MOUNTING PRESSURES ARE DIMMING OUTLOOK FOR STRONG RETAIL GROWTH
Byline: Thomas J. Ryan
NEW YORK — Expect a shorter list of retail winners for 2000.
With consumer spending expected to slow down, only a handful of chains — Kohl’s, Target, Wal-Mart and a selective list of specialty chains such as Talbots, Gap, Limited and Pacific Sunwear — are seen as clear successes this year, according to Wall Street analysts. Many chains will be seeking to reinvent or revive tired concepts, and some will be on the hunt for acquisitions outside their core businesses in a quest for fresh growth initiatives, analysts say. These potential vehicles may include the Internet, international expansion and even department stores returning to operating specialty stores.
Salomon Smith Barney expects same-store sales for all retailers to grow 4.8 percent in 2000, down from 6.4 percent in 1999, due to an expected moderation in consumer spending and the difficulty of growing on top of the robust growth over the past two years. With greater demand for home and electronics products, apparel should rise even less, 3 percent versus a 3.9 percent increase in 1999
So far, consumer spending has been resilient in 2000 despite concerns over interest rate hikes, the eroding stock market, surging gas prices and high consumer debt levels, and most retailers seem to be running in line with or above first-quarter estimates.
“Despite concerns to the contrary, the consumer is still out there and spending,” said Joseph Grillo at Deutsche Banc Alex Brown. “The strong acceptance of spring fashion has been one of the key drivers.”
Among those fashion trends are stretch and rubbery fabrics, bright colors and a variety of silhouettes, including different pant and shirt lengths as well as necklines.
“I definitely think that great fashion creates demand, and I think we’re seeing great fashions this spring season,” said Maura Hunter Byrne, at Salomon Smith Barney.
And while fundamentals — low inflation, low unemployment, good wage growth, high consumer sentiment — are supporting consumer spending, analysts said it will still be difficult for many retailers to beat year-ago results, particularly in the first half. A WWD survey of 30 retailers shows profits in 1999 jumped 20.3 percent as sales climbed 12.5 percent, with profits in the fourth-quarter ahead 14.5 percent on a 14.7 percent sales increase.
Wal-Mart set the tone in mid-February when it said higher prices for oil and other raw materials, stronger Asian currencies and increased labor costs would make it harder to expand its price rollback program. With Asia’s turnaround, retailers won’t be able to take as much advantage of cheap sourcing from the Orient, analysts say. Although the costs for Y2K compliance are behind them, increased spending on Internet initiatives should likely offset any savings. Given the pressure on sales and margins, Wall Street is looking for more modest gains in earnings per share: between 10 and 15 percent for most chains this year, with many using stock buyback programs to get there.
However, as in every year, there will be a few standouts, analysts said.
Walter Loeb, at Loeb Associates, expects specialty retailers, such as Gap and Limited, to “continue to carry the day” with a heightened emphasis this year on color. But he also said the market is undergoing a “resurgence” in concepts offering fashion merchandise at moderate price points, pointing to the success of Kohl’s, Old Navy, Target and even Swedish retailer Hennes & Mauritz’s smashing opening of its Manhattan store in late March.
“I think traditional department stores will have to find a way to attract customers, and that will be a good challenge for the next few years because there is so much sameness in the stores,” Loeb said. “They will have to show more fashion leadership and tell the customer, ‘This is the color and this is the look.’ There’s no real fashion direction from department stores, and it used to always emanate from department stores.”
Kohl’s is a clear Wall Street favorite, with earnings expected to hit $1.87 per share this year against $1.55 for the previous year. Loeb called Kohl’s a “destination fashion store” with an ability to steal customers from both upscale department stores and promotional discounters. Meanwhile, its emphasis on brands — including the recent additions of Columbia sportswear, Arrow shirts and McNaugton Apparel’s women’s lines — is distancing it from direct competitors, such as J.C. Penney and Sears, that are moving to emphasize private labels. Kohl’s entry in March into the New York region has generated sales well above plan.
Target is another stock beloved by Wall Street, with earnings this year expected to reach $2.91 against $2.54. Salomon’s Richard Church said Target’s growth “continues to be generated by reaching out to a more affluent discount customer,” offering new brands including Calphalon kitchenware and Michael Graves home. An exclusive Mossimo apparel line will hit the stores in 2001.
Wal-Mart, a longtime Wall Street favorite, is expected to make $1.44 this year against $1.28 a year ago. While the Wal-Mart chain has virtually covered the entire U.S., the chain still shows growth, internationally as well as domestically, through the expansion of supercenters and Sam’s Clubs. Wal-Mart also has the potential to emerge as the dominant “clicks & mortar” player, with plans to spin off the e-commerce business as a trailing stock, according to Church.
Many analysts expect department stores to pursue greater investments in Internet operations, with possible spin-offs. Federated Department Stores, which is seen as the the most aggressive in e-commerce with its 1998 acquisition of Fingerhut, is the current favorite traditional department store on Wall Street. Besides its pro-Internet savvy, analysts said sales have benefited from successful private-label programs and an emphasis on gift giving. Federated’s earnings are expected to be down slightly in the first quarter due to Internet investments, but should rise to $3.97 for the full year, from $3.62 in 1999.
May, which is expected to earn $2.87 in 2000 against $2.60, also has a solid business, but results lately haven’t measured up to Federated’s in terms of sales and e-commerce, and it’s getting less attention from investors. Sears recently said its first-quarter earnings would be well ahead of Wall Street estimates, but analysts said that mainly reflected strength in its credit and hard goods business. Sears should earn $4.26 in 2000 against $3.89.
But most other department store chains, including Saks, Dillard’s and J.C. Penney, are attempting to find a way to increase sales without resorting to markdowns. As expected, the successful use of technology to improve inventory planning and better track customer desires seems to be key to turnarounds. Kmart is also said to be making slow progress, but still fails in basic areas such as customer service and checkout time compared with competitors.
Besides e-commerce alignments, acquisitions may be a path for many larger chains to not only grow, but attract Wall Street’s attention. Obvious targets would be regional players, such as Elder-Beerman Stores Corp., which could be going on the selling block. Those with depressed stock prices, such as Dillard’s and Saks, also could be vulnerable to takeover.
But Dana Eisman Cohen, at Donaldson Lufkin & Jenrette, feels that chains could look outside to find new growth as the industry arrives at the last stages of department store and discounter consolidation, even returning to operating select specialty stores after spinning them off in the early Nineties. Banc of America Securities’ Thomas Tashjian said May is prepared to make a major acquisition in either a traditional department store format or a nontraditional specialty format. Ann Taylor has recently been cited as a target. Mega-off-pricer TJX also shocked analysts in early March when it said that it was expanding its list of potential acquisition targets to including larger companies with sales of up to $1 billion, firms in Europe and discount chains.
International expansion is also seen as a potential for hiking sales, though only a few chains, namely Gap and Wal-Mart, have found success overseas.
Meanwhile, while their same-store sales have slowed from their torrent pace in the first half of 1999, specialty stores are generally expected to outpace department stores this year, mainly because the stores, with a clearer merchandising vision, are easier to shop.
“Specialty stores have done a great job on merchandise and marketing,” said Salomon Smith Barney’s Byrne. “The stores are easier to shop and have more edited assortments. You know what each brand stands for.”
Nonetheless, it’s clearly become tougher for middle-of-the-mall chains — as witnessed by recent softness over the holiday by Wet Seal, Ann Taylor, Bebe, Gap chain and Buckle. Claire’s recently said first-quarter earnings would miss Wall Street estimates due to poor spring sales. The big surprise last holiday was Abercrombie & Fitch, which said its same-store sales would rise in the low-to-mid single digits this year after a long streak of double-digit gains.
Standouts for 2000 should include Talbots, expected to earn $2.30 per share against $1.85; Limited, $2.29 against $1.93; Intimate Brands, $2.13 versus $1.81; Gap, $2.08 against $1.55, and Pacific Sunwear, $1.38 versus $1.10.
Limited’s women’s chains, particularly Express and Limited, have benefited from moving from a key-item fashion business to a brand orientation, and consumers are responding well to their color assortments, said Byrne. IBI, which is 83 percent owned by Limited, is particularly benefiting from the continued rollout of new products with complementing ad support, including Victoria’s Secret Beauty, Body by Victoria and White Barn. The Gap should see a turnaround in margins at the Gap chain and ride a niche in business casual at Banana Republic, but Old Navy and international are expected to be the two biggest growth vehicles.
Among those catering to teens, Pacific Sunwear continues to benefit from continued demand for surf/skatewear and graphic T-shirts, as well as the addition of dresses, skirts and swimwear. Although their top line growth will be more modest, solid earnings gains are still predicted for American Eagle Outfitters, $2.30 against $1.86, and Abercrombie & Fitch, $1.78 against $1.39.
Ann Taylor is seeing tough comparisons in the first half, but should rebound in the second with full-year earnings pegged at $2.46 against $2.08. Nordstrom, Stein Mart and Goody’s Family Clothing also are coming off tough years and are undergoing serious remerchandising, while Stage Stores is looking for a new chief executive.