Retailing - Broadlines – 28 September 1998
2
Apparel Weak, Hardlines Strong
Apparel sales remain depressed through the fourth week of
September as unseasonably warm weather keeps
consumers from buying Fall apparel. The arrival of
Hurricane Georges in Puerto Rico, Southern Florida and
the Gulf Coast closed some stores and kept consumers at
home in those markets. Sales of home, hardlines and
consumables remain strong at most broadline retailers
month to date, evidence that the sales weakness in apparel
is weather related. We expect our Merrill Lynch Index of
same store sales should increase 4% to 5% in September,
with department stores reporting sales below their plan of
3% to 4% and general merchandisers slightly above their
plan of 5% to 6%. Sales gains should be above the soft
2.4% increase in August and the 2.8% gain last year.
Although the recent slowdown in apparel sales has been
relatively sudden, we expected apparel sales to slow from
the strong pace of the first seven months of the year. As a
result we turned more defensive on the retailing group
emphasizing supermarkets & drugstores, hardgoods
retailers, special situations and blue chip retailers. We are
more negative on Christmas sensitive and apparel retailers.
For a detailed analysis of this strategy see our report dated
September 9, 1998 entitled “Remain Positive on Retailing
Stocks but with Slightly More Defensive Posture”.
n Department Stores Hurt by Apparel Weakness
Our Merrill Lynch Department Store Index of same store
sales is forecast to increase 3% to 4% in September, above
last year's modest 1.2% gain and the year to date rise of
2.8%. Sales are generally below plan for most department
stores as a result of weak apparel sales. Federated's sales
are below plan, weakening significantly in the last two
weeks. May's sales are also below plan although sales of
home categories remain strong. JC Penney's sales remain
below plan.
We are shaving estimates on five department store retailers
as a result of this weakness in apparel. We are reducing
our 3Q EPS estimate for Federated $0.02 to $0.49 (up 4%
year over year) and our 1998 EPS estimate $0.04 to $3.02
(up 17% year over year). We are reducing our 3Q and
1998 EPS estimates for May $0.02 to $0.51 (up 6%) and
$3.43 (up 10%), respectively. For Dillard, we are reducing
our 3Q and 1998 EPS estimates $0.02 to $0.36 (down
10%) and $2.42 (up 5%), respectively. We are reducing
Nordstrom's 3Q and 1998 EPS estimates $0.02 to $0.27
(up 13%) and $1.43 (up 19%), respectively. We recently
reduced our EPS estimates on JC Penney to $0.75 (down
12%) for the 3Q, $3.10 (down 1%) for 1998 and $3.85 (up
24%) for 1999.
n General Merchandise Sales Strong
Our Merrill Lynch General Merchandise Index of same
store sales is forecast to increase 5% to 6% in September,
above last year's gain of 4.8% but below the strong year to
date rise of 7.1%. Sales remain slightly above plan on
average for most general merchandise retailers despite
depressed apparel sales and the impact from Hurricane
Georges. At Wal*Mart, sales are slightly above plan at
both the discount stores and Sam's clubs. The hurricane
shut stores in Puerto Rico and negatively impacted sales in
Southern Florida and the Gulf Coast. While cool weather
apparel sales have been weak, fashion apparel and basics
have been selling briskly. Kmart's sales remain slightly
above plan although Fall apparel sales are weak,
pressuring gross margin. ShopKo's sales are slightly
above plan driven by hardlines, home and health. Dollar
General is on plan with the strongest sales in Florida and
the Ohio River Valley.
Selectively Positive on Retailing Stocks
We remain positive on retailing stocks for one key reason —
“sustainable growth” retailers should realize relative
multiple expansion as corporate profits slow. The relative
strength of retailing profits has been enhanced by the
domestic nature of retailing earnings as global turmoil
sickens non-retailing companies that are dependent on
international sales for growth. Moreover, the increased focus
of retailing management on increasing investment returns
should boost retailers' profitability even if the economy
slows later this year as forecast by Merrill Lynch
Economics. However, the recent market weakness has made
us more cautious on certain sectors of retailing and turned
our emphasis more toward supermarket & drugstore stocks,
hardgoods retailers, special situations and blue chip retailers.
By contrast, we are more negative on Christmas sensitive
and apparel retailing stocks.
Our Buy rated stocks include: Barnes & Noble (BKS, $27
7/16, C-1-1-9), Borders Group (BGP, $26 9/16, B-1-1-9),
Central Garden & Pet (CENT, $18 1/16, D-1-1-9),
Dayton Hudson, Dollar General, Family Dollar, Kmart,
Kohl's, Nordstrom, Saks, Wal*Mart and 99 Cents Only
Stores (NDN, $39 7/16, C-1-1-9).
[KSS, MAY, JCP, SKS, DG, KM, SKO, CENT, NDN] MLPF&S was a manager of the most recent public offering of securities of this com pany within the last three years.
[NOBE, COST, CENT] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are
exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
[BKS, BGP] An officer, director or employee of MLPF&S or one of its affiliates is an officer or director of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1998 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
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