Luxury Retailers Hurt as Consumers Scale Back
Millions of Americans are avoiding malls, dismissing department stores and eschewing luxury goods--but that doesn’t mean they’ve given up shopping.
Instead, they’re weighing purchases more carefully and, in many cases, “downscaling,” meaning they’re bypassing pricier labels and retailers and heading to Target, Kohl’s and other discounters.
“I have to be careful; the credit cards are maxed out,” said David McNutt, 39, as he wheeled a desk and two bookcases--which cost him less than $100--out of a Target store in North Hollywood. “I haven’t bought clothes since I got a bunch of new things at some nice stores six or seven months ago--except for underwear and socks, and those I buy here.”
That kind of scaling back is one reason companies such as Neiman Marcus Group Inc. failed to meet quarterly earnings estimates. In addition, a host of analysts lowered profit expectations on Tiffany & Co. And many department stores reported slower sales as some customers moved back down the retail food chain.
Federated Department Stores Inc. brought down its sales numbers for May, then said because of even lower sales, the company may not meet even those revised expectations.
Meanwhile, Target Corp.’s namesake stores and Midwestern value-seller Kohl’s Corp. picked up sales that added to the bottom line.
For the quarter ended May 5, Kohl’s, which will begin opening Los Angeles-area stores in 2003, reported net income up 43% to $75.1 million, or 22 cents per diluted share, from $52.6 million, or 16 cents per share, last year.
Target Corp., which also operates the Mervyn’s and Marshall Field’s department stores, gained 6.3% in net income for the most recent quarter, to $254 million, from $239 million during the same period last year. The company said the gain, 28 cents per share, up from 26 cents, came on the strength of its namesake stores.
Consumers such as McNutt, suffering a buying hangover from the last couple of years, are letting retailers know they are pretty much shopped out.
And although women were lured to stores last month to buy capri pants and halter tops, men’s fashion has largely been a bust, with nothing to replace the hot-selling cargo pants that were snapped up a year ago.
Those trends bode well for the value-conscious stores and not well for the big department stores--perhaps even beyond the current crunch.
“I don’t think Kohl’s loses customers who would trade down,” said Ellen Schlossberg, a Kohl’s analyst with William Blair in Chicago. “I think they have the opportunity to gain customers who trade down from the moderate department stores.
“The format is just clearly superior. They are more conveniently located in their own stand-alone stores, they have wider aisles, front checkout, shopping carts and they offer branded products at better prices.”
With an offering that is 70% apparel, Kohl’s has focused on a national brand strategy, unlike Target and Wal-Mart Stores Inc., which offer more private-label items. Between 80% and 85% of Kohl’s mix comes from names that are long trusted by Kohl’s shoppers, Schlossberg said.
The shift to more practical goods and away from jewels and other expensive symbols of the late 1990s is at least part of the reason for a rash of seemingly conflicting economic reports.
Wall Street had expected the retail sector to take hits because of higher energy prices and increasing layoff announcements.
But consumer confidence rose in May, according to a Conference Board report, aided by the Federal Reserve Board’s five interest rate cuts this year.
A report due Thursday, on retail sales in stores open at least a year, is likely to again reflect a downward trend and mixed news, analysts said. Although consumers bought more in April than financial analysts expected, they had largely stayed away from the stores in March.
So far, analysts predict a decent May report, although spending last month probably will again reflect deep divisions between the priciest and thriftiest stores.
“The weekly sales data is extremely choppy; it’s up, it’s down, then it’s up again,” said Michael P. Niemira, an economist and retail analyst with Bank of Tokyo-Mitsubishi in New York. “It goes hand in hand with the consumer moving down on the pricing points, which to me says we’re not out of the woods yet.”
Tiffany & Co. demonstrates the downward shift within its own stores.
Though the company was able to report better-than-expected earnings for its most recent quarter--19 cents per share, a penny off of last year’s number--analysts were given pause by the fact that customers were buying lower-priced items.
The famous jeweler actually increased the number of sales it made during the quarter. But the average receipt dropped between 10% and 15%, as shoppers passed up diamonds and gold and headed right for lower-cost sterling silver and other gift items.
“Tiffany has courted more moderate customers by offering them less expensive goods and now they’re benefiting,” said Adrianne Shapira, a luxury goods analyst with Goldman, Sachs & Co. in New York. “You get a blue box no matter how much you spend.”
Longer term, many on Wall Street expect the jeweler to rebound at both the higher and lower ends, partly because diamonds don’t go stale like a department store’s fashions and therefore are able to hold on to their full-price tags.
“In the near term, it could be some tough sledding,” said Harry Ikenson, a Tiffany analyst with J.P. Morgan. “Longer term we’re still very favorable on jewelry because of positive demographics. The baby boomers have entered their high consumer spending years for jewelry.”
Neiman’s said earnings for its most recent quarter fell 15%, with net income of $38.2 million as compared with $45.2 million last year, or 80 cents per share as opposed to last year’s 94 cents per share.
The company said it would cut 190 jobs, or 1.5% of its work force, in hopes of cutting costs.
Neiman Marcus more recently said sales for the four weeks ended May 26 rose 4.9% to $214 million from $204 million a year ago.
Department stores are feeling the downscaling shift in a more painful way.
At the end of the last decade, tony mall anchors broadened their customer base on the strength of a highflying economy.
In the late 1990s, consumer confidence was soaring and people bought more than they had in years. They traded up in style and in stores, in some cases--switching from Macy’s to Bloomingdale’s or heading to Macy’s first rather than starting at Robinsons-May.
Now, however, traffic at the department stores’ home, the mall, was down for the four weeks ended May 26, according to the National Retail Traffic Index.
Of the 21 weeks measured this year, more than half showed a decline in visitor numbers as compared to a year ago.
“That hurts department stores in particular,” Niemira of Bank of Tokyo-Mitsubishi said. “If there isn’t traffic, there aren’t sales and they discount more, which is a problem.”
Early in May, Federated Department Stores pared back its forecast of a 1% to 2% same-store sales gain for May, saying that sales for stores open at least a year were likely to be closer to flat.
As the month went on, Federated came back with even gloomier guidance, suggesting that the company runs the risk of missing even those revised numbers and posting a sales drop.
Arkansas-based Dillard’s Inc., which has stores mostly in the South and Midwest, and Robinsons-May parent May Department Stores Co. reported sharply lower sales last month.
Shapira of Goldman Sachs, however, warns not to count out these longtime players just yet.
“If anyone knows how to operate in a low-growth environment, it’s the department stores, since they haven’t seen high growth in a long time,” Shapira said. “They have already scaled back costs and capital expenditures in order to survive more moderate spending.”
Those spending patterns are likely to be around for a while.
“I don’t think we’re necessarily on track for a lot more improvement,” Niemira said, though he agreed with many analysts that there are opportunities for retailers in the second half of the year. “At least we’re not seeing further deterioration; the consumer indicators are weak but stabilizing.”
