Retailers face tough times to come
Poor consumer confidence may force some into bankruptcy
NEW YORK, Dec. 29 — The weakest growth in holiday sales in three decades might force some U.S. retailers to shed stores or even file for bankruptcy, especially if consumer confidence takes a battering from a possible war with Iraq.
WHILE ANALYSTS DO NOT expect failures on the scale of a Kmart Corp., which sank into bankruptcy last January, they said such niche retailers as MTS Inc., the parent of Tower Records, and Mrs. Fields Original Cookies Inc., may face greater strain than others in paying their debts.
“If retailers were counting on this holiday season carrying them through the year, they’re going to be — or already are —disappointed,” said Jordan Kaplan, a managerial sciences professor at Long Island University’s business school.
Not every struggling business will go belly-up, of course. Yet analysts said that for many retailers, the holiday season was a bust. And analysts said war with Iraq might boost oil prices and make consumers reluctant to spend.
Some retailers are already taking drastic action. On Monday, FAO Inc., the owner of FAO Schwarz and Zany Brainy toy stores, said it will shut down up to 70 outlets as it tries to negotiate new credit terms to avoid bankruptcy.
“Everybody is challenged,” said Michelle Barishaw, senior director at credit rating agency Fitch Ratings. “People are not spending as much, and there isn’t a real bright spot.”
MTS did not immediately return calls seeking comment; Mrs. Fields declined to comment.
SPOILED CONSUMER
Weak sales have in the last three years already driven some of retailing’s biggest names into bankruptcy. Once venerable retailers that shut their doors include Ames Department Stores Inc., Bradlee’s Inc. and Montgomery Ward & Co.
Retailers count on November and December for one-fourth of annual sales. Some electronics stores and specialty apparel chains count on those months for the bulk of annual profits.
This holiday shopping season may have gotten off to a robust start as discounting behemoth Wal-Mart Stores Inc. reported a record $1.43 billion of sales on the day after Thanksgiving.
The optimism didn’t last. Wal-Mart on Thursday cut its December forecast for growth in same-store sales to between 2 percent and 3 percent from between 3 percent and 5 percent. Many analysts also expect rival Target Corp. to miss December goals.
Michael Niemira, senior economist at Bank of Tokyo-Mitsubishi Ltd., projects holiday sales at stores open at least a year to rise only 1.5 percent from a year ago.
That gain would be the smallest since 1970, when Richard Nixon sat in the White House. Analysts said heavy discounting failed to generate a sea of last-minute holiday shoppers.
“It has become part of consumers’ mindset to expect discounts,” said Barishaw. “Even if consumers’ pocketbooks grow fatter, they are not going to revert to paying full price.”
Consumer electronics retailer Best Buy Co., bookseller Barnes & Noble Inc., and retailer Office Depot Inc. all warned in December of weaker sales.
“Consumers are delaying purchases (and) there has been a ’bargain effect,”’ said Richard Hastings, retail sector analyst for Cyber Business Credit in New York.
Much of the discounting results from the relative strength of Wal-Mart and Target, which carry many of the same or similar products as higher-priced rivals. Discounters have stolen market share from department stores, which are cutting inventories to pare markdowns and preserve profits.
“It is now the discounters who are walking away with the cake while the department stores end up eating crow,” said Kurt Barnard, publisher of Barnard’s Retail Trend Report.
“Stores like Dillard’s Inc., Federated Department Stores and Marshall Field’s are not in tune with the public’s needs,” he said. Federated is the parent of Macy’s and Bloomingdale’s; Marshall Field’s is a unit of Target.
EVEN WAL-MART, TARGET STRUGGLE
Some retailers are now paying a penalty for 1990s- era overexpansion and overconfidence about the U.S. consumer.
This “lulled many retailers into the belief that they could continue to expand their footprint forever without adverse consequences for returns and (profit) margins,” said credit rating agency Moody’s Investors Service in a report.
“If consumer spending falters and/or if a double-dip recession occurs,” Moody’s added, “the operating environment could become very rough and increase ... downward rating pressure,” especially for companies trying to rebound from recent losses or sharp profit declines, such as Dillard’s, Gap Inc. and Sears, Roebuck & Co.
Indeed, consumers have grown keen on saving. The U.S. personal savings rate was 4.3 percent in November, twice the level three years ago, Commerce Department data show.
Competition for these consumers impedes retailers’ ability to boost prices, and profits. “Deflation may be one of the smoking guns,” said Kaplan. “I don’t know if it’s bothering the consumer, but it’s bothering retailers.”
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One bright spot might be if Kmart shuts many of its
more than 1,800 stores to convince creditors to help it exit bankruptcy by next summer. Analysts expect Kmart to announce hundreds of closures in early 2003, on top of 283 this year.
“If Kmart closes another 200 to 500 stores it should have a spillover effect” that may help competitors, said Barishaw.
Less competition, though, does not mean an end to bargains. “If you think it’s good now, wait until January,” said Hastings. “It’s only going to get better.”
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