Retailers under pressure
graphic November 8, 2001: 3:18 p.m. ET

Hesitant consumers prompt retailers to slash prices; dismal 4Q expected.
By Staff Writer John Chartier
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  • Mass merchants anticipate holiday sales growth - Nov. 5, 2001
  • U.S. job cuts, unemployment up in month - Nov. 2, 2001
    NEW YORK (CNNmoney) - The economic slowdown gripping the United States since January caused Americans to change the way they shop for most everything from cars to cat litter, and the Sept. 11 terrorist attacks have only served to intensify that change.

    In the two months since hijackers rammed passenger jets into the World Trade Center and the Pentagon many retail stocks have slumped, reflecting a consumer that has burrowed in at home, taking cover from massive job cuts, and fighting jitters about a second attack at a shopping mall or some other public place, analysts said.

    The industry has lost an estimated $5 billion in sales since the attacks, estimates Michael Niemira, vice president and senior economist with the Bank of Tokyo-Mitsubishi, which publishes a weekly snapshot on chain-store sales along with UBS Warburg.

    Though sales crept up 0.9 percent last week, mall traffic sank 8.2 percent from a year ago, the 27th consecutive decline in traffic, Niemira said in his latest report released Tuesday.

    "Shoppers seemingly avoided malls due to perceived security concerns about being there on Halloween," Niemira said.

    Not only are Americans spending less money, but they have shifted away from department stores and specialty shops to bargain-priced outlets, opting for food, prescription drugs, and toothpaste instead of scooters, high-fashion and personal computers.

    "Consumers continued to buy for everyday needs, the staples, such as food, drugs, health and beauty aids," Niemira said.

    These are all trends that fell into place long before the Sept. 11 tragedy. Consumer confidence, which had held up most of the year, was beginning to wan just before the attacks. A robust housing market was beginning to show cracks and companies were still cutting hundreds of thousands of jobs each month.

    The terrorist attacks deepened that impact.

    "What Sept. 11 has done to the economy is to accelerate, hasten and deepen the decline, but the decline existed before," said Kurt Barnard, president of Barnard's Retail Consulting Group, which publishes a retail newsletter. "The attack gave it the extra push in terms of retail sales. If you don't have a paycheck coming in, it doesn't matter how much cost of gasoline has gone down."

    Retailers are trying to remain optimistic about the fast-approaching holiday season on which much of the industry relies for the bulk of its yearly sales and profits. The International Mass Retail Association Monday estimated holiday sales will increase 4.4 percent from last year.

    That stands in stark contrast with figures from the National Retail Federation, which earlier this year projected just a 2.5-3 percent increase. Some analysts predict a decline in holiday sales from last year.

    But no matter what the number, most any sales are likely to be driven by major promotions and huge discounts. For shoppers with money to spend, that means a paradise, but for retailers, the situation will more closely resemble Dante's inferno.

    According to research firm First Call, which tracks earnings data, Wall Street analysts have slashed their estimates on retailers' third- and fourth-quarter results.

    Analysts slashed their expectations for retailers' net income in the fourth quarter, which includes the holidays, by a whopping $984 million since Sept. 11. Admittedly, not all of that is directly attributable to the attacks, but the figure demonstrates just how much the slowing economy, in combination with the tragedy, have dampened expectations.

    On Sept. 11, analysts had forecast a 22.3 percent year-over-year increase in retailers' earnings, according to First Call. As of Nov. 6, those estimates had been halved to an 11 percent increase.

    Expectations for third-quarter results, which most retailers plan to report in the next few weeks, have plummeted from a 6.6 percent expected increase from a year earlier to a 6.6 percent decline, according to First Call.

      What Sept. 11 has done to the economy is to accelerate, hasten and deepen the decline, but the decline existed before  
      Kurt Barnard
    Barnard's Retail Consulting
    "Consumer cyclicals have been slashed much more than what they had been prior to the attack," said Chuck Hill, First Call's director of research. "I think the job losses are a big concern. We've had some big job cutback announcements for a while, but a lot of those didn't take effect right away. But it doesn't really hit home till the guy across the street gets laid off."

    So which companies are in the spotlight?

    Companies such as Federated Department Stores Inc. (FD: down $0.67 to $33.75, Research, Estimates), May Department Stores (MAY: up $0.21 to $34.82, Research, Estimates), Gap Inc. (GPS: down $0.21 to $13.62, Research, Estimates), and Sharper Image (SHRP: down $0.08 to $7.10, Research, Estimates) have all seen their stocks sink since the attacks.

    These companies all operate department stores or specialty shops with a focus on apparel and gifts, both items that have not sold particularly well in the slowing economy.

    Shares of Federated, parent of the Macy's and Bloomingdale's department stores, tumbled from $40 at the end of August to below $30 at the end of September. Shares have since recovered to about $35.

    May, which owns the Lord & Taylor chain, saw its shares plummet from a high of $41.25 in March to $27 in September and October. Shares currently trade at about $35.

    Gap, operator of Gap, Banana Republic and Old Navy stores, has seen its stock slide from a high of $34.98 in June to barely over $11 after the attacks. Shares have crept back up to about $14.43.

    And Sharper Image, the upscale specialty gift retailer, which rode the scooter phenomenon last year, has seen its shares steadily plunge from a high of $17.25 this year to under $7 after the attacks. The stock currently trades at about $7.25.

    Though these companies may appear attractive at bargain prices since they are poised to recover when the economy improves, analysts caution investors to watch out for more solid signs of a recovery. Additionally, just how much market share discount chains have captured and will retain from department stores in a recovery remains unclear.

    Nevertheless, the economic and political situation has created a pocket of opportunity for discount chains, warehouse clubs and drugstores such as Wal-Mart Stores Inc. (WMT: up $0.68 to $54.50, Research, Estimates), Target Corp. (TGT: up $0.24 to $34.35, Research, Estimates), B.J.'s Wholesale Club Inc. (BJ: down $3.45 to $49.14, Research, Estimates), and Walgreen Co. (WAG: down $0.17 to $32.13, Research, Estimates).

    Wal-Mart, the world's biggest retailer, has by far headed the pack, managing to offer every-day low prices because of its strong supplier relationships, tight management and inventory controls and customer service.

    It's stock is trading at about $55, not far off its 52-week high of $58.75 set in January.

    The company and analysts said the company has benefited from bargain-conscious consumers looking to buy more every-day items, which Wal-Mart sells.

    Wal-Mart has previously acknowledged that it has seen customers snapping up lower-priced items than usual, which hurts profits, but by continuing to offer these items and making sure they stay in stock, the company expects to grab even more market share from the industry.

    Target's stock has been a strong performer, though it has struggled a bit with competition from Wal-Mart and the drag from the Marshall-Fields and Mervyn's Department Stores it operates. Target shares are trading above $35, down from their 52-week high of $40.43.

    B.J.'s Wholesale Club, which offers cat food, steaks, motor oil and other common items in bulk at wholesale prices, has seen its stock remain fairly steady, though it is down to about $51 from its 52-week high of $57.24 set over the summer.

    Click here for a look at retail stocks

    And Walgreen Co. the nation's No. 1 drugstore chain, has also performed well, since consumers still need prescription drugs, shampoo and other everyday items no matter what shape the economy is in. Its stock, which had fallen to about $28 from a 52-week high of $45, is now trading at $31.

    Other retailers in each of these categories, discount, department store, and specialty stores bear careful consideration going forward since all are prone to heavy discounting which will undoubtedly impact the bottom line to some degree.

    "The fourth quarter is going to reflect the intensely promotional nature of the holiday shopping season, make no mistake," Barnard said. graphic


    Mass merchants anticipate holiday sales growth - Nov. 5, 2001

    U.S. job cuts, unemployment up in month - Nov. 2, 2001