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Retail rumblings
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February 8, 2002: 1:56 p.m. ET
Analysts like cost-cutting at Dillard's, Saks, but shadows of Kmart abound.
By Staff Writer John Chartier
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NEW YORK (CNN/Money) - Now that Kmart has succumbed to a trifecta of economic recession, tougher competition and poor execution, many on Wall Street are reviewing other retail thoroughbreds whose prime may be past.
Few retailers have been immune to the slowdown in consumer spending and competition from Wal-Mart Stores Inc. (WMT: up $0.48 to $58.87, Research, Estimates) in the last year, but Dillard's Inc. (DDS: up $0.15 to $13.09, Research, Estimates) and Saks Inc. (SKS: down $0.43 to $9.18, Research, Estimates) are two trotters often cited as having the longest odds if the economy fails to pick up the pace.
Both are saddled with millions in debt and are nearing the limit of effective cost-cutting. Growing sales has also been a struggle, mainly because discount chains have been siphoning recession-conscious customers with their every day low prices.
But Little Rock, Ark.-based Dillard's had been struggling with competition well before the economy began to retreat and Saks, based in Birmingham, Ala., faces the additional challenge of having major exposure to New York, where the World Trade Center was destroyed in the Sept. 11 terrorist attacks.
Saks Inc. operates the luxury goods chain Saks Fifth Avenue, which accounted for nearly $600 million, or nearly half, of the company's total sales in the third quarter of $1.4 billion.
"Clearly they're losing share to the specialty guys, and they're suffering really from a downturn in the economy," Prudential Securities retail analyst Wayne Hood said of Dillard's. "...Unfortunately Saks is at the high end and the moderate end and both of those have suffered. On top of that, you have significant exposure to New York and the metropolitan region, so it's a double whammy with the economy and September 11."
Adding to investor fears about Dillard's was a report in a trade publication last month that the company had missed payments to one of its vendors. Dillard's later said the situation had been resolved.
Another major apparel vendor, which requested anonymity, told CNN/Money.com that Dillard's remained current in its payments.
A second retail industry source told CNN/Money.com that vendors are now hesitant to sign contracts with Saks.
It was Hood's research report on Kmart in early January that first mentioned the possibility of a bankruptcy for the No. 2 U.S. discount chain, touching off a string of events that eventually led to the company's Jan. 22 filing for Chapter 11 protection.
He rates both Dillard's and Saks worthy of being on investors' trouble watch-lists because of competition from the discount space, but stopped short of saying bankruptcy looms ahead, noting that their cash positions were not as strained as Kmart's.
Saks' Chief Financial Officer Douglas Coltharp believes recent cost-cutting and inventory reduction has positioned the company well for a turnaround in consumer spending in 2002.
"We repaid our debt by more than $500 million year over year, which leaves us with a debt-to-capitalization ratio of 35 percent by year-end," Coltharp said, adding that the company refinanced its long-term revolving credit facility for $700 million over the next five years, leaving the company "sitting on a substantial amount of cash."
A Dillard's spokeswoman did not respond to interview requests for this story.
While balance sheets are improving, there is still the question of the pace of an economic recovery, and more importantly to analysts, just how much market share discount chains will continue to steal from department stores once the economy does fully rebound. That share could become pronounced if consumers have come to expect discount prices all the time.
For now, analysts are forecasting retail earnings will bounce back in the first half of 2002, according to data from research firm First Call. Retailers' first quarter earnings are expected to increase 7.1 percent from a year earlier. Second quarter earnings are expected to rise 12.2 percent from the comparable year-ago period.
Though consumer confidence is showing signs of bouncing back and economists generally believe the recession is close to, if not already, over, Americans are continuing to shift their dollars to discount chains, a move that has some analysts concerned about the future of traditional department stores and specialty shops.
"There's a war going on out there. Wal-Mart is eating up everything that's good for them (retailers)," said Delos Smith a senior economist at the Conference Board, a research firm that tracks consumer confidence and other.
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There's a war going on out there. Wal-Mart is eating up everything that's good for them (retailers).
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Delos Smith
Senior Economist
The Conference Board |
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Dillard's posted a 4 percent increase in its January same-store sales while Saks reported a 2.1 percent increase. However, much of those gains stem from seasonal winter and holiday clearance sales, which cut into margins and hurt profits.
A report Friday from Chain Store Age, a trade publication, attributed the industry-wide increase of 5.2 percent in January same-store sales mostly to clearance sales, meaning that retailers are not likely to maintain the brisk sales pace in coming months.
If that happens, analysts said, any amount of cost-cutting ends up being just a wet band-aid for Dillard's and Saks, which, like most traditional department stores, are heavily dependent on apparel, where industry where overall sales are flat to down from a year ago, Robertson Stephens retail analyst Bill Dreher said.
Fashion Week is getting under way in New York, and Dreher said its consumers' reactions to the new fashions that in large part will determine whether the sales pace will pick up this spring.
Check retail stocks here
Dillard's and Saks both managed to trim inventories in the third quarter, according to their balance sheets, but some analysts are left wondering how much of that represents real reduction, and how much is simply accounting gimmickry.
If current trends continue, the companies are likely to face real pressure in both the near and long term, analysts said.
"They're trying to create the perception on Wall Street that inventories are in great shape, but how much of that is true sales of merchandise and how much is just accounting?" Dreher said. 
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