Shop Carefully

After several disappointing years, the nation's big department stores and discount mass merchants hope to finally get what they want this holiday season: robust sales.

An expanding economy, low interest rates, higher consumer confidence and the findings of household spending surveys point to the merriest holiday season for big U.S. department store chains since 1992.

Stores "are expected to do very well," said Eileen Gormley, retail analyst with the Pershing division of Donaldson, Lufkin & Jenrette Securities Corp.

Experts predict that the chains' same-store sales--those of stores open at least a year, and the industry's main barometer of growth--will climb 3% to 6% this season, compared with the paltry 1% to 2% increase for the 1995 holiday season.

And if sales are as strong as expected, many retailers will post sharply higher earnings for their fiscal fourth quarters ending Jan. 31 because year-earlier results were dismal. Last year, the stores had to slash prices to reduce bloated inventories, and lousy weather in the East eroded the results even more.

Still, experts cautioned that this season's improvement is by itself no reason to rush out and buy retailers' shares as stocking stuffers.


For starters, the expectations of a good holiday season are already built into the stocks' prices. Also, the shares already have had a solid if not spectacular run-up this year, so finding bargains in the group isn't easy.

The Standard & Poor's index of department store stocks is up 19% this year, although most of the gain came in the first half of 1996 as retailers enjoyed stronger-than-expected demand, cut costs, used fewer profit-eroding promotions and thus posted handsome earnings gains. (The group still lags the broader S&P; 500 index, which has risen 23% this year.)

Also, the holiday season is but one event and it will be over in a few weeks, so any investor mulling the retailers' stocks needs to be thinking about how the stores will perform long after the gifts have been opened.


So analysts are being picky about the retail stocks, urging investors to choose those chains that they expect will post above-average growth, and buying them only when the stocks take a dip.

Sears, Roebuck & Co. is one example. The company has been reporting unexpectedly higher earnings this year by keeping a lid on costs and doing a better job of selling higher-margin apparel goods, especially private-label clothing, according to analyst Thomas Tashjian of Montgomery Securities. The venerable chain, currently trading around $51 a share, "continues to outperform the other major retailers," he writes in a new report.

Pershing's Gormley likes J.C. Penney Co., Federated Department Stores Inc. (Macy's, Bloomingdale's) and discount giant Wal-Mart Stores Inc. All are "aggressively cutting costs and updating merchandising formats to meet changing consumer demands," she said.

Wal-Mart, at a recent price of $25, also is a favorite of brokerage Edward D. Jones & Co. Its retail analyst, Asma Usmani, noted that Wal-Mart is currently trading for about 17 times its expected 1997 earnings per share--the low end of its historical price-to-earnings multiple.

"This is attractive for a company expected to increase earnings by 14% to 16% over the next three to five years," Usmani wrote in a recent report.


Speaking of relatively low P/Es, he also noted that May Department Stores Co. (Robinsons-May), at $49 a share, is trading at 15 times its expected 1997 profit. But even though May is expected to benefit from a stronger retail market in California, some analysts are taking neutral positions toward the stock.

Value Line Investment Survey, for instance, said in a new report that May's profit margins will remain under pressure because of intense competition from Penney, Sears, Nordstrom and other department stores.

May's shares "seem unlikely to outpace the market averages in the year ahead," Value Line concluded.

But note: For the last year May also has been the most profitable department-store chain per dollar of sales in the business, with a pretax profit margin of more than 10%, according to the research firm Market Guide Inc.

Times staff writer James F. Peltz can be reached at


Rally in Store?

National retail chains expect their best holiday shopping season in years, but analysts say that's not enough reason for the stocks to rally. A look at key stocks since June and since January.


Recent % Change from Stock Ticker price June 30 Jan. 1 Federated Department Stores FD $34.00 Unchngd +25% May Department Stores MAY 48.00 +10% +26% Nordstrom NOBE 44.00 -1% +8% J.C. Penney JCP 53.00 +1% +11% Sears, Roebuck S 49.00 +1% +26% Wal-Mart Stores WMT 25.50 +1% +15% Standard & Poor's 500 +13% +23%


Source: Bloomberg Business News

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