And this regarding retail... some interesting points here and I would say that if we do see a tax refund, Americans will put in into purchases.
May 30, 2001
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Retailers More Cautious On Christmas Than Investors
By JAMES COVERT
Of DOW JONES NEWSWIRES
NEW YORK -- Recent gains in retailer stocks reflect investor confidence that an economic recovery will arrive alongside this year's holiday shopping season.
But fourth-quarter planning by the retailers hasn't shown that same faith.
Since October, retailer stocks have rallied in anticipation of each of the Federal Reserve's five, half-point rate cuts, which began Jan. 3. That's more aggressive than their traditional tendency to jump once the central bank acts.
As the technology sector continues to suffer, many fund managers have pegged their hopes on retailers and other so-called early cyclicals, which are stocks that tend to come out of a recession ahead of others. Over the past six months, the Standard & Poor's Retail Index has outperformed the S&P 500 by more than 14%.
Plenty of disagreement remains about whether the economy will recover by year's end. Current valuations of retail stocks, from Wal-Mart Stores Inc. (WMT) to Home Depot Inc. (HD) to Gap Inc. (GPS), are banking on a stronger holiday season this year, analysts and investors say.
"The valuations certainly reflect expectations that the fourth quarter will improve," said Stephanie Hoff, a retail analyst at Banc of America Capital Management in St. Louis.
The companies in question, however, appear to be hedging their bets, buying fewer goods and hoping to make up in profit margins what they lose on volume during the all-important fourth quarter, when many make most of their sales for the year.
Specialty-apparel giant The Limited Inc. (LTD) last week said it's planning the fourth quarter conservatively, having committed to less than 30% of its projected inventory purchases.
Other major apparel retailers including Gap, Abercrombie & Fitch Co. (ANF), AnnTaylor Stores Corp. (ANN) and American Eagle Outfitters Inc. (AEOS) declined to be interviewed about their fourth-quarter inventory commitments, citing competitive reasons.
As a group, they've been pretty noncommittal, said Emme Kozloff, a retail analyst at Sanford C. Bernstein & Associates in New York. During a trip to Asia a few weeks ago, apparel manufacturers lamented to her that, although they've ramped up production capacity since last year, orders from retailers in the U.S. have remained at mostly flat levels.
Deadlines for the bulk of fourth-quarter commitments passed this month. While retailers can add to those orders during the coming months, late fees from manufacturers will cut into margins. The conservative bets have put a constraint on retailers' potential earnings gains this holiday, even though most face easy comparisons, Kozloff said.
"The one bright spot is that inventories will be leaner," Kozloff said, noting that retailers were plagued by heavy markdowns during the last holiday season. "I would bet the farm on low inventory levels being the savior for the fourth quarter."
The high-margin, low-volume holiday season most retailers are planning for won't give them much opportunity to improve on their present valuations, say Kozloff and other analysts who are generally bearish on the sector.
Others, including Jeffrey Feiner of Lehman Brothers Inc., say last year's markdowns were so heavy that it won't be that difficult for well-managed retailers to post healthy year-over-year sales gains - even under a modest economic recovery.
Cautious Planning Is 'No Secret'
Hopes for the year are being pegged on higher margins rather than a higher top line, said Ezra Dabah, chief executive of Children's Place Retail Stores Inc. (PLCE).
In addition to fewer markdowns, the glut of manufacturing capacity has brought wholesale prices down. While most of those savings will likely go to consumers, any retailer worth its salt should be able to squeeze at least a percentage point of margin gains out of the lower wholesale rates, Dabah said.
The main issue remains how much to buy, and Dabah says he's more wary this year of buying too much than of buying too little. He's seen signs that other retailers are being careful, too.
"It's no secret that people are a bit concerned about the future, and are probably taking a more cautious approach to their buying," Dabah said. "Our outlook will continue to remain cautious. We look forward to running after the business as it happens."
Some are already running after the business, said Ross Whithoff, senior vice president of Century Business Credit, a so-called "factor" that extends credit to apparel importers that include Tommy Hilfiger Corp. (TOM).
"Our business is well ahead of last year," Whithoff said. While he confirms reports that the overall volume of imports hasn't increased this year, price competition seems to be minimal. Century's clients seem to "have merchandise that retailers want," Whithoff said.
Bud Konheim, chief executive of Nicole Miller, a firm that specializes in occasion wear, said he's seeing the same thing. While there looks to be less merchandise on the books this year, retailers are nonetheless buying excitedly. It's particularly heartening that mom-and-pop retailers are digging into their own pockets for merchandise orders, Konheim said.
"I personally think there's going to be a terrific recovery in the fall because there's not so much stuff around," Konheim said. "I can smell it already."
Such anecdotal evidence says more about merchandising trends and individual companies than it does about the economy or the sector as a whole, warns Sid Doolittle of McMillan/Doolittle LLP, a Chicago retail consulting firm. The industry's failure to commit to the fourth quarter gives it limited upside in terms of sales and earnings, no matter what the size and timing of an economic upturn, Doolittle said.
"It's kind of a self-fulfilling prophecy," Doolittle said. "If buying is conservative and the market picks up, there's not going to be an enormous recovery."
Even if retailers have been more cautious this year, not everyone is sure they've been cautious enough. Robert Buchanan, an analyst at A.G. Edwards & Sons Inc. in St. Louis, says the retail environment won't likely see a significant second-half improvement, and that markdowns will continue to be a risk.
While department stores and home-improvement retailers have been reducing inventory effectively, specialty apparel retailers have bought too aggressively for too long, Buchanan said.
"I hope they get more disciplined," Buchanan said. "But I'm a doctor, and I'm looking at the patient's chart, and I don't like the history."
-By James Covert, Dow Jones Newswires; 201-938-5360; |
