Santa's Mixed Bag for Retailers Amid a more cautious environment, specialty-apparel, general-merchandise, and jewelry chains could have the happiest holiday
BUSINESS WEEK ONLINE
November 27, 2000
Santa's Mixed Bag for Retailers
Amid a more cautious environment, specialty-apparel, general-merchandise, and jewelry chains could have the happiest holiday
Retailers must have been very naughty this year. With few hot toys, a sinking stock market, and softer consumer spending, analysts say it looks like lots of lumps of coal as we head into the holiday shopping season. But they're not expecting a major washout for retailers. "I have heard a lot of people moaning and wailing about a terrible Christmas," says Kurt Barnard, president of Barnard's Retail Trend Report. "We're predicting a decent but unspectacular season."
First the bad news: The International Mass Retail Assn. (IMRA), a trade group that looks at trends in retailing, projects total holiday spending in November and December will increase 2%, considerably lower than the 5% growth for those two months a year ago.
The past year has been turbulent but still robust for consumers. Although the recent stock market doesn't show it, the economic expansion is rolling into its ninth year. Unemployment remains at record lows. Consumer confidence is high. And inflation is benign. The typical shopper still has an appetite to buy. All good news for retailers. But consumer interest may be waning just when retailers need it most.
SLOWDOWN AHEAD. A recent government report shows that consumers are indeed still spending, but they've started to turn cautious. In October, retail sales, excluding autos, rose 0.4%, vs. a 0.7% rise in September. Further, shopping in November has so far been subdued, according to the Redbook Retail Sales Average. Diminished stock market wealth, interest rate hikes, and skyrocketing fuel and heating-oil prices are holding consumers back, analysts say, but the drop in spending signals a slowdown and not a serious downturn. Redbook expects the spending pace to pick up after Thanksgiving weekend, the traditional kickoff of the holiday shopping season.
As with Christmases past, Santa will have a mix of retail losers and winners in his bag. Analysts are predicting that some retailers -- specialty apparel, some general-merchandise stores, and jewelry -- will find a treasure trove of profits under their tree.
Data gathered in the IMRA survey show that apparel tops Americans' shopping lists in 2000. Even here, though, only certain niches are expected to perform well. "Specialty apparel for boomers seems to be a bright spot," says Margaret Whitfield of Tucker Anthony Capital Markets. She points to Talbots (TLB) and Chico's (CHCS), two clothing chains that have homed in on middle-aged women, as strong performers this holiday season.
BRIGHT SPOT. Apparel stores that focus on attracting teenagers are also expected to perform well. "People in the younger age groups are more interested in fashion and are purchasing with greater frequency," says Jeffrey Klinefelter, an analyst with U.S. Bancorp Jaffray. His top pick in this area is preppy clothier Abercrombie & Fitch (ANF).
One bright spot in general-merchandise retailing could be department stores, says Sally Wallick, an analyst with Legg Mason, given that many of them have low year-ago numbers. Her favorite is May Dept. Stores (MAY), which she expects will beat last year's fourth-quarter earnings.
Warehouse clubs could have a tough time beating their 1999 fourth-quarter earnings, as these companies got a boost from millennium business -- both in survival supplies for the Y2K-panicked and party supplies for the revelers. Wallick's top pick among warehouse clubs is BJ's Wholesale Club (BJ), which is continuing to gain market share from other retailers during holiday shopping months.
UNTOUCHED. Shoppers at discount stores like Dollar Tree Stores (DLTR) and Dollar General (DG) are most affected by rising prices at the gas pump and for heating oil, says Mark Miller, an analyst with William Blair & Co. But they also benefit most from high employment rates and are relatively untouched by stock market losses seen by consumers in higher tax brackets. Some of these low-cost stores have had internal problems, but Miller says Family Dollar Stores (FDO) has outperformed the group.
On the other hand, "the higher-end consumer is going to have a very merry Christmas," says Eric Beder of Ladenburg, Thalmann & Co. He expects the "make it and spend it" buying habits among baby boomers and Generation X to give upscale department stores like Nordstrom (JWN), Saks (SKS), and Neiman-Marcus (NMG.A) jolly holiday profits.
Ken Gassman of Davenport & Co. expects jewelry stores to turn in sterling results as a group, due in part to lingering millennium fervor. An expensive DeBeers campaign for diamond rings is also boosting sales, he says. Jewelry retailer Zale (ZLC) could fare well as gold and gems are still within the means of middle-class consumers. "Zales is really addressing middle America. They're stressing value this season," says Lynn Detrick, an analyst with Sanders Morris Harris. She expects the company to perform at least in line with expectations, if not slightly better.
With four weeks left before Christmas, retailers of all stripes are praying that Santa is more generous than most of the experts are predicting.
By Amy Tsao in New York
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