What's the connection? In 2001, car sales were very strong, boosted by promotional financing from automobile companies that may have have caused consumers to push forward their vehicle purchases. As a result, S&P is projecting a 4.7% drop in light-vehicle sales, to 16.3 million units in 2002. If consumers aren't spending on new cars, they're left with more money to spend in other categories, such as apparel, that have been given lower priority in the past two years.
Spending on durable goods -- those items intended to last at least three years, like washing machines -- may still rise 3.9% in 2002. That figure would be well below the 6.7% increase posted in 2001. Personal-consumption expenditures for services, meanwhile, are projected to increase 3.3%, compared with 3% growth in 2001.
GOING UPSCALE. Although we at S&P continue to believe that consumers will favor discount stores for much of their shopping, we see an opportunity for a modest rebound in apparel sales, beginning in the spring of 2002. Having scrimped on clothes shopping for the past year while spending more for the home, women may find themselves combing the racks for a new wardrobe. This ought to be good news for department stores. Given the cost-cutting and better inventory management, 2002 should be a year of improved department-store profitability.
Upscale outfits, such as Saks Fifth Avenue, Neiman Marcus, and Bergdorf Goodman, should show improved sales in 2002, in part because 2001 was so poor. The luxury retailers experienced sharper sales declines than the midprice department stores because of the overall weakness in the economy. In addition, many of these stores are dependent on business from tourists, such as the flagship Saks Fifth Avenue store in New York City, which experienced a sharp drop in sales after the September 11 terrorist attacks.
Discount stores will have an easier time, as they're less dependent on discretionary purchases such as apparel, and they should continue to post sales gains of 4% to 6% on average. The breadth of their merchandise assortment also works in their favor.
SEARS' STRATEGY. We estimate that the retail industry will report overall modest year-to-year sales gains for the first half of 2002. Most retailers are counting on the second half to boost annual profitability. All told, the combination of anticipated sales gains, leaner inventories, and a lower cost structure bodes well for earnings improvement in 2002.
What are our top selections among the retailers? We like Sears (S
), which is ranked 5 STARS (buy), especially in the wake of its May 13 announcement that it had agreed to buy catalog apparel merchant Lands' End (LE
). The Lands' End deal is part of Sears' strategy to boost apparel sales in mall-based stores with a well-known brand. And it gives Sears the opportunity to increase Internet sales through Lands' End's strong and growing online business.
Our other 5-STAR picks in the group are warehouse membership retailer Costco (COST
) and apparel chain Chico's FAS (CHS
). Analyst Sack follows stocks of general merchandise retailers for Standard & Poor's