Picky approach to retail stocks is best


Sorry, Santa: We may have a ho-hum holiday sales season ahead of us.

Chief executives of large retailers I've chatted with all seem to point to the same factors that give them pause as they ponder their prospects.

There isn't the buying euphoria that followed President Clinton's election last year, and, even though the economy seems to be improving, Americans are still worried about jobs.

This year's shopper is tight, and proud of it. Compounding the situation, there aren't many hot trends in merchandise likely to lure consumers to stores in droves.

Last year, retailers received a marvelous holiday present in the form of 8 percent sales growth, the strongest selling season since 1988. This year, nervous estimates of most analysts are in the 4 percent to 5.5 percent range. That's not exactly coal in the stocking, but nothing to get excited about either.

This doesn't mean, however, that there aren't good investments in retailing stocks. It's just that you have to be picky. For example, many analysts fear Sears, Roebuck and Co.'s stock price has gotten ahead of itself and are waiting to see if its increased store sales are due in part to gains from shoppers who formerly used the now-discontinued Sears catalog.

"The strong players who control expenses and still offer good prices, quality and style are what consumers and investors alike are seeking," said Richard Jaffe, analyst with Wertheim Schroder.

Most retailers are becoming lean, mean fighting machines.

"Retailers worked to cut costs, have smaller inventories than in the past and are following an industrywide trend to more value," said Dorothy Lakner, analyst with Oppenheimer.

There's also hope the shopping climate may improve closer to the holidays.

"The holiday season now looks OK, but would improve on any events that boost consumer confidence," said Terry McEvoy, analyst with Janney Montgomery Scott. "Because the Clinton health plan has people worried about their pocketbooks, it would really help if it got bogged down."

Discounters continue to be strong, but analysts see additional opportunities.

"In times like these, the consumer wants the broader selections available in department stores, rather than specific types of items from specialty stores," said Rick Nelson, analyst with Duff & Phelps. "Apparel stores will be under pressure because there aren't many hot new fashion items this year."

It's possible to advance beyond the pack.

"While I expect most retailers will be in the 4.5 to 5.5 percent range in sales gains, a company improving its market share will get much better than that," observed Bruce Missett, analyst with Morgan Stanley. "An example such as Gap Inc. shows how a company can improve its margins."

Gap, excelling with its Gap and Banana Republic chains, is a stock recommendation of Jaffe, Lakner and Missett. Third-quarter income rose 27 percent because of lean inventories, fewer markdowns and addition of fashion merchandise for women. This turnaround follows four consecutive quarters in which company earnings declined compared with the prior year's periods.

Toys 'R' Us, likely to have a much better holiday sales season than it did last year, is suggested by Lakner, Missett and Nelson. The store is not taking any chances and has distributed 55 million catalogs nationwide.

May Department Stores, which reduced its divisions from 12 to eight, is another pick of Lakner, Missett and Nelson. It is benefiting from consumers seeking broader merchandise selection.

Wal-Mart Stores, the king of discounters in a holiday season likely to be generous to discounters, is a Lakner and McEvoy favorite. Its purchase of Kmart's warehouse-store business should help its bottom line.

J.C. Penney, successfully transformed from a general merchandiser to one specializing in apparel and home furnishings, is a Lakner and Nelson selection. Record earnings are likely this fiscal year.

Charming Shoppes, a fast-growing low-priced women's specialty apparel chain, is a McEvoy and Missett pick. Nordstrom Inc., a high-quality retailer likely to weather the difficult California economy where half its stores are located, is a Jaffe favorite. TJX Cos. and Dillard Department Stores are other Missett selections.

Tandy Corp. is a McEvoy choice, and Federated Department Stores and Caldor Corp. are Lakner picks.

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