San Francisco, CA (March 6, 1997) -- Welcome, Foolish readers, to the newest of the Industry Weekly updates: The Retail Sector. Each week, with a credit card in my hand, I will travel with you through many of our favorite stores to see if any major bargains are around.

To start off, let me say that the major macro indicator used to follow national retail sales is the LJR Redbook Research numbers. In the last week of February, national retail sales rose 2.4%, essentially the same as the week before. In addition, retail sales finished up better than expected and most retailers were on target. Unlike last January and February, when retailers were cleaning up the mess from excess inventory, the first few months after the holiday season this year were helped by leaner inventories and warmer weather. It is also interesting to note that the retailers say shopping bags were filled mostly with apparel in many of the department stores. (Note that 75% of Christmas gifts this past year were clothes.)

Fickle Fashion World

It has always been my belief that an investor is amenable to buying stock in a company even if the store might not draw him or her in as a customer or does not meet the investor's personal budget standards. For example, back in October 1995 when GUCCI's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> IPO was at $23 (stock opened at $26 3/8) there was not much 10 shares of stock would have bought in any Gucci store except maybe a pair of shoes. At the stock's high on November 20, 1996, at $80 1/2 , I would much rather have had the 10 shares of stock than the 8-month-old worn pair of pumps. Keeping that in mind, let's examine two of New York's most luxury retailers, TIFFANY & CO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIF)") else Response.Write("(NYSE: TIF)") end if %> and SAKS HOLDING, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %>. Both reported earnings above analyst expectations. Tiffany's net income of $35.8 million, or $1 a share, for the fourth quarter beat the First Call analysts mean estimate of $.93 a share. The fourth-quarter sales totaled $327.6 million, or 16.7% higher than a year earlier. That's a lot of diamonds, gold and silver pens. Sales at stores opened at least a year in the US rose 11% and in Japan, the largest international market, rose 20%.

The continued success of Tiffany's has been the allure of the blue box with the white ribbon. The sales continue to be strong in three major areas -- U.S. retailing, direct marketing and international retailing. As a Tiffany charge customer, I have seen the development of the company's mail order business, over time and it is extremely well run and very successful. Further, the company is opening a new store in Palo Alto, California, hopefully to take advantage of all that IPO/Silicon Valley money floating around. In certain cultures today, a husband wouldn't think of bringing his wife home anything but a Tiffany box, and even teenagers view it as the ultimate status symbol. All of these things together have kept the glitter of Tiffany's sparkling. At the close of the market today, Tiffany's was trading at $39 1/8, which is about 24 times earnings estimates. For comparison, note that upscale retail stocks such as Gucci have traded as high as 30 times earnings.

Down the street from Tiffany's on Fifth Avenue is Saks Fifth Avenue, located near Rockefeller Center and St. Patrick's Cathedral. Saks Holding, which is the holding company for Saks, reported fourth-quarter net income of $46.7 million or $.73 a share, beating by a penny the mean estimate surveyed by First Call. Saks's earnings for the last quarter were 10.7% higher than the $42.2 million, or $.66, for the previous year's quarter. These results are pro-forma as the company's IPO was in May 1996. However, the company did report that fourth quarter sales of $600.3 million was an 18.3% increase over the $541.0 million reported a year ago.

The company credited the profit on operating leverage, tight expense control and inventory management. I have noticed better merchandising, more private Saks labels which increases margins, and an expanding men's store. In looking at the future of Saks, it is to be noted that the short-term plan is to build 20 new stores and is involved with 12 expansion projects in California, Texas, New York and the Southeast markets in fiscal 1997 and 1998. Saks attributes its 17.2% sales growth in the first 10 months of 1996 to the recent store expansions. In early December, Smith Barney analyst Richard Church initiated coverage of Saks Holding Inc. with a buy rating, saying, "Saks has attractive growth prospects, and that the company's management has been 'adding shine to the Saks franchise' over the past few years."

The stock closed today at $34 3/8 with a little more than a 50% increase in the 30-day volume average. This may have been attributed to rumors on the street that both Saks and NEIMAN MARCUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NMG)") else Response.Write("(NYSE: NMG)") end if %> may be interested in acquiring the privately held retailer, Barney's, which is in in bankruptcy protection. The creditor's committee would be thrilled to see a higher bid come in from Saks or Neiman's within the next few weeks. Stay tuned.

For me the notion of retailers does expand to any store that can get me to pull out my plastic on a regular basis... especially for things I don't really need. As baby boomers turn 50, they we will be spending more and more time in drug stores. Notwithstanding the fact that managed care has in some cases limited the amount we may spend on prescribed medication, the revenues on over-the-counter drugs and preparations are growing. For me, every trip to the drug store is a retailing extravaganza.

GENOVESE DRUG STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GDX.A)") else Response.Write("(AMEX: GDX.A)") end if %> posted a 65% rise in fiscal fourth-quarter earnings. Total sales grew 14% and sales at stores open at least one year were up 9%. Fiscal 1996 showed a net income of $.25 a share while 1997 saw a rise to $.40 a share, on almost a $2 million increase in net income. Genovese operates a chain of 120 retail drug-stores and general-merchandise stores located in southeastern New York, and in New Jersey and Connecticut. In addition, Genovese operates one professional photo retail store, a photo processing facility, and a division that provides nursing homes with prescriptions and medical supplies. Genovese closed today at $14 1/8.

CVS CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVS)") else Response.Write("(NYSE: CVS)") end if %> said Wednesday that same store sales for the four weeks ending Feb. 22 rose 14.5% and for pharmacies open at least one year same store sales rose 23%. The total sales for the month rose 17.7% to $474.4 million. Total sales for the year-to-date period rose 21.2% to $919.4 million. That is a lot of bandages, aspirin, shampoo, batteries, and ice cream. In addition, CVS announced in February it would be merging with REVCO D.S. INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RXR)") else Response.Write("(NYSE: RXR)") end if %>. This deal would make the two together the second-largest drug store chain in the United States behind WALGREENS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAG)") else Response.Write("(NYSE: WAG)") end if %>.

Walgreens reported that same stores sales for February were up 6.2 % from a year ago. Total sales grew 11.6 percent to $1.08 billion from $954.1 million. Calender year-to-date sales for 1996 were $2.17 billion, up 13.2 percent from $41.92 billion in 1992. As of the last day of February 1997, Walgreens operated 2,256 drugstores, up from 2,131 one year ago. Walgreens closed at 42 3/4.

Another drug chain worth evaluating is RITE-AID <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RAD)") else Response.Write("(NYSE:RAD)") end if %>, which reported its same store sales rose 9% this February compared with last February. Total sales for the five weeks ending March 1 increased 85.4% to $1.03 billion from $554 million a year ago. These figures exclude about $31 million in volume from 190 stores in North and South Carolina being sold to J.C. PENNEY CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCP)") else Response.Write("(NYSE: JCP)") end if %>.

Clearance Rack

Retailer and manufacturer GUESS? <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GES)") else Response.Write("(NYSE: GES)") end if %>,which went public last August, had its stock hit hard when its quarterly earnings came out last week, even though the pro-forma numbers were up from $.22 to $.28 a share. The stock tumbled 2 1/2 points. After earnings, Merrill Lynch said it downgraded Guess? to a near-term neutral from buy. Merrill said it kept Guess's long-term rating as accumulate. However, the stock has never really traded higher than its IPO price, which at the time the underwriters found difficult to sell, and kept lowering the price of the intitial shares. I believe what really hurt the stock was that in the past few years while kids where doing the grunge look, the type of chic sleek look that Guess was known for was not being bought by the teens of America, and the Baby Guess line was so overpriced it was being passed up by even the fashion conscious baby boomers. Perhaps now that the grunge look has finally passed us, Guess will see their merchandise once again come into favor. At the close of business today Guess traded at $10 3/8.

Special Purchases

Over the past two years, I have noticed a huge interest in home do it yourself, crafts, projects, all keeping the family together with something to do besides watching television. Women are enjoying Martha Stewart's Living and TV show, and trying to replicate many home decorating items themselves. Cable stations are filled with programs that teach fabric painting, making curtains, and just general easy projects for the home. The leading national fabric and craft retailer, FABRI-CENTERS OF AMERICA, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCAa and FCA.B)") else Response.Write("(NYSE: FCAa and FCA.B)") end if %> announced on Wednesday record sales and earnings for its fourth quarter and fiscal year ending Feb. 1. This last quarter marks the 15th straight consecutive quarter of improved earnings over the same quarter the previous year. In fiscal 1997, net earnings were $24. 6 million, or $1.30 a share, compared with 17.4 million, or $.91 a share, in fiscal 1996, representing a 41% increase. The president and CEO attributed the record numbers to "strong sales growth across all product lines, combine with our ability to leverage expenses." He further stated, "Our accomplishments included the generation of substantial cash flow. During fiscal 1997, we reduced long term debt by $83 million, improving our long-term debt to total capitalization ratio to 27% at the end of fiscal 1997, compared to 46% at the end of the prior year."

For those who want a closer look at this company, it operates 914 stores in 48 states, primarily under the names of Jo-Ann Fabrics and Crafts, Cloth World, and New York Fabrics. Fabric-Centers is very thinly traded, and closed at $18 today.

Each week, in this weekly update, I will be examining all aspects of the retail industry. Remember your plastic -- "We never leave Fooldom without it."

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