Retailers’ Growth Plans May Backfire
A glut of new retail space could mean a rough year for some of the country’s big specialty clothing chains.
Many of these stores, after suffering weaker sales for much of 2000, are continuing with their growth plans as if 1999’s record-breaking shopping spree would only get bigger.
“They’re not admitting they’re overgrowing or cannibalizing their own stores,” said Lazard Freres & Co. analyst Todd Slater. “A lot of these companies are growth junkies, and it’s not until the industry stops pushing growth that they can be rehabilitated.”
The problem is that the 1999 buying craze has long since sputtered. A recent cut in interest rates did not come in time to save the holiday shopping season as previous rate hikes, high energy costs and a volatile stock market all conspired to give retailers a Christmas with the slowest sales growth in years.
Retailers such as Gap Inc., AnnTaylor Inc., American Eagle Outfitters Inc., Limited Inc. and others have felt the pinch, suffering sluggish sales.
Still, many of these same companies have yet to alter ambitious growth plans put in place to satisfy investors eager to see expansion.
“If the industry continues to increase capacity at double-digit rates through 2001, then our view is that margins will continue to decline,” Slater said.
Some of the expansion plans are startling:
* AnnTaylor, which in the first nine months of its fiscal year watched operating income drop almost 6% in spite of a nearly 13% sales gain, opened 67 new stores during the same period.
* Through October, American Eagle Outfitters reported a sales gain of 2.9% in stores open at least a year and a net loss of $44.6 million. By the end of its fiscal year, however, the company plans to open 90 new stores.
* Pacific Sunwear of California Inc., with 568 stores, reported a same-store sales gain of 2.7% for the first nine months of its fiscal year. But in its December SEC filing, the company said that by the end of its fiscal year, it will have added 142 new stores and expanded 32 others. For its 2001 fiscal year, PacSun plans to open 125 stores.
* Limited will have 5,216 stores by the end of its fiscal year, an increase of about 300, mostly within Intimate Brands Inc., the parent company of Victoria’s Secret and 83% owned by Limited.
“The problem is that the competition is difficult,” said retail economist Michael Niemira at Bank of Tokyo-Mitsubishi in New York. “We have too much capacity and are just shifting market share back and forth.”
What the chains are doing, Niemira said, is robbing themselves by siphoning sales from older stores to new ones practically within shouting distance. In a tighter economy, that means lower overall sales are now spread among more players.
Gap Inc.--with its ubiquitous namesake stores and its Old Navy, GapKids and Banana Republic outlets--is perhaps the best example of what happens when growth and sales head in opposite directions.
“If there are too many Gaps, it has a ripple effect on the whole industry,” Niemira said. “When demand is shrinking and the supply is growing, then nobody wins. This supply problem will only get worse. It’s a significant 2001 story, because these companies cannot change their plans so easily.”
By the end of this fiscal year, Gap Inc. expects to have added as many as 700 new stores and expanded 200 others. That would give it a total of nearly 3,700 stores. Yet Gap Inc.’s net earnings fell more than 15% through the end of October. And its December same-store sales were off by 6% from the year before.
Gap Inc. for months now has reported flat or declining sales in stores open at least a year, an important measure of a retailer’s ongoing health, because it factors out new and closed stores.
“We have acknowledged that we may have built stores too quickly,” said Gap Inc. spokesman Jack Dougherty. “But we disagree that we built too many stores. We have less than 6% market share and we believe there is a tremendous amount of opportunity out there.”
Meanwhile, what has happened to Gap Inc.’s stock is a warning for the rest of the sector:
Last summer, when many on Wall Street were still bullish on the company, analyst Slater downgraded Gap Inc.’s stock, warning of the company’s pending oversupply problem.
By October, following several earnings warnings from the company, Gap Inc. shares had sunk to a 52-week low of $18.50. On Friday, Gap Inc. closed at $29.50, up 63 cents on the New York Stock Exchange.
Still, Gap Inc. executives continued to insist the company’s ailments were in execution rather than oversupply.
Executives blamed their problems on a Gap “look” that was too young, distribution problems at Old Navy and high prices at Banana Republic--not that more stores and shrinking demand meant fewer sales spread among more stores.
The company’s growth strategy had worked in the past. Gap Inc.’s sales nearly tripled from 1994 to 1999 as the number of stores doubled. At the end of fiscal 1999, Gap Inc. reported $11.5 billion in sales, up from $3.7 billion in 1994. In 1999, there were 3,018 stores in the chain, up from 1,508 in 1994.
But as Gap Inc. was building more stores, so were others. And, Slater noted, that growth came at a time when consumer spending was growing.
“If it was just the Gap telling us there were merchandise issues, maybe I’d buy it,” Slater said. “But when 20 out of 20 companies in the industry all fall on their swords at the same time, I think it speaks to some larger, macro supply-demand imbalances--which can only be addressed by companies shrinking or pulling back growth.”
