Retailing Shakeout Will Benefit Survivors

Retailing appears to be in crisis. On the same day that Carter Hawley Hale filed Chapter 11, Sears announced more staff cuts and writeoffs. Sales and earnings are down for stores in all parts of the country, with almost no chain untouched.

Yet on the day Carter Hawley went down, stock prices went up--including the stock of Sears. And although the market backtracked Tuesday, the overall trend of stock prices has been up since the Gulf War began.

That includes such retailers as Wal-Mart, Dayton Hudson, Gap Inc., Dillard Stores, the Limited and others--which are selling near their 52-week highs, even though they are uniformly suffering flat to declining sales and earnings.

What’s going on? Signs of things to come.

The stock market’s signal is straightforward: Its strength now, say analysts, predicts that the recession will be short, sharp and shallow, ending in an upturn by midyear--provided events in the Persian Gulf War don’t take a bad turn. And the market could be right, although it’s an uncertain barometer of the nation’s economy.

The story in retailing is far more interesting, and could tell you what kind of economy to prepare for in the years ahead--whether as investor, job-hunter or consumer.

Declining sales and earnings signal a shakeout in the industry in which many stores will close and some companies will disappear. Behind that shakeout is a fundamental shift, from a decade in which consumer spending grew faster than the U.S. economy as a whole to a period when consumer spending won’t grow at the same rapid rate.

Consequences for retailing are profound. The industry built malls and opened stores in the 1980s in anticipation that the growth of consumer spending would go up and up. It was the folly of extrapolation: the belief that trends continue in a straight line, that trees grow to the sky. The aftermath of folly is overcapacity.

Retail analysts have been saying for years that the country is “over-stored.” Now the evidence is showing up in lower per store sales for many companies and declining overall earnings. Industry average profits have declined four years in a row, according to Forbes magazine.

Consumer spending had slowed before Iraq’s invasion of Kuwait last Aug. 2, has certainly been slow since then and won’t be very strong even after the recession, economists predict.

Why then are stock prices of some retailers at or near their highs? Because shakeouts are therapeutic, although at present most companies seem to be in pain.

When consumer spending slows, stores do less business. Those desperate for cash, perhaps to repay debts taken on in the ‘80s, sell merchandise at knockdown prices and this hurts the general level of profits for all companies.

The way out of unprofitable situations often is bankruptcy. A retail expert describes the process: “Say a shoe company has 400 stores but only 200 are profitable. He can’t close the unprofitable stores because the landlord won’t let him out of the leases. So he declares bankruptcy to break the leases and the stores either get new tenants or they close.

“Suppliers who are owed money approach the bankrupt shoe company, which offers maybe 30 cents on the dollar. There’s haggling and finally the creditor says, ‘OK, give me the 30 cents but give me a new order. And we do business again.’ ”

Like most aspects of business, bankruptcy is not really a complicated process.

And today’s trend could even benefit small retailers, observes George Rudes, owner of Saint Germain, a Los Angeles maker of women’s sportswear. “When big stores are giving away merchandise to pay their debts, that hurts the small business,” Rudes says. When they stop, everybody benefits.

The stock market is saying that is happening now and it’s already choosing survivors. The stock of Dillard Department Stores, for example, a Little Rock, Ark.-based chain that is expected to bid for some of Carter Hawley’s Broadway Southern California stores, hit an all-time high Tuesday. Similarly, Gottschalks Inc., a Fresno-based chain that would like to buy Carter Hawley’s Weinstock’s stores, is also selling near its 52-week high.

Sears and other chains will close some stores; other stores will open. Retailing is hardly the first industry struck by folly and overexpansion. U.S. agriculture is now in good shape, although its recovery took the better part of a decade. Financial services overexpanded wildly in the ‘80s, believing easy credit and the merger game would go on indefinitely. Now the brokerage and finance business is shrinking back, hurting New York and the Northeast.

But the real message in this downturn, economists say, is that inventories are spare and conditions in most businesses are not as bloated as in past recessions. The thinking is that the economy could snap back by the middle of the year, which is why the stock market is celebrating now.

The winnowing process in retail will last longer than that, but ultimately there will be fewer stores and better business for the survivors.