Byline: David Moin / Jennifer Weitzman / With contributions from Kristin Young, Los Angeles

NEW YORK — Last week was about as gloomy as it gets for retailers. Wards and Bradlees called it quits, Paul Harris announced a wave of closings and Christmas figures came in flat or thereabouts for most chains.

With the economic mood turned sour, corporate profits seen flattening, layoffs anticipated, consumer confidence declining, energy prices high and stock prices low, the retail sector is expecting about as much momentum in the first and second quarters as it had for holiday 2000.

Further consolidations, particularly among regional players, or a “rationalization” of square footage and inventories are widely seen, with discounters and some stronger specialty chains outperforming department stores.

Still, despite all that, and their meager forecasts of 1 or 2 percent comp-store gains for the first half, some retailers do hold out some hope.

Sluggishness, they said, was first seen around May, so comparisons should be easier as the year progresses, and inventories are generally thin and planned lean, which could help offset some of the margin erosion of heavy markdowns.

Also, a gift from the government in the form of an interest rate reduction could spur spending. Plus, with retailers consolidating and dot-coms dropping out, there’s finally some talented manpower available. The talent pool may not be quite so dry in 2001 as it’s been for the past years.

Retail consultant Walter Loeb thinks some fresh colors that designers showed in the past year may trickle down to clothes sold by the mass merchants, helping sales, though the consensus for spring is that the fashion is generally not inspiring. As Joan Kaner, senior vice president and fashion director of Neiman Marcus said after the spring showings: “It has not been a stellar season, I’m afraid. There have been some good collections and some disappointments.”

Retailers are looking for help outside the industry.

“An interest rate reduction would send out a positive note,” said Allen Questrom, chairman and chief executive officer of J.C. Penney Co. “Hopefully, we’ll see some action early.
The positive impact of the millennium, that stimulus, is gone. I would like to see Mr. [Alan] Greenspan [chairman of the Federal Reserve Bank] take action sooner rather than later. If it happens, it could be a soft landing. There is so much good in this American economy.”

Questrom said for more moderate businesses such as Penney’s, the big issue is energy, though Penney’s, he has admitted, needs work on its assortments and marketing.

“If fuel prices stay higher, that effects the middle-income customer much more,” while equity market declines dampened the luxury sector, Questrom said.

He said he would like to see the nation adopt an energy program to stimulate fuel production and develop new sources of energy, possibly through tax abatements to help build refineries and tapping new sources of power, possibly atomic energy.

Hal Kahn, chairman and ceo of Macy’s East, said: “Though I am concerned about the retail environment, there was no doubt about the bell ringers in women’s apparel and accessories in December that outperformed in the store.

So, I still feel fairly optimistic for sportswear, shoes and accessories for 2001, and have a more cautious feeling about men’s and the home business.”

His counterpart in San Francisco, Macy’s West chairman and ceo Jeremiah Sullivan, said his chain is planning cautiously for 2001.

“We’re ready for whatever happens, but we expect it to be a tough first quarter,” Sullivan said.

Macy’s West expects gains in apparel, cosmetics and fragrance and while seeing no slowdown in these categories, Sullivan said: “There are plenty of signals that consumer confidence has changed. It would be less than prudent to ignore them.”

Hal Reiter, ceo of Herbert Mines Associates search firm, said: “With [Wards] going down and Bradlees going down, and all these dot-coms failing, there is more talent available — merchants, marketing and financial executives. We’re getting a lot of calls from people at pure dot-coms who want to know what the market looks like in bricks-and-mortar. That’s good, because it’s been hard to recruit good people in every retail business sector, whether its high-end or basic.”

While dot-coms seem like dinosaurs already, the personal-computer business is expected to reach $74 billion in sales during 2001 against $45 billion in 2000, sparked by eight million new PC shoppers, according to Forrester Research.

“The Internet will provide some immunity to an economic downturn,” Forrester Research said in a statement last week. “A growing pool of value-focused customers will flock online as the economy dips. Tax-free purchases on Walmart.com, price-comparison Web sites like mySimon.com and a wide range of liquidation merchandise on overstock.com and Penney’s Red Alert shop will appeal more than ever to price-conscious shoppers.”

But Arnold Aronson, managing director of retail strategies for Kurt Salmon Associates, contended that buying tax-free over the Internet “at this point, is a very small issue. It’s probably washed out by delivery costs.”

“We’re into a retail retraction,” stated Aronson. “The first half or three-quarters of year 2001 are going to be a continuation of what we saw in the fourth quarter. At best, they’re looking at a very low, single-digit increase if not flat, even if fuel prices go down and the weather gets warmer,” to stimulate sales of spring goods.

“Now that companies are being valued at rational earnings ratios, the stock market is not about to come bounding back,” Aronson continued. On top of that, there are fears of business downsizing and layoffs.

“Some of those fears will turn to realities,” Aronson said. “It will be hard to maintain the [low] unemployment rate.
We’re looking at a technology industry in a near state of collapse. Certainly, that will have a ripple affect on other parts of the economy.”

In addition, Aronson said there’s a lack of fashion innovation, like the capri pants, to excite shopping.

“The fashion trends are comfortable and wearable, but I am not sure there are things people are going to be flocking to the stores to have,” he said. “The product fundamentals are not there, and the stock market has been a real damper and a psychological damper. There is no question that when people see big chunks of their net worth evaporate, they start thinking about how much they buy at retail.”

“I anticipate the first half will be very bleak,” added Walter Loeb of Loeb Associates, a retail consulting firm. “I shaved all my estimates by a nickel or more for the first half and anticipate in the second half to see a pickup only if there is a more stable environment.

“Every retailer is lean in its inventories. That’s very positive for continued profitability for a lot of people. I am looking for more color from designers to be translated into popular prices, which will bring more fashion excitement, and makes the mood more optimistic for the second half.”

Jim Glassman, a senior U.S. economist with Chase Securities Inc., said regionally, the Midwest’s auto industry, which saw a boom over the past five years, is returning to normal levels of activity, while the farm belt will struggle, and the South will benefit from the aging demographic migrating and needing new housing, while technology companies also move to the region.

The technology and e-commerce-driven East and West Coasts, while hard hit by the fall of the Nasdaq, still have favorable outlooks, Glassman said.

“It’s hard to get worked up over the short-term hit this year,” said Glassman, explaining that the spectacular and fast growth rate enjoyed by the technology sector may be gone, but last year’s ups and downs were “just a taste of the world we are in. We live in a fast nation with technology and the rapid speed of progress and we will go through bouts.”

He said the current financial environment is not so threatening because it will benefit in the long run from subdued growth and diminished inflation fears, allowing for interest rates to come down. After the U.S. economy endures some “rough patches” over the next six months, it will balance out in the long run, Glassman predicted.

He said businesses must cut back on inventory as consumer spending slows and that some businesses were caught off guard with bloated stocks. While this hurt the economy, it sets the stage for corrections and a good performance in the second half and beyond.

While the economy is downshifting, it’s not heading towards a hard landing, Glassman stressed. That would be one marked by an abrupt end to the good times and a recession. He said he expects a soft landing since inflation is under control.

“The Federal Reserve will cut rates if they have to in order to help regenerate the economy and set the stage for decent growth in 2002,” Glassman said. “To me, the pain of transition will be worth the gain that is coming.”

Jim Lonski with Moody’s Investors Services said states with heavy manufacturing and textile industries are at a disadvantage this year. The Midwest and parts of the South are seeing plants close as companies move to emerging market regions like East Asia or Mexico, where labor is cheaper and there’s a favorable exchange rate with the the overvalued dollar.

Todd Slater, an analyst at Lazard Freres, said issues facing retailers in 2001 will be the slowing macroeconomic environment, difficult early comparisons and store overcapacity. He said 2001 is shaping up to be a “rationalization” period for retailers.

“While consumers’ spending slowed, square-footage growth accelerated to irrational proportions,” Slater said.
That could lead to slower growth by many companies, consolidations and liquidations in 2001 and 2002, he said.

Slater said each retail sector has its challenges, but all can perform well. He said specialty stores must rationalize real estate and consistently innovate, renovate and evolve their brands. Brand stagnation means death, he said. One big risk alienating customers is updating an image, he said citing Estee Lauder, Nordstrom and Gap as falling victim to that last year.

He praised Express for its turnaround and “doing the best job at delivering newness and consistency as well as price and value.” Other standouts were Victoria’s Secret and Bath & Body Works for being focused and for steady product innovation that sets them apart.

Department stores will still have it tough, Slater said, since they will continue to loose share to specialty and discount stores.

“It’s is hard [for department stores] to differentiate with product assortment and they do not have the pricing benefits of discounters,” Slater said.

On the West Coast, Jack Kyser, chief economist at the Los Angeles Economic Development Corporation, said: “On the one hand, California is leading the nation economically. Arizona, Colorado and California are all doing extremely well. There’s been a lot of migration to the West Coast. But there are weaknesses in the tech sector, people are nervous about the stock sell-off, and California’s energy issues are impacting everybody.”

In short, the LAEDC forecasts a slowdown in 2001. California’s nonfarm employment growth rate in 2001 is expected to slow to 2.8 percent from 3.6 percent in 2000. Arizona’s employment rate is forecasted to slow to 3.2 percent in 2001 from 3.8 percent in 2000 and Colorado’s is seen slowing to 2.6 percent, compared with 3.4 percent this year.

The growth in taxable retail sales in California will slow to a 6.5 percent increase forecasted for 2001 from the 10.2 percent increase in 2000.

California’s electric power crisis that hit about six months ago will have a ripple effect throughout much of the Western region, Kyser maintains.

“A lot of households are going to see their discretionary income clipped from higher electric bills,” he said. “The lower-to-middle income brackets are going to feel some definite squeezes on their purchasing power. Retailers have to be very alert to what’s going on.”

In Los Angeles, several retailers are bracing themselves for a downturn in the entertainment industry. The Writers Guild of America and the Screen Actors Guild contracts with studios are set to expire next year and economists are expecting strikes and a three-month period of slower movie and television production activity.

“That’s of some concern,” said Tracey Ross, owner of her eponymous boutique in Los Angeles. Ross said she is essentially optimistic about 2001 but will not overbuy.

“We still expect a growth rate for our business, but not the numbers we originally projected back in 1999,” said Mark Freeman, co-owner of the Jill Roberts boutiques in Santa Monica, Calif., and Beverly Hills, also citing the guild strikes.

Allen B. Schwartz, president of ABS by Allen B. Schwartz, said his business is 10 percent ahead of last year, a growth he attributes to having a diversified product mix. The Los Angeles-based manufacturer and retailer sells separates, dresses and eveningwear.

“If I were in one category right now, I’d be very nervous,” he said. “If you don’t have the right item, watch out. I’m in town [during the holidays] because my product should be fine-tuned for 2001.”

Garment contractors, manufacturers and retailers could also be adversely affected by the state’s minimum wage increase. The floor wage increases from $5.75 to $6.25 per hour. California’s tourism is expected to be strong in 2001, lifted by Disney’s California Adventure theme park slated to open this year. Executives at the South Coast Plaza mega mall in Costa Mesa, Calif., said they expect an uptick in foot traffic generated by the new park.

International trade is not expected to be the growth engine it once was, said Kyser, but it will do well.

David Contis, chief operating officer of the Macerich Co. development firm in Santa Monica, said that because of capital restraints in the real estate investment trust market, one should see limited-to-no new mall additions in 2001.

“I see only a few coming in the next year or two, so there will really not be a net growth in retail space on the mall side,” said Contis.

As a result, existing mall occupancy will continue to improve dramatically over the next year, with occupancies ranging in the 92 to 95 percent range, he said.

Also, Wal-Mart and Target should further expand in California and Kohl’s could open 20 to 30 units in the region in the next few years.

“They face a challenge finding suitable sites that would accommodate their size requirements,” said James Rosenfield, president of J.S. Rosenfield & Co., a real estate redevelopment company.
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