Management can do a lot with the franchise. It’s bigger than Kohl’s and can get consumers into their stores.”
On Dillard’s, she cited “serious issues with comp sales, but tremendous liquidity” because the company owns lots of its real estate.
On Saks Inc., “the capital structure is in excellent shape,” she said, adding that the company has hardly any debt maturities coming up in the next couple of years, and has cleaned up its balance sheet.
The Gap’s balance sheet is “OK” and the company is not heavily leveraged, Cannella noted.
She also downplayed recent rumors on Kmart, fueled last week by retail analyst Wayne Hood of Prudential Securities, who wrote in a report that the chain could go bankrupt down the road.
Cannella said Kmart is not heavily leveraged, that she didn’t know of anything that would “trigger” a filing, that the chain has ample liquidity and that there is no immediate financial issue. There are, however, issues over how Kmart is positioned against the competition and how it should differentiate, she pointed out.
What’s her primary reason for downplaying the bankruptcy speculation?
“Over the last decade, the view of bankers toward the retail industry and manufacturers has gotten significantly smarter,” she explained, meaning that banks won’t allow retailers to become as highly leveraged as they were in the late Eighties and early Nineties.
On Neiman Marcus, she also expressed confidence, despite its precipitous slide in sales last year. “Neiman Marcus does a tremendous job of target marketing. I can’t think of a retailer that does more things right. It has a great balance sheet and hardly any debt.” Still, luxury sales in 2002 should continue to be pretty tough, she said.
Cannella’s presentation was sponsored by the Intimate Apparel Council and Swimwear Industry Manufacturers Association, both divisions of the American Apparel and Footwear Association. Among the crowd of 75 were several suppliers to the retailers in question.
She said she believes 2002 will be marked by much M&A activity, though in the form of quiet consolidations, rather than mega-mergers.
“Mega-deals in retailing have largely failed,” she said.
On the other hand, she pegged Kohl’s as a potential takeover by a larger retailer, such as a Federated or May Co., and said it could grow as large as Sears.
While praising Kohl’s performance and consumer appeal, she does expect to see “some kind of hiccup” due to its rapid growth. While deflating the bankruptcy rumors, Cannella was not optimistic about 2002.
“Retailing this time, unlike all previous recessions, is really going to lag the recovery, rather than lead the recovery,” and that’s because retail sales coming into the recession were much higher than normal, unemployment will remain around six percent and wage gains will be relatively small, she said. Cannella added that proceeds from mortgage refinancings will go into consumption to some extent, particularly home improvement retailing, but will also go heavily into debt repayment.
After conditions deteriorate further in the first quarter, an overall economic recovery could occur in the late winter or early spring, she predicted. Non-auto retail sales, she forecast, would be flat over the next couple of months while comp-store sales almost certainly will be negative.
Disparate growth trends between low-cost providers, like Wal-Mart, and fuller priced department stores, are likely to persist in 2002, and recent trends in merchandise categories will continue. “I don’t see anything extraordinary happening that will help in apparel,” Cannella said, adding that housewares should fare better.
She said retailers are telling her profitability will improve in the first half, helped by inventory cutbacks, though unfortunately that makes the scenario very tough for manufacturing.

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