http://www.businessweek.com/stories/2001-01-07/retail

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Retail


Industry Outlook 2001 -- Distribution

Retail

For several years, retailers have enjoyed the spectacle of affluent shoppers peeling off some of their stock market winnings to pay for everything from new wardrobes to PCs to kitchen renovations. But with the market correction and the slowing economy expected to crimp consumer spending, 2001 may be the proverbial morning after. Matching the 7% sales growth that the retail business rang up in 2000 "will be very difficult," notes Carl Steidtmann, chief retail economist for PricewaterhouseCoopers. "We had a boom, and booms don't last forever."

The industry has tried to put a happy face on the situation. The National Retail Federation estimates that retail sales will grow a relatively healthy 5% in 2001, to $880 billion. At least one major chain, discounter Target Corp. (TGT), expects to beat that number by a nice margin. Target and Kohl's Corp. (KSS) will continue to steal traffic from the higher-end stores as consumers become more price-conscious.HEAVY DEBTS. Most analysts, however, don't find much solace in these pockets of growth. The consensus is that the retail sector will be vulnerable to any deterioration in stock prices or the economy at large--particularly given the heavy debt burdens many consumers have taken on in the belief that the good times would keep rolling.

Indeed, the industry has recently been transfixed by a parade of fourth-quarter warnings from bellwether merchants such as Lowe's Cos. (LOW), Neiman Marcus (NMG.A), and Ann Taylor (ANN). In November, Best Buy Co. (BBY) lowered earnings projections by 12% a share, to 90 cents, for the quarter ending Mar. 3. The retailer said the softer economy has forced it to increase promotional activity as sellers fight to gain market share, and the stiffer competitive rivalry is biting into gross margins and profits.

Other retail sectors are also feeling the pain. After recording a heady 10% gain in same-store sales in 1999 and an expected 5%-to-6% jump in 2000, Home Depot Inc. (HD) recently braced investors for a mere 4% gain in existing stores next year, amid signs that housing activity is cooling. Last November, Home Depot's then-CEO, Arthur M. Blank, told analysts that "in the coming year, the business environment will be fairly difficult."

Women's apparel looks most like a rout. Given the dearth of new fashions that are inspiring shopping sprees, clothing retailers will likely be challenged in the first half of 2000, predicts Wendy Liebmann, president of WSL Strategic Retail, a New York-based consultant. Things might pick up in the second half, she adds, but for now, "there's not anything particularly compelling coming off the runways."

The slowdown comes at a rotten time for retailers, given that many have placed big bets on a continued bull market. Lazard Freres & Co. analyst Todd Slater estimates that the square footage of apparel specialty retailers, which grew by 10.4% in 2000, to 186 million square feet of selling space, will rise an additional 9.5% in 2001. In some sectors, the overexpansion could set the stage for store closings or even a shakeout. "Saturation is a major concern in the office products category," says Robinson-Humphrey Co. retail analyst Mark D. Mandel. The U.S. doesn't need three big players, he notes. And since Staples Inc. (SPLS) is outperforming all its rivals, the pressure will be on Office Depot Inc. (ODP) and Office Max Inc. (OMX)

Already, some retailers are tinkering heavily with their capital budgets. Instead of expanding into virgin markets, they're holding the line in their core markets. Toys `R' Us Inc. (TOY) says it plans to spend as much this year as last: about $550 million. But most of that will go to remodeling existing stores rather than building new ones in the U.S. And while Staples plans to open 170 new stores this year--the same number as in 2000--it will concentrate on entering only one new metro market, rather than the two originally targeted, and remodeling existing stores. That way, says Ed Harsant, head of North American operations for Staples, "we can leverage costs such as advertising."

Fair enough. But whatever strategy you pick, the days of ringing up easy profits are over.By Aixa M. Pascual in AtlantaReturn to top


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