Byline: Jennifer Weitzman / With contributions from Thomas J. Ryan

NEW YORK — Analysts think the returns of the day on Dec. 26 may be on merchandise, not investment.
They believe a handful of retailers — those with the right fashions at the right prices, those with user-friendly Web sites and those in the luxury sector among them — are poised to slide through the season with glee and merriment, but most appear to agree with Merrill Lynch’s Dan Barry who, as reported, predicted “the worst Christmas since 1990.”
Banc of America Securities’ Thomas H. Tashjian foresees “a gray Christmas rather than a white Christmas” with sales down and, even when flat or ahead, profits down from 1999 levels.
With uncertainty surrounding who will be the next president, interest rate hikes, gyrations in the stock market, oil prices that are near double last year’s level and trouble in the Mideast, many retail analysts said things are getting dicey for apparel retailers this Christmas.
Janet Kloppenburg with Robertson Stephens said that while she expects a healthy Christmas this year for retailers, it would increase at lower rates than the good times experienced between 1997 and 1999. She said higher fuel bills and stomach-churning stock portfolios, which are roughly 25 percent lower than a year ago, will hamper consumer spending.
With two months to go, retail analysts said they predict sales to slack off from the bountiful past three Christmas holidays. Most say same-store sales in the fourth quarter will increase between 2 and 3 percent compared to 1999, when Christmas sales improved 5 percent.
Tashjian said retailers will be alarmed this year because consumers will make their gift purchases later in the season. Because of this year’s retail calendar, there would be an extra shopping weekend. Christmas this year falls on a Monday as opposed to last year, when it fell on Saturday, pushing last-minute purchases into the extra weekend.
As a result, he said he expects “most retailers to see flat, if not down sales the three weeks following Thanksgiving.”
And in light of a weaker economic environment, analysts said they expect retailers to be aggressive in promotional pricing right after Thanksgiving.
“I believe that Christmas is going to be very promotional,” said Walter Loeb, an analyst at Loeb Associates. “Retailers are going to have the hook out to pull people into the stores. Many promotions have been planned, but more promotions will result from competition with other retailers.
“Apparel, which has been very difficult, will continue to be disappointing for the rest of the year,” he added. “I see a lot of color and excitement in the stores, but the customer is not buying unless it’s marked down.”
Retailers are also up against the toughest of sale comparisons. Tashjian said the fourth quarter last year brought the strongest rate of retail sales growth in the entire decade. In addition, retailing in all sectors, except footwear, witnessed peak operating margins in 1999.
Specialty retailers are expected to fare better than department stores this year, analysts said. Through a combination of direct and effective advertising, sharp pricing and the right fashion assortments, specialty retailers will be able to move through the season more nimbly.
Tashjian said this is a peculiar period. Consumers are cutting back on their discretionary spending and are not looking for the same basics they already have in their closets. However, retailers made a shift back to basics in the second half of the year to combat the difficulties experienced during the first half when retailers offered consumers too much color and too much fashion.
Steve Kernkraut with Bear, Stearns & Co. said this Christmas season is going to be difficult. He said consumers are nervous, whether because of oil prices or the economic slowdown. Taken together, he said they create a backlash in which consumers are leery and expectations are less robust.
Marcia Aaron with Deutsche Banc Alex.Brown said Christmas will be “lackluster” this year and expects specialty comp sales to improve a pale 1 percent in December. “Overall, we are cautious about the outlook for the fourth quarter,” said Christine Kilton Augustine, who covers retail and apparel stocks for ING Barings. “Clearly the consumer is slowing and there’s a lot of volatility in the stock market. When people get their 401Ks, that might put a damper on what they might spend versus what they spend now.”
She also said retailers are facing tough numbers because of millennium-induced spending last year. Those tough comparisons ran through January because people hoarded cash due to Y2K worries and bought goods rather than putting the money back in the bank, Augustine noted.
But with consumer confidence remaining at historic highs, some apparel and retail companies can expect a few crumbs from Santa.
PaineWebber’s Richard Jaffe believes that despite challenging macroeconomic conditions, many chains will do well this holiday season.
“It’s not going to be black and white,” said Jaffe. “I think those who are on target and have the right product will excel this quarter. But, I don’t think there’s a rising tide that will lift all ships.”
Jaffe’s favorites include Men’s Wearhouse, for its opportunity to grow in men’s casual dressing for the office, Victoria Secret’s because of its “very effective advertising and strong brand identity,” and TJX Cos. because of its expanded home fashion and newer gift-giving focus. He also likes American Eagle Outfitters, Pacific Sunwear and Talbots.
Kloppenburg said she saw some bright spots, especially for those retailers who make that extra effort to display gift ideas. She said sweaters and denim would be top sellers this year.
For example, Ann Taylor, who had a miserable Christmas in 1999, made huge strides this year with its holiday assortment and gift giving selection.
For others, the theory goes that if your back-to-school and fall selling were strong, then the brand momentum should help drive Christmas sales since there are few fashion changes in that period of time.
Dorothy Lakner with CIBC Oppenheimer said, “Things were looking gloomy a couple of months ago, yet fall has not turned out to be bleak as expected. Consumers haven’t completely crawled in the hole and died.”
Lakner said strong results from companies like Talbots and Ann Taylor, both of which saw positive third-quarter results, thanks to the comeback of the suit, would likely carry over to the Christmas season.
Lakner expects Gap to perform better for Christmas, despite tallying its fifth consecutive month of same-store sales declines, with September comps falling 8 percent and expectations for this month dropped with them.
“We can already see improvements in store assortments and Old Navy looks less promotional,” Lakner said.
Kloppenburg also said brands with good Internet sites — including Gap, American Eagle and Abercrombie & Fitch — will do well with the many American victims of time poverty. “People are time pressed and would use the Web to get the brands they want if they are user-friendly and give all the services provided in the brick-and-mortar store.
The outlook for the luxury segment this Christmas remains vibrant, according to analysts.
According to Greg Furman, founder and chairman of The Luxury Marketing Council in New York, the luxury retail sector has enjoyed a 27 to 29 percent revenue growth over the last 12 years. The more specialized you are, he noted, the higher your growth rate becomes. On the other hand, the mass retailers are up 4 to 5 percent.
Furman said the luxury sector is poised to maintain that type of growth. According to a survey by J.P. Morgan, the number of U.S. households with a net worth of at least $1 million has doubled since 1994 to 7.1 million households. Furman added that the number of people with investable assets of $1 million and more is also growing.
Augustine pointed out, “We still believe it will be a good holiday for companies like Tiffany, as jewelry has held up well across all price points. We still like the high end because in general that consumer is less impacted by the economy and, to some extent, not impacted at all by the prices of gas and heating oil.”
While she remains less optimistic about apparel, Augustine said “we’re seeing some pockets of strength like denim, leather, fur trim and gold accents. Career is also selling and the consumer wants that type of look. Even some new women’s lines like Kenneth Cole and Nine West are bringing people in. We know she’s in the store but, overall, it’s still mixed.”
What most analysts can agree on is that spring 2001 should present retailers with some relief as comparisons get easier and unemployment rates and consumer confidence appear likely to remain at high levels.

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