.
Federated “is expecting a good Christmas and I think most retailers are expecting a good Christmas,” Sanger said.
— Fairchild News Service

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