STUCK IN THE MIDDLE
THE ECONOMICS FAVOR LUXURY AND DISCOUNT STORES, LEAVING THE MID-MARKET MERCHANTS AT RISK.

Byline: Thomas J. Ryan

NEW YORK — It’s the high road or the low road for retailers come Christmas.
Luxury chains and their diametrically opposite cousins, value-priced chains, are largely projected by Wall Street analysts to be best positioned to ride out an anticipated spell of weaker consumer spending in the second half.
The brunt of the impact of a slower economy is expected to hit right in the middle — the moderate-to-better-priced traditional department store and specialty chains.
Faced with a more unstable job market, penny-pinching consumers are likely to flock to bargain stores for savings. At the other end of the spectrum, high-end chains are expected to do well because of still unabated demand for luxury items. Indeed, luxury appears to be most immune to an economic slowdown.
“The Neiman Marcus customer doesn’t have to make a choice between filling the tank and paying the credit-card bill,” said Christine Kilton Augustine at ING Barings.
While Asia’s economic crisis clearly stung luxury sales in the fall of 1998, and in some cases beyond, this year’s stock-market gyrations, particularly in technology stocks, have had little impact on luxury sales.
Kilton Augustine noted that Neiman keys in on the top 10 percent of its customer base, which makes up about 50 percent of its volume. “They continue to overachieve their same-store sales plan,” she said.
Dana Eisman Cohen, at Donaldson, Lufkin & Jenrette, also said luxury goods have “the most momentum” with strong first-quarter sales seen from Tiffany, Bulgari, Gucci’s core division, LVMH and Neiman Marcus. “Further strengthening of the yen and the increase in Japanese travel and consumption bode well for luxury consumption, since the most important global luxury consumer is the Japanese customer,” said Eisman Cohen. While fall 1998’s luxury weakness can be traced partly to stock-market collapse as well as to financial crises in Asia and Russia, she said the stock market has shown the propensity to bounce back.
Nonetheless, analysts said even high-end chains will be somewhat impacted by any moderating in growth, and they caution that there’s still great uncertainty as to the depth of the descent. Determinants of the degree of erosion include whether the Federal Reserve hikes interest rates again, if gas prices come down, and the tone of business during the back-to-school season.
Meanwhile, they said, many retailers are already planning more conservatively in inventories — including canceling or reducing orders — in anticipation of somewhat of a fall shortfall.
“Retailers will be more conservative, and as a result, I don’t think you’ll see the level of markdowns this fall that we’ve seen this spring,” said Elisabeth Armstrong, senior equity research analyst at Invesco, a money-management firm.
Stores are also “starting to play it safer” by offering more basic apparel staples and career and structured looks after making the mistake of pushing too many modern and edgy styles in women’s this spring. This should also prevent heavy markdowns, Armstrong said.
Lehman Bros.’ Jeffrey Feiner also said that given the “somewhat more conservative macroeconomic and consumer-spending outlook,” many retailers are planning for leaner sales and inventory. “Margin erosion, with the exception of some potential slippage associated with markdowns from poor winter sales, should be limited, and overall profit growth should still be close to expectations,” he said.
Feiner particularly likes the prospects for value-based chains such as Kohl’s, Wal-Mart and Costco Wholesale.
“Given the economic uncertainty and concerns of a consumer-spending slowdown, we believe companies that target the value end of the spectrum will provide the most resistance to an economic slowdown,” said Jeffrey M. Feiner, at Lehman Bros.
But to many analysts, a potential sales shortfall is only part of the problem. DLJ’s Eisman Cohen said that while the retail sector is generating all-time-high operating margins, these margins are not only being pinched by markdowns but also by rising prices in Asia, increased wages in the U.S. and accelerating square footage.
Said Michael Exstein, at Credit Suisse First Boston: “We continue to be cautious about the prospects for the retail industry, with capital spending trends continuing to rise, fewer signs of rationalization [consolidation] activity, and many retailers registering historically high operating margins.”
Walter Loeb, at Loeb Associates, believes fall could be a disappointment if the back-to-school season is a dud. “I’m watching back-to-school sales carefully, because they will give an indication about how the season will go. The sales momentum last year was stronger during Christmas than earlier in the season, so November could be quite strong. As a result,” he concluded, “I’m still optimistic that the year will be better than anticipated. But we need a cold winter, lower gas prices and a stock market to stay strong so the consumer remains buoyant.”
Pam Stubing, retail analyst at Ernst & Young LLP, said there’s a good chance consumers may finally start to deal with their “whopping” credit-card debt, but she said the toughest task for chains will be just surpassing 1999’s stellar results.
“I’d be happy if they just break even with 1999. That would be great,” said Stubing.

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