Retail Industry Update
by Risa Kaplan (TMF Style)

SAN FRANCISCO, CA (July 4, l997) -- In honor of the Fourth of July, I am pleased to announce some very patriotic figures. There was no increase this year in the number of stripes and stars on our American flag. Still 13 strips and 50 stars, though the State of California is still considering its options for splitting 2 for 1. No significant change in the three colors used -- red, white and blue, chosen by Miss Betsy Ross (though some think Tommy Hilfiger was the originator of that color combo). Created with the signing of the Declaration of Independence, our nation is now one year older, two-hundred and twenty-two years old, a slight increase over last year. Next week we will return to those fascinating Redbook retail sales numbers. Happy Fourth!

WHO CARES IF YOU HAVE 2,000 NEHRU JACKETS LEFT FROM THE '70s AND ARE STILL CARRYING THEM AS INVENTORY...

Forgetting my occasional pleasure in buying another pair of black patent leather shoes and always loving a big selection, bloated inventories are never a welcome sign for retail stock investors. There may be a lot to choose from, but what does inventory really mean to the company and, in turn, the investor? A large inventory usually means that markdowns are just around the corner as retailers look to unload their merchandise to make way for more. (Especially in seasonal apparel.) Reduced selling prices often lead to lower margins and lower same-store sales. The longer a store has to hold its inventory, the longer it doesn't have the proceeds to pay off the debt it incurred in acquiring the merchandise.

NORDSTROM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOBE)") else Response.Write("(Nasdaq: NOBE)") end if %> and J.C. PENNEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCP)") else Response.Write("(NYSE: JCP)") end if %> both turned in sales increases of around 5% on a year-to-year basis while inventories grew at around 13%. Normally when inventory grows faster than sales, profits drop, and that usually doesn't play well on the Street.

The fat inventory numbers can be a sign of a few different things. First, that shoppers are not turning out in the numbers they did in the past; or second, the customers don't want the merchandise the stores are carrying. Understanding the difference is very important when looking at retail stocks. If consumers aren't spending across the board in similar sectors, that may be a sign of a general slow down in retail and lackluster consumer confidence. But if the problem is just that a particular store is not selling its merchandise, that may not spell gloom and doom for retail in general, just for that specific company. In the recent case of the immense drop in the stock of teenage retailer GADZOOKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GADZ)") else Response.Write("(Nasdaq: GADZ)") end if %>, the problem wasn't that kids had stopped spending their money on clothes, they just weren't buying at Gadzooks. The inventory wasn't wanted by our fickle youth.

Last month the GAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> reported a 28% increase in inventory, compared to a 12% rise in sales. KMART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %> had an 8.9% jump in inventory, compared with just a 4.1% rise in sales. However WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> showed a 2% decline in inventories and a 11.6% increase in sales and DAYTON HUDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %>, parent company of discounter Target, showed a larger increase in same-store sales than inventories.

Wall Street seems to believe that inventory growth that is equal to (or less than) the growth in sales is okay. It is one of the numbers that analysts look at to determine earnings estimates. Recently a NatWest analyst lowered ratings on both the Gap and Kmart as a result of inventory overhang. Quarterly earnings estimates for Gap were lowered to $0.23 a share from $0.25, and Kmart estimates dropped to $0.10 cents a share from $0.13.

This past Christmas, it was very noticeable that retailers had much less inventory, after having taken a major beating during Christmas 1995. January 1996 numbers fell apart because many retailers had too much inventory and put too much on sale, which really hurt the bottom line. Unfortunately, retail trends can never really be predetermined or accurately projected, so retailers are always planning amid very tumultuous seas.

In an interesting note, Nordstrom is having it big Anniversary Sale this month and is advertising "brand new fall fashions" and "outstanding pre-season savings." When I was growing up, you didn't see fall sales until at least Veteran's Day. But now it is important for retailers to get the merchandise in the stores, out on the floor, and sold, to limit those inventory numbers.

REFUNDS, RETURNS & EXCHANGES

An few months ago, I reported on some of the fine jewelers that are located in malls throughout the country. This week many of them were adversely affected when FRIEDMAN'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRDM)") else Response.Write("(Nasdaq: FRDM)") end if %> pre-announced weak profits. Third quarter revenues are expected to be around $45.8 million, up 18% from year-ago levels but below both the company's and the analysts' expectations. The numbers showed the jeweler will only earn $0.11 to $0.14 per share in the third quarter compared to the estimates of $0.26 per share.

It appears that these weak earnings are caused by a 4.7% drop in comparable store sales. Cash sales remained brisk, but sales of jewelry on store-financed credit fell below expectations. Many jewelry stores have their own credit cards and financing plans to encourage sales. Stores want customers to use their financing plans so that the store can benefit not only from the sale, but also from the finance charges that accrue. One reason for the drop in store-financed sales is that customers might be using their favorite "mileage plus" or discount cards to buy the family jewels, rather than using the store's programs. Of course it is also possible that less jewelry is being bought on credit due to the consumer's desire to be saddled with less debt.

Other retailers, such as home furnishing company HELIG-MEYERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %>, also benefit greatly from having their own credit operations. In Helig-Meyers case, it is usually the only furniture store in town and tends to be in rural areas where customers may not have the option of qualifying for a "bonus" credit card. Moreover, changes in credit card use may not be felt as severely by retailers selling durable goods rather than "whimsical" goods. (Try telling Ivana Trump that a 3-carat diamond is whimsical darling.) Friedman's closed this short trading week at $16.

STEVEN MADDEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHOO)") else Response.Write("(Nasdaq: SHOO)") end if %> announced the signing of a new retail lease in Bethesda, Md. The company also reported that June 1997 same-store sales increased 17%. Same-store sales for the second quarter ended June 30, 1997, increased 22%. In addition, the company's two most recently opened mall stores in Queens Center Mall, Elmhurst, N.Y., and Lenox Square Mall, Atlanta, continue to exceed projections. However, there does appear to be some shareholder dissatisfaction with Mr. Madden's $436,000 bonus. Shares of Steven Madden closed the week at $6 5/16.

Apparel company NAUTICA ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NAUT)") else Response.Write("(Nasdaq: NAUT)") end if %> announced first quarter earnings per share of $0.18, up 38% on a 25% year-over-year increase in revenues. Nautica has very consistent customers and has not ventured into other areas, instead staying focused on the men's sportswear line it does so well. Nautica shares closed at $26 1/4.

NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> reported record fiscal fourth-quarter profits after warning earlier that sales and earnings would be below expectations. In May the company had forecast profits for the three months ended in May of between $0.51 and $0.56 a share, reflecting a shift in Europe to more advanced ordering, a shortage of certain products, and some cancellations in the U.S. The earnings of $0.52 a share were just short of the First Call consensus estimate of $0.53.

Nike earned $155.8 million, up from $133.7 million (or $0.45 a share) in the year-ago quarter. Revenues rose 28% to $2.37 billion from $1.85 billion. Looking forward, Nike said worldwide futures orders for delivery between June and November, a key indicator of demand, rose 18% to $4.9 billion.

On Wednesday, Hambrecht & Quist cut its first quarter fiscal 1998 EPS estimate for Nike to $0.88 from $0.92, and lowered the fiscal year 1998 EPS estimate to $3.00 from $3.24.

In a story that could affect Nike sales, on Wednesday German sportswear maker and arch-rival Adidas AG signed a multi-year global marketing alliance with the National Basketball Association (NBA), giving the company licensing rights to sell NBA merchandise in the U.S.

Adidas, known by its three-stripe logo, said the deal gives it the right to create and develop a NBA apparel line and use league uniforms in Adidas athlete-endorsed advertising. The deal also makes Adidas a marketing partner of the new women's basketball league in the U.S. In March, Adidas signed a marketing deal with George Steinbrenner and the New York Yankees baseball team, giving the German company the right to make the pin-striped uniforms and to sell uniform replicas. All of this is allows Adidas to compete with Nike on its home turf. Nike closed the week at $58 11/16. Adidas shares trade on the German stock market.

TUESDAY MORNING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TUES)") else Response.Write("(Nasdaq: TUES)") end if %>, that crazy "we are only open certain times of the year" deep discount retail chain, reported record sales for the second quarter ended June 30, 1997. Sales during the company's second quarter sales event were $67.4 million, a 24% increase from last year's $54.3 million, which represents the eighth consecutive quarter of double digit increases. Sales for the first half of the year increased 28% to $114.9 million from last year's $90.0 million. Comparable store sales during the first half increased 19%. Tuesday Morning shares ended the week at $21 1/4.

Kmart said on Thursday that it has signed a definitive agreement to acquire 20 stores from VENTURE STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VEN)") else Response.Write("(NYSE: VEN)") end if %>. Under the terms of the agreement, Kmart would assume occupancy of the sites approximately 60 days after closing. The sale, which is subject to regulatory approval (oh no the FTC again!) and certain terms and conditions, is expected to be completed in July. The company hopes that these stores fit well with Kmart's existing locations in key metropolitan areas and will add significantly to market penetration in the Dallas and Houston markets. Kmart shares closed at $11 15/16.

ALTERATIONS

LIZ CLAIBORNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LIZ)") else Response.Write("(NYSE: LIZ)") end if %> announced a regular cash dividend on the company's common stock at the rate of $0.1125 per share to be paid on September 2, 1997 to stockholders of record at the close of business on August 8, 1997.

Robertson, Stephens & Co. research analyst Ed Weller initiated coverage of PIERCING PAGODA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PGDA)") else Response.Write("(Nasdaq: PGDA)") end if %> with a "buy" rating.

Goldman Sachs removed SAKS HOLDING CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %> from the priority list, but said Saks remains on the recommended list.

Goldman Sachs also upgraded COMPUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> to "market outperform" from "market perform" as the company announced that its fourth quarter same-store sales rose 9.7%.

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

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