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Retailers had sluggish 2Q
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June 25, 2001: 9:59 a.m. ET
Inventory buildup, steep markdowns, slower sales put pressure on earnings
By Staff Writer John Chartier
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NEW YORK (CNNfn) - Retailers are facing weak second-quarter results, analysts and industry experts said, hurt by an inventory buildup in May and June as consumers held back amid the slowing economy and cool spring weather.
With the July Fourth holiday still two weeks away, weekly sales circulars hawk "end of season" clearance sales, reflecting moves to sell off at steep discounts inventory that built up in May because of sluggish sales.
That's great if you're a shopper hunting for a bargain, but bad if you're a merchant, since those markdowns reduce the amount of profit earned from each sale.
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Going back to the beginning of summer they had a lot of inventory on hand and they need to get rid of it
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Kurt Barnard
President
Barnard's Retail Trend Report |
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"We're seeing clearance sales that are early by at least three to four weeks. Going back to the beginning of summer they had a lot of inventory on hand and they need to get rid of it," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "Second-quarter earnings are going to reflect the markdowns. Everybody has been caught in the downdraft."
No. 5 U.S. retailer J.C. Penney Corp. (JCP: down $0.68 to $25.24, Research, Estimates) is among those offering early summer clearance sales.
"It looks like all stores are having clearance specials, summer sales. It's very competitive out there. It's a very competitive market, and we think retailers are vying for consumers' dollars as the economy is slow and people probably aren't spending as much," Penney spokeswoman Stephanie Brown said. "So retailers are giving consumers incentive to come in and traffic their stores."
Retailers' second-quarter earnings as a group are expected to come in sharply lower than year-ago levels, according to research firm First Call, which tracks corporate earnings. If so, it would be the fourth consecutive decline in earnings for the sector from year-earlier levels, First Call analyst Ken Perkins said.
Current expectations are for retailers to post a 3.2 percent decline in second-quarter earnings compared with a 9.8 percent increase in the year-earlier quarter, according to analysts surveyed by First Call. That's down from the a 1.2 percent decline analysts were forecasting the previous month.
The question many now face is whether they can clear all of that merchandise by the end of the second quarter and avoid an earnings impact.
"The retailers want to make a big push for fall apparel this year," Scott Krugman, a spokesman for the National Retail Federation said. "That's definitely a fact. There's a very strategic message here. This is well planned out in advance. The question isn't so much the timing of the markdowns as it is the amount of inventory."
Meanwhile, sluggish sales are having an effect on company performance.
On Thursday San Francisco-based Gap Inc. (GPS: down $0.63 to $31.40, Research, Estimates), owner of Gap, Banana Republic and Old Navy stores, said it planned to slash 5-10 percent of 10,000 headquarters jobs and that it could take a $20 million pre-tax charge as it continues to struggle with sluggish sales in the slowing economy. Though analysts generally like the stock, the Street has criticized the company for repeated fashion "misses" that also have hurt sales.
Additionally, shoe retailer Kenneth Cole (KCP: up $0.01 to $19.15, Research, Estimates) warned late Thursday that it anticipates lower-than-expected second-quarter earnings due to the "worsening retail environment."
The Fed has been closely tracking retail sales, as they offer a glimpse into consumer spending and confidence. Consumer spending has become particularly important to the Fed, which next meets Tuesday and Wednesday, since it accounts for two thirds of the U.S. economy.
Though consumer spending is down sharply from year-ago levels, it has not fallen off completely. U.S. unemployment remains at a scant 4.5 percent, though it has begun to edge up. And the real estate market remains robust, with continuing increases in new home construction and existing home purchases.
Many consumers have simply streamlined their purchases to necessities or shifted from upscale department stores such as Nordstrom (JWN: down $0.09 to $18.03, Research, Estimates) to discount chains such as Wal-Mart (WMT: up $0.27 to $50.25, Research, Estimates), Kmart (KM: down $0.22 to $11.58, Research, Estimates) and Target (TGT: up $0.42 to $36.76, Research, Estimates) in search of bargains, analysts have said.
Nevertheless, even Wal-Mart, the world's biggest retailer, anticipates a scant 3-5 percent sales growth in stores open at least a year, a key gauge known as same-store sales, for the month of June.
But the company maintains that the soft retail environment has not prompted it to shift its focus to fall merchandise any earlier than normal.
"We've not expressed anything. Our key thing we're doing right now is being in stock," Wal-Mart Spokesman Tom Williams said. "When you have times like these, we have many people who are shopping with us who don't normally shop with us. We want them to keep coming back. We emphasize that at every meeting."
But analysts think the group could be reaching the bottom and that retailers are poised for a comeback in the second half of 2001. That is, if the five interest rate cuts the Fed has imposed the year finally take effect, encouraging increased productivity in manufacturing and making people feel more confident about their jobs, which would give a boost to consumer spending.
And tax rebate checks, due to start arriving in mailboxes in July, also could give a boost to consumer spending.
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"There's a feeling that consumer spending could certainly get a boost as the first Fed rate cuts will have been in place for 8-9 months," First Call's Perkins said. "And people will start receiving their checks from the tax rebate. Things are looking up for the retailers. I think the comparisons are looking better too."
Krugman heartily agrees with that, noting that warmer weather toward the end of June and Father's Day prompted sales of apparel, gadgets and other gifts as well as big ticket items such as air conditioners.
J.C. Penney, too, maintains a positive outlook. The company, which had been struggling against fierce competition from Target (TGT: up $0.42 to $36.76, Research, Estimates), Kohl's (KSS: down $0.69 to $64.61, Research, Estimates) and Kmart (KM: down $0.22 to $11.58, Research, Estimates) amid the sluggish economy, is in the midst of a massive turnaround effort.
CEO Alan Questrom told analysts at a luncheon in Boston Friday that he is optimistic about the fall season despite the economy because the company has streamlined and improved its management.
On Wednesday, the company said it remained comfortable with Wall Street's second-quarter estimates for a loss of 22 cents a share and full-year earnings of 32 cents a share. 
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