Nary a frown was in sight at Boston's Four Seasons Hotel July 9-10, as consumer-product company executives and institutional investors gathered for the annual Canadian Imperial Bank of Commerce (CIBA) World Markets conference. And who could fault this group for putting on a happy face? While 2002 has seen the telecom sector crash, and others pummeled all year long, stocks of retailers, restaurants, and other consumer services have been holding up nicely, thanks to the determination of American consumers to keep their wallets open, even after September 11.
However, amid all the glowing forecasts presented at the Beantown confab, a low but clear murmur could be heard: How much longer can consumers carry this economy? Privately, many investors expressed worry about the latest numbers on consumer confidence, which have indicated weakness in recent months. The Conference Board's latest index dipped by four points, to 106.4, in June from May's 110.3. And with a 282-point tumble in the Dow on July 10, scandal-mania in Washington over corporate accounting shenanigans, and jitters about another possible terrorist attack, such worries are growing.
"We're seeing companies be nimble with their inventories. The consumer is holding up. But no one is ready to make a bet that it will last," said an institutional investor from Boston who attended the meeting.
CHALLENGES AHEAD. Though they were trying to be buoyant about an economic recovery, company executives were also calling for caution. While strong demand for their products might be intact over the long term, industry leaders like Best Buy (BBY), Starbucks (SBUX), Tiffany (TIF), and Talbots (TLB) all expressed some degree of concern that shoppers in the U.S. and beyond will pull back from previous spending levels.
Retailers generally are forecasting solid returns in the second half of 2002, but most are also mindful that the consumer may not be so inclined to spend much longer. While he sees "positive trends" for the rest of the year, Dan Wewer, an analyst at CIBC World Markets, also sees a challenge for big-box retailers later in the year to beat fourth-quarter 2001 earnings, which came in stronger than expected.
Not to worry, presenters at the confab assured their audience. Consumer-electronics leader Best Buy has performed well amid demand for updated DVD players, new video-games consoles such as Microsoft's Xbox, and other electronic gadgetry. "Even though there's a lot of uncertainty, people want to spend money to entertain themselves," says Al Lenzmeier, Best Buy president and chief operating officer. "Economic risk is the highest, but I'm confident in our ability to execute our plan."
LEANING TOWARD CAUTION. Investors in mid-June sold off Best Buy stock after the company lowered its fiscal 2003 second-quarter earnings expectations to between 30 cents and 32 cents per share. But for full-year 2003, Best Buy is forecasting revenue growth of 17% to 20% and profit growth of 18% to 21%.
Women's classic clothing retailer Talbots, which saw a 7% decline in same-store sales in the first quarter, is erring on the side of caution when it comes to predicting a possible rebound this year. "We look at the economy, and it has had some effect on us," says Arnold Zetcher, chairman, president, and CEO. "We are hoping for a turn for the second half of the year." Zetcher says he doesn't blame the economy or unseasonable weather for the worse-than-expected first-quarter, and he's confident that Talbots can meet expectations for the third and fourth quarter.
Some investors were clearly rattled, however, over high-end retailer Tiffany's July 9 earnings warning that its second-quarter profit will fall to the low end of its previous forecast of 22 cents to 24 cents a share. "The current economy has been challenging," says Michael Kowalski, president and CEO. But he adds: "We believe Tiffany has proven an ability to weather economic downturns."
TROUBLE IN JAPAN. The luxury jeweler has indeed performed surprisingly well as gifts wrapped in its signature robin-egg blue boxes continue to draw customers. However, sales figures for May and June were flat in the U.S. and down by 13% in Japan, its second-biggest market. Tiffany expects earnings per share in the range of 18 cents to 20 cents in the third quarter and 64 cents to 67 cents in the fourth.
Tiffany isn't the only company having trouble in Japan, where consumers appear to be buckling under more than 10 years of a deep economic recession. Coffee giant Starbucks is also experiencing a slowdown there. Its return on investment in Japanese stores is high, but operations there have been reporting negative comparable sales for the last year. Micheal Casey, Starbucks chief financial officer says the slowdown appears to be due to the country's ongoing recession.
Still, the ever-expanding java brewer is one of the most positive companies around, predicting 22% to 24% revenue growth in fiscal 2002 and same-store sale growth of 3% to 7%. Starbucks aims to have 10,000 stores worldwide by yearend 2005. Though it saw its softest ever same-store sales from April to November of last year, consumers have since decided that its products are an affordable luxury, Casey says. Even hard-hit regions like Northern California are still spending on Starbucks. "We haven't noticed a change in those areas. All 40 of our regions in the U.S. have shown positive same-store trends," he says.
Whether they're selling espresso, blazers, baubles, or gizmos, the outlook for retailers generally remains positive. But you could practically feel the plea coming from this group of execs and investors: Consumers, don't fail us now. By Amy Tsao in Boston