Byline: David Moin

NEW YORK — After a great 1999, when just about everything went right for them, how does Wall Street reward retailers? With the booby prize.
Prices are at or near their 52-week lows. Even the mighty Wal-Mart is trading at a discount, slipping 3 1/8 Monday to 49 1/2 on the New York Stock Exchange. In the past year, Wal-Mart’s been as high as 70 1/4 and as low as 38 7/8.
Yesterday’s retail sales and earnings mean nothing to Wall Streeters, who are plunking down more dollars on riskier, high-growth tech stocks and have a sixth sense for detecting the slightest sign of a consumer slowdown. As if to underscore the point, the Dow dropped 196.70 points Monday.
“People are concerned about the future,” observed Allen Questrom, chairman and chief executive officer of Barneys New York, which hopes to launch an initial public offering in the future. “Investors don’t give you that much credit for what you just did. The reason Internet stocks have great multiples is that people think the Internet is going to be Nirvana.”
Right now, a slowdown is just conjecture. This year’s sales have been strong, spring merchandise looks good, employment is up and consumer confidence is holding. However, rising interest rates and fuel prices, fear of inflation and a belief that retailers have been on a roll for too long — and are due to stumble — are turning investors away. What’s it going to take to drive retail stocks up? A seismic shift in investor psychology away from overweighting technology stocks, or perhaps Internet companies going by the wayside, as a shakeout and consolidations are expected. Barring those scenarios, some monster-sized retail mergers might help.
With the exception of a few market dominators and hyper-growth firms, like Home Depot, Costco, Gap and Kohl’s, most retailers are currently trading at or near their 52-week lows, leaving management perplexed and in a state of anxiety. There’s little they can do about it, other than wait out the cycle and pitch growth strategies to potential investors. With stock prices and market caps down, financing and acquisitions become more difficult, as does trading of the stock. Also, calls to chief executive officers, chief financial officers and investor relations officials from mutual funds, pension funds and investment banks take on a different tone, adding pressure to develop and convincingly articulate strategic visions and growth plans.
Few retailers make the pitch as energetically as Intimate Brands Inc. The Columbus, Ohio, specialty retailer regularly conducts large analyst meetings, invites the press to them and spotlights its high-powered, high-priced management talent. The marketing of its Victoria’s Secret brand is equally aggressive, through splashy fashion shows that parade supermodels. Last year, Victoria’s Secret held one at Cipriani’s on Wall Street. This May, it will be at the Cannes Film Festival.
“It’s very important for people to know how we differentiate from the pack. Investors need to know we have a strong strategy,” said Debbie Mitchell, who manages IBI’s investor relations. “It’s very important that you make your story well understood, and you must keep producing. Last year, we had exceptional, record results. We continue to make sure our story is well known and keep our focus on executing our strategies.”
“Of the 28 analysts in brokerage firms that cover the company, three have recommendations to hold the stock and the rest are at buy,” Mitchell said. Nevertheless, after being among the strongest retail stocks last year, rising to 52 3/8, IBI recently has been in the low 30s, befuddling the management. IBI Monday closed at 32, down 7/16.
“The stock market is impossible to explain, particularly this one,” said R. Brad Martin, chairman and chief executive of Saks Inc., which closed at 12 7/8 Monday, down 3/8, and has been as high as 34 13/16 in the past year.
“However, the overriding issue seems to be what kind of growth seems to exist for the department store industry; every five or six or 10 years this happens. We think we have outstanding growth prospects, but we do not understand or predict the stock market.”
“There is no silver-bullet answer to this,” said Arnold Aronson, managing director for retail strategies at Kurt Salmon Associates. “There are a lot of reasons. There’s a fear that higher interest rates will lead to an impact on consumer spending. People are up against fairly good numbers from 1999, so there’s a question whether they will be able to anniversary that. Plus the fact that a lot of money that was being invested in retailing is going to the Internet, to more highly speculative kinds of things, and taking away some of the romance and allure of more conventional retail stocks. And then when they announce bad earnings, or project bad earnings, look how badly they get punished. Ann Taylor got killed. Unless you are with the segment leader, like a Wal-Mart, there’s a feeling that your investment is not secure.” Ann Taylor stock closed at 21 5/8, up 7/8, and has been as high as 53 1/16 in the past year.
“Earnings have been great. There’s no doubt about it,” said Kurt Barnard, president of Barnard’s Retail Trend Report. “But there is an underlying sense of concern that the party is not going to last forever. It’s future earnings that create the demand for shares.”
“Last year, bricks and mortar stocks were undervalued,” Questrom noted. “Retail stocks are products of the future. Retail stocks lead slowdowns of business, and several already have been reporting lousy business.” Questrom noted two great exceptions: Wal-Mart and Kohl’s, which split its stock on Monday, closing at 76 13/16 after the day’s trading. “They continue to expand very rapidly, with no interruption. Wal-Mart has a big international opportunity.”
Another luxury retailer said, “Investors don’t like retail stocks. They don’t understand retailing. Retail stocks just aren’t explosive enough. They don’t quadruple, unless there’s a takeover. There’s not enough demand to drive up the price. It’s never an industry in fashion. There are too many variables.”
“Wal-Mart, Gap and Kohl’s have displayed a high growth rate. Growth companies will carry a higher multiple. Some retail companies, such as Federated, are not getting the benefit in their stock price that they feel they should.”
As for broad-line retailers, which have about the lowest multiples among retail stocks, “There’s a number of competitive threats that investors are concerned about,” observed Joseph Grillo, vice president and chief department store analyst for Deutsche Bank Securities. “There’s growth in the specialty store channel. Specialty apparel and home furnishings stores have built very strong consumer franchises, and proved that anchors are not the only places to shop in the mall.”
He said discounters and the Internet were threats to broad-line retailers, though the Internet could prove an advantage for department stores that use it.
Analysts also noted that department stores’ use of capital has been less efficient; return on equity and other measures of capital efficiency have been below those of specialty and discount stores.
Other factors discouraging retail investment: excess retail square footage; costs associated with opening, operating and stocking new stores; a lack of differentiation between department stores, and deflationary pressures on apparel prices, as rent and labor costs rise.
“Merchandise prices, particularly on apparel, have not kept pace. That’s put pressure on comp-store figures,” Grillo said. His advice on choosing retail stocks: “Selectivity is very important. Get involved with those names that have long-term viable franchises and stay away from the idea du jour.”
“You’ve got an extremely bifurcated market — the most we’ve seen between value and growth stocks,” said George Strachan, vice president of research at Goldman Sachs. “There is no appetite for anything except the highest-quality growth stocks, defined by top and bottom-line growth potential and momentum.
“There is kind of a crowding effect in portfolios as investors weigh their holdings more and more toward technology. That leaves less room for secondary and tertiary stocks, not only in retailing, but in many other sectors as well.
“Federated is a high-quality stock because it has a good balance sheet, high-quality management, extraordinary private brand development, a leg up on the Internet, terrific headquarters stores. They’re extremely effective marketers, but the market isn’t paying much attention to this stock. Federated is not adding a lot of square footage, so the market isn’t getting excited. As long as this market psychology prevails, until you get a shift in market psychology away from tech and away from growth, it will be very difficult to awaken investor interest in the value names within the retail group.”
Isaac Lagnado, president of Tactical Retail Solutions, said, “The market never looks back. It’s already figured earnings for the fourth quarter [of 2000]. What matters now is what’s going to be a long way down the road. The next three or four months are not very important.”
He said that when analyzing retail stocks, the market examines, in order of priority, comp-store growth; absolute growth, such as expansion and market share; consumer spending, and the prospects on interest and employment rates.
May Co., which closed at 24 15/16, down 1 1/16, is “very well managed, has great expense controls, financial disciplines. Nevertheless, the stock is sort of lagging because investors wonder where the growth is going to come from. It’s nice to have good margins, but they want growth.”
Nevertheless, Lagnado continued, “If you look at the ownership of retail stocks, they are still a very important allocation of big funds, big pension funds. That’s because retailing has very predictable earnings and revenues, particularly brick-and-mortar retailers. This business just doesn’t suddenly go away. Even when there is a bankruptcy, you can find institutional buying. Fidelity bought into Macy’s when it went bankrupt in the hope of future redemptions.”
At the moment, institutional investors aren’t exactly clamoring over retail stocks, largely considered “value stocks.”
“They jump to what makes quicker money,” said Matthew C. Hershberg, equity retail analyst at Standard and Poor’s. “Retail does not represent this. Rather, it represents solid business plans, increasing market share, strong returns on equity, strong earnings growth and in many cases, no debt but, lo and behold, no interest.”
Ross Stores, the nation’s second-largest off-pricer after TJX Cos., has “virtually no debt, same-store sales at or well above industry norms and, despite the fact that earnings are on target and tremendous success in California and Florida, no one wants to pick up the shares,” Hershberg said.
“People will put money in technology before they look at fundamentals in retailing, before they look at a solid, consistent revenues and earnings story. The killer mass monopoly retailer — Home Depot, Wal Mart — those type of stores will get a p-e (price-earnings) multiple premium. Anyone who doesn’t dominate the country with a business model that is bulletproof, or with only regional appeal, can sit for months and go down in share price.”
He characterized Claire’s, the costume jewelry chain, as “a simple business catering to mall rats and generating plenty of money. They don’t have competition, they have incredible profit margins and high turnover.”
According to Hershberg’s view, retailers usually achieve high turnover on low margins. But high turn and high margin is what Claire’s has. Nevertheless, the stock closed Monday at 16 7/16, down 1/16, and has ranged from 14 3/4 to 36 7/8 in the past year. “People jumped away when those same-store sales came down seven months ago,” he said.
There is hope, however. “The pendulum will swing the other way,” Hershberg said. “Same-store sales will start to shoot up, and it does help when a company has the Internet or technology as part of the company.”

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