Retailing stocks are mixed bag

Donald Saltz

January 17, 1992|By Donald Saltz

These are difficult times for the retailing business, although investors in the shares of many of these companies have fared exceptionally well. Shareholders of Wal-Mart Stores and K mart have seen their holdings double in value over the past year. Shares of the Gap Inc., a fast-growing chain of apparel stores, have more than tripled during the last year.

On the other hand, holders of Ames Department Stores suffered greatly because of its untimely and over-priced acquisition of the Zayre discount store chain.

A vast number of retailers have struggled during the recessionary period.

Generally, sales have grown, but moderately, and much of the growth has come from promotional selling prices.

Profits have not been very good. Because of these conditions, retailers have cut back on overhead and have probably learned how to operate permanently in a leaner way.

When times become better, some of this cost-saving will continue, thus adding to earnings.

The Hechinger Co. chain, for example, made the decision to close some of its weaker stores and redo others.

Although beset by increased competition in the home-center business and by the recession in general, the Landover-based chain's earnings have again moved higher. The share price, under $7 last year, is now about $14.

Investors are perhaps more optimistic about the retailing business than they should be, but the much higher share prices they're paying provides proof that retailing stocks are looked upon as good values.

Thus, we see price-earnings ratios of 20 for Hechinger and a massive 46 for Wal-Mart.

Appearing to be more of a value, shares of K mart sell for only 12 times annual earnings. The Merry-Go-Round Enterprises chain of Joppa goes for 14 times earnings. In contrast to the other companies that are up sharply, Merry-Go-Round's share price has fallen in half although its earnings have continued to gain.

Companies' earnings seldom remain stable, but past results -- those achieved during non-recessionary times -- provide a good idea of what to expect in the future. With Hechinger, earnings were $1.30 a share in 1988, and that was an especially good year.

It is unlikely that they will break above that for years to come. K mart's earnings are at the company's 1988 level. Wal-Mart is an exception because its smooth expansion program has caused earnings to triple since 1987; hence the huge P-E.

There are few better-managed companies than Giant Food of Landover, the leading food retailer in the Baltimore-Washington area.

That top-flight management and the success it has achieved are supporting Giant's share price despite weaker earnings and a likely continuation of same.

Giant's low for the year is $20.625, but the price now generally remains above $23.

The company is up against an array of competitive and innovative food chains that have led to a series of costly promotions, probably holding down profits for the foreseeable future. Giant has a P-E of 14.

*

The shares of McCormick & Co. of Sparks have continued to run up in price since announcement of a 2-for-1 stock split that is effective today, along with a 20 percent dividend increase.

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