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Target, Penney warn
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August 31, 2000: 6:57 p.m. ET
Slowing economy, tapped-out consumers hurt back-to-school season
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NEW YORK (CNNfn) - In the August back-to-school shopping season, some prominent retailers got left back.
A slowing economy marked by higher interest rates and rising oil prices, combined with a perceived fashion "sameness," ate away at retailers' August sales, prompting several to issue fiscal third-quarter earnings warnings.
J.C. Penney Co. and Target Corp., two of the nation's largest retailers, issued their warnings after reporting lower August sales Thursday. And continued fashion problems at s Old Navy stores prompted several analysts to lower their ratings on parent company Gap Inc.
 Additionally, the fashion softness led to lower sales and a third-quarter warning from specialty clothing retailer Pacific Sunwear (PSUN: Research, Estimates).
Apparel retailers in particular have been hard hit this year, as consumers have scaled back on purchases. The greater reason is the slowing economy, but other factors driving consumer frugality include whopping credit card debt and a fashion malaise in which people's closets are already filled with enough khaki, Capri pants, and blue shirts to last a while.
There is good news in the long term perspective. Although things are tough now and likely to remain so for the rest of the year, retailers should be able to adjust inventories to the slower economy and stabilize profits.
But that's little comfort now, as retailers face the possibility of a weaker-than-expected holiday season.
"The bottom line is the consumer is falling down," said Kindra Hix, a retail analyst at Banc of America Securities. "It's going to be a tough road in the near term because it takes a while to manage your inventory down. I think part of it is the consumer is slowing down and part of it is they are satiated on apparel."
Hix said she expects many retailers in the coming months to announce plans to scale back new store openings, which have exploded along with the economy in the last several years.
Many retailers held earlier summer clearance sales that saw heavily marked-down prices -- an effort by retailers to turn earlier to normally profitable back-to-school items. And that has hurt sales for many.
"It wasn't surprising really. The August same-store numbers really confirm the trend of slowing retail sales and consumer spending," said Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J. "August was the back-to-school that wasn't. August and back-to-school doesn't quite have the importance it did a decade ago, but outside of that make no mistake, consumer spending has slowed down and Americans are tapped out."
Steve Kernkraut, a retail analyst with Bear Stearns, told CNNfn's Before Hours program that retailers, particularly the Gap, need to initiate a better fashion mix in order to get consumers, who, despite the slowdown, are still generally willing to spend money. [WAV 475KB] [AIFF 476KB]
"I think looking at the numbers that came out this morning, you had pockets of strength, but generally you had a weaker August, a weaker back to school, and the Fed's plan seems to be working unfortunately," Kernkraut said.
Penney warns on 3Q
Penney, the No. 5 U.S. retailer, gave no specific estimates, but said weak August sales, higher-than-expected promotion costs, and depressed profit in its drugstore business "could adversely affect current estimates of third-quarter earnings."
Wall Street analysts had expected Penney to earn 31 cents a share for the quarter, compared to a profit of 51 cents a year earlier, according to First Call Corp., which tracks Wall Street forecasts.
While catalog sales edged up 0.4 percent, the Plano, Texas, retailer said department store sales slumped 5.4 percent to $1.13 billion in August.
 Total drugstore sales rose 5.3 percent to $970 million, but profit margins remained depressed, the retailer said in a statement.
Barnard said Penney's August sales dip is not surprising given the troubles the company has had in recent years, namely sloppy, difficult-to-navigate stores and a poor merchandise mix. The department store has also been hit harder than most by the discounters, Wal-Mart, Target, Kohl's and even Kmart, Barnard said.
"Penney is continuing a three- or four-year downfall," Barnard said. "I never expected anything but that because of the consumer slowdown," Barnard said. "It's everything: poor merchandise mix, sloppy looking stores, narrow aisles, appearance."
Shares of J.C. Penney (JCP: Research, Estimates, which have been trading near 52-week lows, closed down $1.16 to $14.03 in trading Thursday.
Target to be off-target
Target Corp., the No. 4 U.S. retailer, likewise said it expected to miss third-quarter estimates because of lower-than-expected sales during August, and lowered its full-year outlook as well.
The Minneapolis retailer gave no specific estimates, but said "in light of current business trends and strength of last year's results, we now expect earnings per share to decline somewhat in the third quarter."
The First Call consensus was for Target -- which includes the Marshall Field's and Dayton's stores -- to earn 28 cents a share during the quarter, up from the 26 cents a year earlier. The company said it expected profit growth to resume in the fourth quarter.
 Although he cited no specific numbers, Barnard said Target's sales were likely dragged down by results at the traditional department stores, which have been hit sector-wide as increasingly spendthrift consumers shop the discount chains. And that includes the company's own Target stores as well as rivals Kmart (KM: Research, Estimates), Wal-Mart, and Kohl's (KSS: Research, Estimates).
Target posted sales of $2.74 billion during August, up 7.5 percent from a year earlier. Sales at stores open at least a year rose 2.5 percent. Sales at the company's namesake Target stores rose 9.5 percent to $2.16 billion, although only increased 3.2 percent on a same-store basis.
Target's (TGT: Research, Estimates) shares tumbled $2.88 to close at $23.19 Thursday.
Analysts see widening Gap
Gap Inc. saw August comparable-store sales dive 14 percent as fashion problems continued to plague the company's Old Navy division. San Francisco-based Gap also owns Banana Republic.
Although analysts remain confident in the company's strong management and unswerving ability to reinvent itself in cyclical fashion and economic climates, many lowered their ratings on Gap, noting that a lack of fashion variety at Old Navy first announced last month is now affecting the entire company.
 Prudential Securities, Banc of America Securities, PaineWebber, Credit Suisse First Boston, and Salomon Smith Barney all lowered estimates on Gap following Gap's report of decreased sales.
"I think what happened is that Gap has always been a bellwether. They've always proven to be able to reinvent themselves," Hix said. "The company has been struggling, it was Gap last year, Old Navy this year. For more than a year they've been slowing down and the Street has been giving them the benefit of the doubt. They have good management, great execution, yet their problems appear to be to be deeper than anyone thought."
Gap Inc. (GPS: Research, Estimates) shares fell 25 cents to close at $22.25 Thursday.
Direct retailer Lands' End Inc. (LE: Research, Estimates) fell 69 cents to $24.25. after warning of sagging profit in the second half of their fiscal years in recent days. Leading U.S. retailer Wal-Mart Stores Inc. reported (WMT: Research, Estimates) strong second-quarter results this year; Wal-Mart shares were down 81 cents to close at $47.62. 
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J.C. Penney.com
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