Retail Industry Update
by Risa Kaplan (TMF Style)

SAN FRANCISCO, CA (May 22, 1977) -- In this week's column we will look at slightly different numbers. Housing starts, mortgage rates and the weather seem to be important numbers in the home improvement sector. Stock prices are very sensitive to the announcement of housing start numbers. In terms of mortgage rates, neither contractors nor home buyers want to spend more interest dollars to either build a house, buy a house or remodel a house. Also, according to all the retailers in this sector, consumers don't want to think about remodeling and going into a hardware store when the weather is cold.

The Commerce Department said last Friday that housing starts over all rose 2.6% in April, to an annual rate of 1.473 million units, exceeding analysts' expectations.Though construction this year may not beat 1996 levels, which were the highest in eight years, starts remain strong because demand in parts of the country is exceeding the supply of new homes.

Relatively low mortgage rates are helping the market. Although the average rate on a 30-year fixed mortgage rose to 8.14% in April from 7.9% in March, rates are below last summer's levels. Thanks to Fed Chairman Alan Greenspan and the gang who didn't raise rates it should stay there at least through August..

In terms of the weather, Mark Twain once said of the city by the bay," the coldest winter I ever spent was a summer in San Francisco". The weather is often blamed for slower sales in winter and many professional and home projects are put off until the weather warms up, and football season is over.

HEY, HONEY, COME FIX MY FAUCET

As we approach the first days of summer, Memorial Day Weekend represents for me, the stylish one, that time I may bring out of my closets anything white and wear it. The rules according to my mother: no white shoes, pants, or handbags except between Memorial Day and Labor Day. For others, the end of May signals barbequeing, planting the tomatoes, and all around "tool time" activities. This is the season for charcoal briquettes, sprinklers, redwood decking, paints, pots, seeds, and between 40,000 and 50,000 items a large hardware chain may carry in stock. Would I hate to be in line for a price check.

This time of year I can see on TV and in fliers more of one of my favorite sportscasters. No, not Marv Albert or Frank Gifford. John Madden, the spokesman for Ace is the Place for the Helpful Hardware Man. (Take it from me, a helpful hardware man is a oxymoron.) Did you hear last year the Madden cruiser beat the Fuiji blimp in a race across the country?

Anyway, this week let's go looking at the stores where grass and weed killer, sealant with silcone, and my favorite, "the bug zapper" is sold.

North America's largest home improvement retailer is HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>. The company operates stores that sell an assortment of building materials and home-improvement products. As of January 1997, the company operated a total of 536 stores, including 503 Home Depot stores, five EXPO Design Centers in the U.S. and 28 Home Depot stores in Canada, with an aggregate of approximately 57 million square feet of selling space. The 40,000 to 50,000 items stocked in a typical company store are name-brand merchandise. The largest segment of sales, 33.9%, is from building materials, lumber, and floor and wall coverings. For the past four years, the company has been ranked by Fortune magazine as America's most admired retailer.

Tuesday, Home Depot reported record first quarter net earnings of $259 million ($0.53 per share) for the first quarter of fiscal year 1997. The net earnings were a 33% increase from net earning of $195 million ($0.41 per share) in the first quarter of fiscal 1996. Sales for the first quarter of fiscal 1997 were $5.66 billion , up 30% in the first quarter of fiscal 1996. Annualized inventory turnover improved to 5.5 through the first quarter of fiscal 1997 from 5.3 through the first quarter of fiscal 1996. Customer transactions during the first quarter were 129,744 and the average sale was $43.45, up from $41.86. Weighted average weekly sales per store is up from $834 from $782. The nation's largest mutual fund, Fidelity Magellan, recently placed Home Depot (the only new stock listed) into its fund as the tenth largest holding.

On May 8, Home Depot's rating was downgraded by Goldman, Sachs & Co. to "market outperformer" from "recommended list-buy" based on stock price. Well on that date, Home Depot was selling at $57 1/2. I guess no one agreed because after the earnings came out and the Fed left the interest rate unchanged the stock broke threw and today closed at $61 1/4, up 3/8 on heavy trading. (A note about cold weather -- a few days before last Christmas this stock was selling at a chilly $48 1/4.)

Home Depot's conference call which took place yesterday is available at 5/21/97: Home Depot Q1 1997 Conference Call.

Eagle Hardware & Garden <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EAGL)") else Response.Write("(Nasdaq: EAGL)") end if %> operates 27 home-improvement centers in the western region of the U.S, mainly in the Pacific Northwest.Eagle provides a wide range of "do-it-yourself" customers and professional contractors with a broad selection of brand name home improvement products. The company's stores, averaging 119,000 square feet each, offer a wide range of more than 57,000 brand-name home-improvement and building-supply products. Built around a design center with display areas and design coordinators, the stores' major departments are plumbing, electrical and lighting, lumber and building materials, paint and decor, tools and hardware, and lawn and garden supplies.

For the 52 weeks ended January 31, l997, net sales rose 24% to $761 million. Net income rose 92% to $21.7 million. Revenues reflect increased number of store weeks of operations and increased same store sales. Earnings also reflect volume-related buying efficiencies and a reduction in realized inventory shrinkage. Earnings per share were $0.88 with a 12-month trailing P/E of 24.20. Eagle shares closed at $23 unchanged.

LOWE'S COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %> is the nation's No. 2 home-improvement retailer as well as a specialty retailer serving the home-decor, home-electronics, and building-contractor markets predominantly across the Midwest, South Atlantic, and South Central regions of the United States. Each store combines the merchandise, sales, and service of a home-improvement center, a building-contractor-supply business, and a consumer-durables retailer. The stores are divided into big, medium, and small size categories. Big stores, which have more than 100,000 square feet of selling space, account for 79% of company sales. The company operates 402 stores located in 24 states.

Revenues for the fiscal year ending January 31, 1997, increased 22% to $8.6 billion. Net income rose 29% to $292.2 million. Results benefited from the company's expansion program, and increased comparable store sales. Net income also reflects an increased gross margin. The 12-month trailing EPS is $1.75 and the 12-month P/E ratio is 22.31.

This past Monday, Lowe's first quarter profit climbed on robust sales. The company posted net income of $0.41 a share compared with $0.28 a year earlier. Twenty analysts surveyed by First Call had a mean estimate of $0.40 a share for the latest quarter. Sales, meanwhile, climbed 26% to $2.4 billion, while same-store sales rose 7%.

First quarter expansion included two relocations and six new stores. This representing approximately 760,000 square feet of incremental retail space. In a statement the company said, "relocations have a definite initial advantage with an established store presence and customer base. New stores, new markets must establish a customer base and name awareness. As Lowe's continues to expand into newer territories, the new stores, new markets are becoming a greater proportion of the total store projects." Shares of this home improvement center dipped $3/8 to $38 3/4.

Lastly, SEARS, ROEBUCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> acquired Orchard Supply Hardware Stores of California in 1996 for $415 million. In a creative marketing move, instead of bring Orchard Supply into Sears, it is doing just the opposite. The company plans to bring the best of Sears into the Orchard Supply Stores. The stores will sell Sears's most popular line of tools, Craftsman products, giving Sears another fanatastic outlet for selling. This enables customers who might not venture into a big store like Sears to purchase this well known brand.

NEWTON'S LAW: Throw a book in the air and it might come down on your head

As reported the online bookseller AMAZON.COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:AMZN)") else Response.Write("(Nasdaq:AMZN)") end if %> went public last week amidst great hoopla. The stock was brought out by Hambrecht & Quist with an initial offering price Wednesday night of $18. The stock shot up during pre-market trading Thursday morning and opened at $29. It hit a high of $30 and then over a week's time was selling at a price below the initial price valuation of $18.

So what happened? There was great excitement drawn to this young Internet company. It appeared to have almost a monopoly in the Internet bookselling market since it was so far ahead of any potential competitors. But hot on the trail and ready to rock and roll was BARNES & NOBLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %>, the largest bookseller in the nation (we will get to that later).

Barnes & Noble was not going to let this little upstart company infused with new capital take over the Internet. In a fabulous corporate and public relations move, Barnes & Noble made a series of announcements the week of the Amazon IPO. They closed a deal with Microsoft and Hewlett Packard to ramp up quickly and provide the services that Amazon had and more, and announced with great fanfare a new website.

The last nail banged in the IPO coffin was bringing in the big legal guns and slapping a lawsuit on the back of this start-up company. This lawsuit based on "goodwill", alleges that Amazon wrongfully refers to itself as the "largest bookseller in the world". A claim that Barnes and Noble not only wants but intends to keep. So in a week when the eyes of investment community were made fully aware of the multitude of possibilities in the internet bookselling market, smarter folks decided to go with #1. Amazon shares fell sharply and Barnes & Noble stock rose. Amazon today hit a one week low of $15 3/4 to close at 16 3/4, down $3/8 on half of the week's average volume. Barnes & Noble which was selling in the $30's for most of this quarter, hit a high of $40 the day the Amazon IPO hit the trading floor, and today closed at $42 1/4, hitting a new 52-week high. Investors in the nation's largest bookseller can look up and over and say " Thank you Amazon dot com."

REFUNDS, EXCHANGES, AND RETURNS

Returning to one of the first stocks mentioned here back in March is FABRI-CENTERS OF AMERICA, INC.,<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCA.A)") else Response.Write("(NYSE: FCA.A)") end if %> which announced Tuesday improved financial results for its fiscal first quarter ended May 3, 1997. The fiscal 1998 first quarter marks the 16th consecutive quarter of improved earnings over the same quarter of the prior year for the national fabric and craft retailer. Net earnings for the first quarter of fiscal 1998 were $0.14 per share, a 144% improvement from net earnings of $0.06 per share, in the first quarter of fiscal 1997. Net sales for the quarter increased 8% to $218,826,000 over the $203,028,000 of net sales recorded in the same quarter last year. Fabric Centers closed today at $23 1/8, up $1/8 on thinly traded volume.

WILLIAMS SONOMA, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSGC)") else Response.Write("(Nasdaq: WSGC)") end if %> today announced sales and net earnings for the quarter ended May 4, 1997. Net earnings for the 13 weeks ended May 4, 1997, were $0.05 per share on a fully diluted basis -- an increase of $0.14 per share compared with a net loss of $0.09 per share reported for the 13 weeks ended April 28, 1996. First-quarter net sales grew 12.2% from $157,396,000 in 1996 to $176,535,000 in 1997. Retail sales for the quarter increased 16.7% to $106,257,000 and accounted for 60.2% of the company's total net sales for the 13-week period. Mail order sales were 39.8%. It looks like the home furnishings area is still strong, and judging from my last visit at Pottery Barn, hasn't even shown an ounce of slowdown. Shares of this retailer closed at $35 1/8, down $7/8.

My love affair with drugstores is still alive and well. ARBOR DRUGS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARBR)") else Response.Write("(Nasdaq: ARBR)") end if %> is the nation's ninth largest drugstore chain. It operates 194 locations, predominantly in metropolitan Detroit, the country's fifth largest drugstore market. The chain announced record sales and earnings for the third quarter of fiscal 1997. Net income for the quarter ended April 30, 1997 increased 24.5% to $0.19 per share as compared to $0.16 per share last year. Sales for Arbor's fiscal 1997 third quarter were up 14.5% with comparable store sales (stores open for one year or more) rising 7.8% in the period. Pharmacy sales accounted for 54.6% of total sales in the quarter, with comparable store pharmacy sales increasing 13.5%. Arbor closed at $19 1/2, down $1/2 on thinly traded volume.

Another closely watched stock, PAUL HARRIS STORES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAUH)") else Response.Write("(Nasdaq: PAUH)") end if %>, a specialty retailer of private label women's casual wear, today reported first quarter 1997 net income of $1,324,000 or $0.12 per share, compared with $138,000 or $0.01 per share a year ago. This represents the company's highest first quarter net income since 1987,and the seventh consecutive quarter-to-quarter earnings improvement. On May 8, 1997, the company announced first quarter revenues of $43.8 million, up 11% compared with revenues of $39.6 million last year. Comparable store sales for the quarter increased 10%. Paul Harris shares traded at $18, down $3/8 at the close of the session.

Coincidently, today along with my new catalgoue from DELIA*S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLIA)") else Response.Write("(Nasdaq: DLIA)") end if %> (which I had to fight my daughter Brittany to look at) came an announcement that the company intends to file with the SEC a public offering of 2 million shares of common stock (excluding shares subject to anover-allotment option), 1 million of which are being sold by the company and one million by selling stockholders. The company intends to use the net proceeds from the sale of the securities for general corporate purposes,specifically for working capital to support growth and capital expenditures related to infrastructure improvements. The company in its press release said it may also use the proceed so make future strategic acquisitions. Presently the company has 12 million shares outstanding with a float of approximately 2.7 million shares. Delia*s closed at $24 up 5/8 on heavy trading.

SUNGLASS HUT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAYS)") else Response.Write("(Nasdaq: RAYS)") end if %> announced today its results for the first quarter of fiscal 1997 ended May 3, 1997. Sales for the first quarter increased 12.6% to $138.3 million from $122.8 million for the comparable 13-week period in fiscal 1996. Comparable store sales for the first quarter decreased 3.3%. Results of operations for the first quarter were negatively impacted by the continued weakness of comparable store sales. Reported results for the first quarter decreased to earnings of $292,000, or $0.01 per share, from income of $7.2 million or $0.13 per share during the first quarter of 1996. On a related note, I had heard rumors floating around that NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> wanted to buy a sunglass company but no one was selling. This weekend, big ads appeared in the national magazines for a new line of sunglasses being put out..you guessed it Nike. I guess they just went out and did it. The Hut closed at $7 3/16, up 1/16.

Remember your plastic -- "We never leave Fooldom without it."

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