Wall Street bets on winners, losers in store wars


August 18, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- At the ubiquitous local outlets for the Gap, or the more scattered branches of Lane Bryant (stores for full-figured women) and Merry-Go-Round (for svelte youth), customers continue to honor an American religion: shopping.

But at J. C. Penney's, Woolworth's, Sear's, Child World, Circuit City, Businessland and many other retailers, customers have seemingly lost the habit. Sales are lackluster and profits depressed. And these stores may be far more indicative of the current environment.

Statistics published early last week by the Commerce Department showed retail sales grew minutely during July and, when adjusted for inflation, probably declined from a year ago.

A brighter way of viewing the numbers is to note that the contraction has moderated considerably since early this year -- meaning that if times are bad, they aren't as bad as they were. Moreover, ignoring inflation, last month's results, along with revised June and May figures, do provide the first three months of consecutive expansion since the summer of 1989.

Still, retail sales growth has been sliding since 1984. The last strong Christmas season, noted Robert Buchanan, an analyst with Alex. Brown, was in 1986. And, at the moment, it is difficult to imagine what could rev up business.

Labor force and personal income are growing at the lowest rates in decades. Debt and bankruptcies as a percent of gross national product are at all-time highs. Where's the money for a shopping mall binge?

Occasionally, a product or fashion comes along that's so compelling it reverses consumer apathy and forces even the most strapped buyer into stores.

But that kind of salvation is rarely feasible in difficult times because manufacturers and retailers react to tough times by being more risk-averse and less willing to take a flyer on a novelty, said Steven Roorda, research head at Bank One in Ohio.

Lacking an extraordinary product or boisterous economy, an already evident industrywide shakeout could accelerate.

Both Mr. Roorda, who looks at retailers by analyzing their stocks, and Neil Thall, director of retail services at Kurt Salmon Associates, a consultant to the companies themselves, contend that up to half of the nation's retailers will disappear by the end of the decade, victims of a brutal Darwinian struggle.

L Others are less specific but draw the same broad conclusion.

"There's no question about it," Mr. Buchanan said. "The strong are getting stronger and the weak are going out of business. As long as the environment stays weak, and we think it will, that will continue."

Wall Street has already begun taking bets on the winners. Shares in such retailers as the Gap, the Limited, Staples, Merry-Go-Round, Home Depot, Wal-Mart, Nordstrom and a few others sell for 20, 30, 40 or even 50 times earnings, compared to a market average of about 15.

Hechinger's carries a more normal valuation, as does May Department Stores Co., owner of Hecht's, indicating more modest, or uncertain, expectations.

Most difficult of all to read is R. H. Macy & Co. It has no public stock and carries a large debt burden, which has been a tremendous drag on its bottom line. Macy's management draws widespread praise, but its debt burden raises doubts.

Given that the retail industry isn't expanding, the growth of the winners must come from increased market share. But because the industry is so volatile, trends can change quickly, and that can make a mockery of long-term predictions.

The Gap's prospects improved dramatically in 1983, when new management shifted the chain's focus from common, brand-name blue jeans to more fashionable clothes. Businessland saw its fortunes swing in the opposite direction as enthusiasm for its core product, computers, waned. Comparative sales at the Limited's Victoria's Secret lingerie segment have recently flattened out, but customer enthusiasm for another Limited division, Lane Bryant, has begun to accelerate.

Perhaps the most extreme example of shifting sentiment, though, is consumer electronics. Remember Crazy Eddie? Or J. G. Boyd, Wall to Wall Sound, Kaufman and Roberts and innumerable other chains, all with insane prices for imaginative new products? The chains all have disappeared, victims of a business structured to take advantage of growing volume, in an industry segment where annual growth slid from 18 percent in the first half of the 1980s to 6 percent in the second half -- and

disappeared in the 1990s.

Chastened investors dumped shares in all the major electronic retailers last year. But a new sentiment may be emerging. Its premise: Once the industry shakeout ends, survivors will prosper.

Take Circuit City Stores. Stung by 11 months of flat or declining same-store sales (a key industry benchmark), the company would seem to be a good candidate for a bad year on Wall Street. Yet, Circuit City's shares have soared from $9 to $21. Investors apparently have tagged it as a winner in the vastly compressed field of electronics retailers.

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