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Retail sector sets 'sale'
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May 8, 1998: 6:50 p.m. ET
Retailers witness Wall Street revival, but future is unclear for shifty stocks
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NEW YORK (CNNfn) - Retail stocks, the historically shifty market sector that hit rock bottom during the economic downturn earlier this decade, are fast becoming a darling of Wall Street as economic data pumps up earnings and shoppers fill up their carts.
Stocks, including those of J.C. Penney, Wal-Mart Stores and Dayton Hudson, have rallied in the last 12 months on the wings of growing consumer confidence - in Wal-Mart's case nearly doubling its stock price from $27 to $50 per share.
Sears (S) and Kmart Corp. (KM), while charting more peaks and valleys, also are hovering around their 52-week highs.
"This spring has been great for Kmart and other retailers," said Robert Burton, the company's vice president of investor relations. "Hopefully, the consumer will continue to come out, the weather will continue to remain warm and we will go right into summer without missing a step."
Kmart last week posted a 16.2 percent jump in same store sales for April, beating out its discount rivals.
At the same time, certain specialty retailers, including Gap (GPS) and Talbots (TLB), recorded a 30 percent jump in sales - proof that the long suffering apparel sector is back in vogue.
"The whole retail environment is pretty solid out there, especially in home furnishings," said William Blair & Co. analyst Skip Helm. "It's not just a result of the April Easter either. Consumer spending seems to have great momentum and it's hard to imagine something that could get in the way of that."
Lining up for retail stock
For 1997, the general merchandise retail index calculated by Standard & Poor's was up nearly 55 percent. The index for discount stores were up 70 percent.
By comparison, the overall S&P 500 index, which tracks the performance of the 500 most widely held common stocks, rose nearly 31 percent last year.
Analysts expect first quarter retail results, due out next week, to maintain their double digit growth rates.
"Things are looking great for retailers, surprisingly so," said Rick Gallagher, publisher of STORES magazine, put out by the National Retail Federation. "Retail stocks are usually sleepy and nobody really pays attention to them. But the chances of a first quarter earnings surprise, on the positive side, are very great right now - across the board."
One of the most surprising trends, Gallagher said, is that sales have been strong in all primary product segments, including home furnishings and apparel, the sector that has suffered for years from an oversaturated market and fading interest in fashion.
"What has really helped the quarter is very good sales because of El Nino," said Merrill Lynch Global Securities analyst Daniel Barry, who believes the atmospheric instigator has gotten a bad wrap. "El Nino, is blamed for many things, but this time it can take credit for the boost in sales."
What's in store for retailers?
With economic leaders hinting at a possible interest rate hikes and consumer debt levels threatening to put a stranglehold on spending, industry observers say it's unclear what the future has in store for retail stocks.
Some say retail sales can't keep up their fever pitch and that the over inflated sector may be due for a correction.
"I think the earnings are going to be there, but in terms of stocks that's another question," said William Blair & Co.'s Helm.
Linda T. Kristiansen, an analyst with Schroder Wertheim & Co., added a rate adjustment by the Federal Reserve would send shockwaves through the industry.
"One of the big leading indicators for retail sales are home sales," she said. "If interest rates go up, that won't be good for home sales or retailers."
Others, including Gary Balter, of Donaldson Lufkin & Jenrette, say the industry has come a long way towards insulating itself from economic pressures.
Any near-term interest rate hike, he said, would have less of an impact on retail stocks than many suggest.
"The retail sector has nothing to do with the economy," he said. "The sector is surging because the larger retailers have finally figured out that they are an oligopoly. They are no longer fighting for market share and instead are focusing on profit. People are getting stuck on interest rates and whether or not they will go up, but they are going to miss the rally that will continue in this group."
A changing philosophy
Retail stocks are generally categorized as cyclical, or those that rise and fall on the strength of the nation's economy.
Historically, that's been true.
But Balter said many of the leading retailers are taking steps to eliminate economic pressures from their earnings equations, giving investors more consistent returns.
As a result, chain stores are tightening up their inventories - so they don't get stuck slashing prices at year-end - and focusing more on profit than market share.
"The motto used to be, 'if we get bigger we win,'" Balter said. "Wal-Mart started that trend. But you see even from them that they are not using price as the only weapon anymore. That same strategy has allowed Dayton (Hudson) to flourish and Kmart to grow."
The same trend will help retail stocks outperform the overall market even if rates go up, he said.
That's not to say, however, that market share doesn't count - as evidenced by the recent name change of Woolworth.
The one-time five-and-dime retailer last month announced it will change its name to Venator Group, a decision driven by the competitive retail environment and its ever shrinking market share.
Since 1995, Woolworth has sold or divested 19 retail formats encompassing 1,237 stores. Last July, the company closed its 442 namesake stores, converting some of them into Foot Locker and others of its brands.
Pac Rim crisis keeps investors at home
The retail revival that began in the second half of 1997 is largely a product of wavering confidence in international markets and the economic crisis in the Pacific Rim.
"If you are worried about an international company that might lose revenue growth [as a result of economic turmoil abroad] you go back to the domestic places with the earnings, that means retail," Balter said.
For the next few quarters, Balter is recommending most of the major retail stocks, including Dayton Hudson (DH), Wal-Mart (WMT) and Kmart (KMT).
Kristiansen is touting Federated Department Stores (FD), J.C. Penney (JCP) and Staples (SPLS).
-- by staff writer Shelly Schwartz
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