Retailing - Broadlines – 9 March 1999
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Cold Weather Slows Comps
The cold weather that Strategic Weather Service had been
predicting finally arrived, slowing consumer traffic. Thus,
broadline retailers posted relatively flat comp store sales
gains. The sluggish start to March comes after two stellar
months of comps in January (up 6.4%) and February (up
4.5%). March and April sales plans are affected this year
by the early arrival of Easter, which falls on April 4 this
year versus April 12 last year. As a result, plans are higher
than normal in March and should be lower than normal in
April. Persisting cold weather could cause problems for
broadline retailers as they are facing difficult weather-boosted
comparisons against spring 1998, when warm
weather arrived to stay very early. Department stores are
generally slightly below plan and general merchandisers
are generally in line with plan month-to-date. Boosted 1%
to 2% by the early Easter, our Merrill Lynch Broadline
Comp Index is expected to increase 3% to 4% in March, in
line with the 3.9% gain last year and slightly below the
4.4% gain over the last 12 months.
General Merchandisers Slightly
Above Plan
Based on retailers' merchandising plans, our Merrill Lynch
General Merchandise Index of same store sales is forecast
to increase 5% to 6% in March, in line with the 5.6% gain
last year and slightly below the gain of 6.6% over the last
12 months. Sales were generally in line with plan for most
general merchandisers during the first week of the month.
Wal*Mart's sales were in line with plan at both the
discount stores and Sam's Clubs. Kmart's sales were
slightly above plan with consumables leading softlines and
hardlines. At Dayton Hudson, total company sales were
in line with plan with Target slightly above plan, Mervyn's
in line with plan and the Department Store Division below
plan. At Dollar General, sales were on plan. At Sears,
comps were in line with plan, with hardlines and softlines
both on plan at the full-line stores. Off-the-mall Home
stores were in line with plan with strength at Dealer stores
and some weakness at Auto stores.
Department Store Sales In Line
Our Merrill Lynch Department Store Index of same store
sales is expected to increase 1% to 2% in March, slightly
below last year's 2.6% gain and slightly below the last 12
month rise of 2.7%. Sales through the first week of the
month are slightly below plan for most department stores.
Through the first week of the month, comps were in line
with plan at Federated across all categories. May sales
were slightly below plan, negatively affected by cold
temperatures and winter storms. JC Penney was again the
laggard, with sales below plan for the first week.
First Quarter Rally Buoyed By
Falling Interest Rates
There is a rough historical correlation between interest
rates and the relative performance of retailing stocks.
Thus, rising interest rates during January and February had
been limiting the first quarter rally in relative retailing
stock performance. However, falling interest rates at the
beginning of March have sparked retailing stocks and the
market as a whole. Retailing stocks have begun to rally,
outperforming the market in seven out of the last eight
days. The S&P Retail Composite has outperformed the
market in three of the last four months, with the exception
of January, and The Merrill Lynch Equal Weighted Index
of 120 retailing stocks has outperformed the Value Line
Index of 1,700 stocks in each of the last four months. We
believe that the following six reasons accompanied by
steady to declining interest rates should enable retailing
stocks to continue outperforming the market over the next
month: (1) retailing stocks have a historical seasonal
tendency to decidedly outperform the market in March, (2)
we are forecasting strong February and March comp store
sales on top of robust January comps, (3) expecting
continued upside surprises in fourth quarter retailing
earnings as four out of six broadline retailers reporting
have already exceeded expectations, (4) expect first
quarter retailing stock earnings to be extremely strong
relative to sluggish earnings in corporate America, (5)
strong consumer spending is forecast for the first half of
1999, and (6) relative valuations are still not excessive.
We believe that all of our intermediate term Buy-rated
broadline retailing stocks should perform well in the
projected first quarter rally. Best positioned for the rally
are Dayton Hudson, Kmart, Nordstrom and Saks.
Other Buy rated stocks, poised for the rally, include:
Barnes & Noble (BKS, $27 1/16, C-1-1-9), Borders
Group (BGP, $13 3/4, B-1-1-9), Dollar General, Family
Dollar, Kmart, Kohl's, Nordstrom, Saks, Wal*Mart
and 99 Cents Only Stores (NDN, $47 13/16, C-1-1-9).
For more detailed information, please see our recent 26-
page report “Strong Potential For A Powerful 1Q Rally.”
Merrill Lynch is currently acting as financial advisor to Barnes & Noble
Inc., in its proposed acquisition of Ingram Book Group, announced on
November 6, 1998. |
