Retail-Industry Outlook Is Not as Rosy as Expected

UNITED States retailers - who were expecting 1994 to be a strong sales year, given an expanding economy and declining unemployment rate - are suddenly faced with a new threat: stingy consumers. Faced with higher interest rates, shoppers are cutting back their spending.

``As far back as January, we knew that 1994 was going to be a difficult year, but a relatively good year, for many retailers,'' says Kurt Barnard, president of Barnard's Retail Consulting Group in New York. ``But the interest-rate hikes, which we had not fully anticipated, are a double whammy for retailers.''

``With the rate hikes, consumers now have less discretionary spending,'' he says. ``And they are feeling poorer, because, for many of them, they are poorer. We now think that 1994 sales gains for the retail industry [will] be around 3.5 percent to 4 percent,'' unadjusted for inflation, Mr. Barnard says. But with inflation around 3 percent or more, that will mean ``a wash'' in real sales gains.

The Federal Reserve has raised short-term rates four times since February in an effort to slow the economy.

``The retail market is very much distracted right now by climbing rates,'' says Janet Mangano, an analyst with investment house Burnham Securities Inc. in New York. ``Rising rates are pushing up adjustable-rate mortgages for many families; furthermore, most home-equity refinancing is behind us now. Consumers, thus, have much less disposable income to use for retail items, especially costly big-ticket items. The rate increases are starting to hurt retailers.''

According to analysis done by Wayne Hood, a retail specialist with investment house Prudential Securities Inc. in New York, comparable store sales fell sharply in May from March and April. They rose 11.1 percent in March compared with a year ago; in April, they rose 3 percent compared with April 1993. In May, they rose only 2.8 percent. Prudential analysts attribute the drop to cooler weather and slower growth in real income.

Prudential reports that real disposable income rose 3 percent in January over a year earlier, 4.4 percent in February, and 4 percent in March. But it slowed to a gain of 2.6 percent in April, as interest rates rose.

The economic slowdown has slashed earnings estimates for some retailers. Prudential has lowered second-quarter and full-year estimates for May Department Stores and Family Dollar stores. May stores are expected to earn about $2.90 a share in 1994, down from $2.95 projected earlier this year. Prudential also lowered expectations for May stores in 1995.

Prudential expects overall comparable store retail sales to rise about 4 percent in the second half of 1994, down from a gain of about 6 percent in the first half, Mr. Hood says.

Some retailers are slashing costs to protect earnings. One New York area chain is using more part-timers but giving them shorter hours so the chain can lower its benefits-package outlays. And many chains use coupons and discounts to lure customers. ``The environment is now geared to price promotion,'' Ms. Mangano says.

``Americans are trading down'' on clothing and other disposable items, Barnard says. ``Look at designer dresses. Those companies are having a hard time, as consumers hold back from higher-priced items.'' Discounters and mass-marketers, like Walmart, Sears, and J.C. Penney, will do well in this current environment, he says.

In terms of investments, brokerage house Dain Bosworth Inc. in Minneapolis, looks upon ``niche marketers,'' or firms with extensive distribution systems, as providing substantial returns within retail.

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