Retail sector's bright light: discounters

If 2001 appears to be shaping up as a dismal year for the multi-trillion dollar retail industry, one bright spot may be a beacon for investors sold on the sector: Discount stores and wholesale chains seem to be poised to get a rise from Americans' thrifty behavior.

In general, US retailers were pummeled by lackluster sales in June, normally the second-hottest month after December.

And, despite some reports to the contrary, it may not get too much of a lift out of tax-refund checks in the weeks ahead.

Steve Wagers, a freelance writer in Queens, N.Y., says he will "put any tax-refund money toward living expenses," but on a careful basis. "If I need a new pair of slacks, maybe I'll take out a little of the refund and buy them. But nothing frivolous."

"Jo," a friend of Mr. Wagers, says she agrees. "Maybe I'll earmark some of it for a business outfit. But I'm not going to go out and waste it at some clothing store somewhere."

The pair may reflect a national attitude. "Most Americans are not going to take their refund checks and use it to buy lots of new clothing or other items at their local retail store," says Kurt Barnard, editor of the Barnard Retail Trend Report, published in Upper Montclair, N.J.

And even if they did, that infusion of cash will not be enough to provide the kick necessary to revitalize the slumping retail sector, he says.

"We are besieged with reports of job layoffs and higher unemployment," Mr. Barnard says. "People will buy what they need, but only that. They are going to shop very carefully and look for bargains."

Carl Steidtmann, director and chief economist of the retailing division for PricewaterhouseCoopers, a New York consulting firm, recently told a retailing symposium in Florida that the retail sector - which employs about 1 in 5 US workers - may not return to full recovery until sometime in 2002.

Stingy shopping was clearly evident in June, as retailers turned in far lower than expected sales reports. Total sales rose a tepid 0.1 percent.

But while most department stores and upscale retailers saw sales drop sharply, in some cases into the red, discount chains and warehouse clubs cranked out generally robust numbers.

Stores that saw declines in June included Ann Taylor, Gap, Federated, and Dillard's Stores that turned in solid numbers were discount-oriented stores, including WalMart, the nation's largest retailer, Costco, BJ's Wholesale Club, and Target.

Barring a major turnaround, Barnard expects that total store sales this year will be up only about 2 to 3 percent. In 2000, total sales were up 5 percent over 1999.

But even a 2 to 3 percent gain will not be across the board, he says. "The only stores that will do very well this year are discounters or warehouse clubs," Barnard says.

"Look for the Targets to do well this year, but not the large, expensive retailers or the department stores," says Brian Piskorowski, a vice president and market commentator with Prudential Securities.

Money managers are taking notice. James Clarke, who co-manages small- and mid-cap investment portfolios valued at more than $350 million with Brandywine Asset Manager, in Wilmington, Del., currently has only a few retailers in his stock roster, all generally unknown to most investors.

His most successful and best-known retail holding - Abercrombie & Fitch - was sold a number of weeks back, after he garnered some hefty profits.

"But things have stopped" in the whole retail universe, he says. Mr. Clarke, who looks for low valuation levels before buying stocks, went out to his local mall recently and talked to store managers.

The evidence was overwhelming, he says, that - for now at least - retailers are stymied.

So is Mr. Clarke when it comes to buying retail stocks. Clarke, for his part, believes that valuation levels for retailers remain too high, despite their downward drift in the past year.

"We're just not finding anything to buy now," he says. Retail stocks may look better toward the end of the year, assuming that holiday shoppers turn out in force. But for now, at least, Clarke is looking elsewhere - such as the beaten-down technology sector.

Mutual fund investors, experts agree, may want to make certain that they are not overexposed to the broad retail sector.

If they own an all-purpose stock fund, they probably hold selected retail stocks. They will also hold retail stocks if they own an index fund.

The bottom-line, say experts: It may be better to own just a few solid retail stocks - such as discount chains - than retailers in general, including large department-store chains.

(c) Copyright 2001. The Christian Science Monitor