Retail Is Up, but That's Not Same as a Good Buy

Consumers returned to the malls in February, giving the U.S. retail industry its best one-month sales gain since last spring, store reports issued Thursday show.

And Wall Street saw it coming: Investors have pushed beleaguered retail stocks sharply higher in recent weeks, outpacing the rest of the market.

But one month of better sales, and even the possibility of a decent spring for many stores, isn't enough to change the widespread Wall Street view that the retail industry overall remains in a long-term downtrend--a result of changing demographics, too many stores and cut-rate pricing.

The stocks may look cheap because they haven't risen much, if at all, in recent years, while the stock market as a whole has rocketed. But many analysts warn that the shakeout that has landed dozens of big retailers in bankruptcy over the last year--including Bradlees, Caldor and Barney's--is far from over.

On Thursday, however, the industry had some reason to be hopeful:

* As better weather allowed more Americans to get out of their homes after January's devastating Eastern blizzards, sales at retail stores open at least a year rose 5.3% in February, according to Bloomberg Business News' same-store sales index, up from January's gain of 1.5% and the best since last April's 6.7% rise.

Retailers such as Sears, Federated Department Stores and Wal-Mart reported hefty same-store sales gains, helped by brisk clothing sales. But sales fell at J.C. Penney and Ann Taylor, among others.

* Troubled Kmart, which Wall Street had recently feared would be the next big retailer to end up in bankruptcy court, said its same-store sales rose a strong 6% in February. The chain also reported a fourth-quarter loss of $420 million, including restructuring expenses. But Chairman Floyd Hall insisted that the 1995 results represent "a bottoming out of Kmart's financial decline."

Some analysts were willing to give Hall the benefit of the doubt. NatWest Securities analyst Robert Buchanan on Thursday upgraded Kmart stock to "hold" from "underperform." Walter Loeb, a veteran retail analyst in New York, also said he believes Kmart is turning the corner.

Despite the positive news, however, Kmart stock fell 25 cents to $8 Thursday and investors pushed most other retail stocks lower as well.

That may just have been profit-taking after the shares' recent gains. The retail-stock sector has sizzled in recent weeks, which some analysts say reflects not just the February sales turnaround but anticipation of a healthy spring.

Easter comes earlier this year, which should help March retail sales, analysts say. And many retailers' first-quarter earnings will be compared with weak results a year ago, which could make the industry's earnings momentum appear strong.

What's more, if the U.S. economy overall picks up steam this spring and summer, the retail industry would be considered a natural beneficiary.

Yet many analysts and money managers view most of the stocks as mere trading opportunities, not great long-term investments to make today.

Richard Hokenson, economist at DLJ Securities in New York, sees one last gasp for consumer spending this year. But in 1997 the number of 25-year-olds in America will begin to decline sharply, he said, an unalterable demographic shift. That coming slump in 25-year-olds heralds the shrinking of the 25-39 age group overall, with troubling implications for retail because that group traditionally is the big-spending consumer sector.

Obviously, an aging population won't mean the end of retailing altogether. People will still need things. Analysts like Loeb see Sears, May Department Stores, Home Depot and others as strong franchises that will survive in the long run.

But in the near term, with most analysts conceding that America is over-stored, the question is how fast most retailers' earnings can grow amid vicious competition. With many of the stocks now selling for price-to-earnings ratios greater than their expected annual earnings growth rates, retail is no bargain basement for investors.

Bernice Behar, manager of the new John Hancock Global Marketplace stock fund in Boston, argues that the money to be made in retail stocks long term is in selected specialty plays--such as computer seller CompUSA and high-end retailer Nordstrom--and in foreign retailers, which don't face the same competitive pressures as in America. Her fund now has 30% of its assets overseas.

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Can the Rally Last?

Despite a recent surge, retailing stocks have generally been poor performers in the 1990s, especially in the last three years. Quarterly closes and latest for two retail stock indexes tracked by Standard & Poor's Corp.:

DEPARTMENT STORE STOCK INDEX

1996: 1,590.3

SPECIALTY STORE STOCK INDEX

1996: 993.2

Source: Bloomberg Business News

Taking Stock

Here's a look at some major retail stocks, their 1995 earnings per share (EPS), 1996 estimated EPS and the stocks' price-to-earnings ratios (P-E) based on estimated '96 EPS.

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Thurs. '95 '96 P-E on Stock close EPS EPS '96 est. Dayton Hudson $79.63 $4.00*$4.90 16 Federated Dept. 32.75 1.82** 1.95 17 Gap 53.25 2.46 2.80 19 Home Depot 48.13 1.54 1.92 25 Limited 19.38 0.87** 1.35 14 May Dept. Stores 50.00 2.61** 3.35 15 Nordstrom 48.00 2.02 2.35 20 J.C. Penney 49.75 3.33 3.60 14 Sears 47.75 2.53 2.90 16 Tiffany 54.63 2.38 2.75 20 Toys R Us 26.13 1.55* 1.82 14 Wal-Mart 22.63 1.20 1.35 17

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* Estimate

** Results from continuing operations

All stocks trade on NYSE except Nordstrom (Nasdaq).

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