Relief from a bleak 2001 in store

Sales: Experts are predicting moderately improved sales this year as the economy lifts out of recession, most likely by the second half.


January 20, 2002|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Retailers have struggled through one of the toughest years in recent memory, marked by a recession and waning consumer confidence, and capped by the worst holiday season in a decade.

This year should bring some relief.

"I think we will come out of 2002 thinking we had a better year than 2001, but it will be a good six to eight months before we see that," said Richard Shortess, a partner at Andersen consultants in Baltimore. "I don't think we're out of our economic malaise" yet.

Retail experts and economists are predicting moderately improved sales this year as the economy lifts out of recession, most likely by the second half.

Sales at stores open at least a year are expected to rise 3 percent to 3.5 percent, driven by improved consumer confidence and a pickup in manufacturing orders, according to Bank of Tokyo Mitsubishi. That compares with a 2.6 percent or 2.7 percent increase for 2001 over 2000.

"It's off the bottom but still on the slower side, presumably with the slower pace up front in the year as the industry and the consumer readjusts from recession to recovery," said Michael P. Niemira, a bank vice president.

William Ford, a senior economic adviser to check-acceptance company TeleCheck Services Inc., offers a slightly more optimistic view, calling for a 4 percent to 6 percent sales gain and an end to the recession by the beginning of the second quarter. Ford says the unemployment rate should peak in the next four to five months, giving a lift to retail as it improves.

The adjustment from recession to recovery could be rough on retailers, who are coming off one of the most disappointing holiday seasons in a decade. Sales were hurt by layoffs, stock market drops and consumer uncertainty in the wake of the terrorist attacks of Sept. 11.

Sales fell short of expectations for many retailers, which responded by marking down inventory, sometimes as much as 75 percent. That will hurt profit margins going into this year, experts said.

"Profit margins are falling short," said Andy Moser, chief operating officer of Boston-based Wells Fargo Retail Finance. "The real problem for retailers going into 2002 is managing inventories and the lack of cash flow and profitability from the fourth quarter ... to manage their business. ...

"A lot of them are going to be struggling to get the right inventory in and the wrong inventory out. They'll have to really focus on having enough cash to replenish the good inventory and move out inventory that's not productive for them."

Retailers that have been disciplined in managing their business - and understand what the customer is looking for - will continue to do well, Moser said. Some examples have been The Talbots Inc., White House Black Market, Chico's FAS, Inc., Wal-Mart Stores Inc. and The Children's Place, he said.

Shoppers in the coming year are likely to spend less on apparel and high-end and luxury goods, and focus more on accessories and home- and hobby-related merchandise, all with an eye toward bargains.

"The stock market, the attack on America and the recession have caused people to be cautious in their spending," Ford said. This year, he said, "obviously, the emphasis will be on value shopping."

That would benefit mass discounters such as Wal-Mart and Target Corp.; specialty department stores that stress value, such as Kohl's Corp.; retailers that focus on products for the home, such as Home Depot, Bed Bath & Beyond Inc. and Best Buy Co. Inc.; and warehouse clubs such as Sam's Club, BJ's Wholesale Club and Costco.

The discounters probably will continue to dominate and gain market share from specialty stores and upper- to middle-end department stores.

Experts expect some shakeout among the national specialty apparel chains, which were among the retailers hit hardest last year. Those with weak sales and earnings toward the end of the year - Gap Inc. and Ann Taylor Stores Corp. - appear to be the most vulnerable.

"The situation now is pretty tentative for many retailers who are waiting to see what kind of Christmas" sales they end up with, said Susan Anderson, a vice president with retail real estate brokerage H&R Retail.

"Sales this fall were not so great for some people, particularly the specialty apparel people. If Christmas meets their expectations, they will go ahead with regular expansion programs."

Some expanding retailers probably will be those new to the Baltimore region, most likely nonspecialty apparel stores, said Anderson, who declined to identify any before leasing deals are made final.

"We're not seeing people stopping making deals, even in this market," she said.

That might be, in part, because retailers will be able to negotiate lower rents for stores, said Shortess, the Andersen partner.

"The real estate market is getting softer, and the labor market will be a little looser, so the retailers' bottom lines may not be as adversely affected as their sales," Shortess said.

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