Nervous retailers wonder whether worse yet to come
By Anne DâInnocenzio
Associated Press
NEW YORK — Stung by a slowdown in sales that only worsened after Sept. 11, retailers are nervous not just about getting through the holiday season and into the new year.
They're worried about what comes next: an expected slew of consolidations and store closings.
Many of the country's big merchants already began to scale back on store expansions and focus on cost-cutting before the holiday. Yet in the words of Therese Bryne, a partner at investment firm Pantheon Capital Management, "The worst may be yet to come."
Unemployment shot up to 5.7 percent in November and made consumers pull back even more, and retailers were forced to discount more deeply and earlier this holiday than in the past — at the expense of profits.
Still, bargain-hungry consumers flocked to the value-oriented chains, most notably Wal-Mart stores, and the season was almost certain to be the worst in more than a decade.
"There will be record losses due to the deep discounting this holiday, and as a result you will see a tremendous amount of store closings," said Burt Flickinger III, managing director of Reach Marketing, a consulting firm in Westport, Conn.
He predicted that the retail slump, which actually began in February 2000, is deeper and will run until probably early 2003, or six months longer than the last one in the early 1990s.
Department stores have been the hardest hit. Specialty stores have had a mixed performance, with apparel merchants, most notably Gap Inc., faring poorly, while home improvement chains, such as Lowe's Cos. and Home Depot, doing well.
Even drugstore chains, which have benefited from an aging population and a growing list of prescription drugs, have been vulnerable. CVS Corp., the largest drug store operator, said in October that it will close 200 of its pharmacies in January as it reported a 16 percent decline in third-quarter earnings.
Analysts are not expecting a spate of big-name chain bankruptcies similar to what was seen in the early 1990s, in part because many of the major companies carry less debt than 10 years ago.
But they are closely watching the underperforming regional discounters, particularly Ames Department Stores Inc., which is trying to emerge from bankruptcy, and struggling ShopKo Stores.
Montgomery Ward and Bradlees Inc. were already forced into liquidation this year.
"The longer the weak environment continues, the more pressure it will put on retailers that don't have the wherewithal," said Philip M. Zahn, an analyst at Fitch Ibca, Duff & Phelps, a bond rating firm.
On the department store front, Zahn expects to see the better operators, such as Federated Stores Inc. and May Department Stores Co., continue to acquire groups of stores from their weaker counterparts. Earlier this year, Saks Inc., for example, sold nine stores in three Southern states to May.
Following the Sept. 11 terrorist attacks, many retailers were forced to re-evaluate their expansion plans for next year.
Gap, which has been on a precipitous sales decline for 19 months, now projects a 5 percent store growth rate next year. That comes after an estimated growth of 17 percent this year, and 31 percent in 2000.
But Joseph Teklits, an analyst at Wachovia Securities, said: "There has been too much growth in the past two years, and any more growth just doesn't help."
Last month, AnnTaylor cut its original projection for store expansion in half to 8 percent for next year.
Home Depot is plotting a more focused course for making each store more profitable by better tailoring them to specific markets and offering new services for homeowners. The company plans to slow the number of new stores it opens each year, with fewer than 200 in 2002, and a nearly 50 percent cut in the number of Expo Design Center stores, its home decorating concept.
"The facts are the economy has changed. The economic conditions are more stressed," said Robert Nardelli, Home Depot's chief executive.
The retrenchment is in sharp contrast to a fierce retail expansion boom, fed by a rocketing stock market, that occurred through much of the 1990s, particularly from 1997 to 1999.
Retail square footage grew anywhere from 3 to 5 percent each year throughout the decade, ahead of the population, which has been at a 2 percent pace, according to Flickinger. He believes there is now at least 15 to 20 percent more retail square-footage than consumer demand dictates.
Not everyone is cutting back. Wal-Mart, Target and Kohl's, in particular, are increasing expansion as they strive to steal more market share. Wal-Mart, for example, plans to expand its square footage by 9 percent in 2002, following an 8 percent growth rate this year.
But what will the sluggish retail environment mean for some of the merchants like J.C. Penney & Co., Kmart Corp. and Sears, Roebuck & Co., all of which are in the midst of overhauling their businesses?
"In this environment, it is going to make it more difficult to restrategize," said Jeff Feiner, managing director at Lehman Brothers.
