The Browsers Are Finally Buying

Allen Questrom is getting reacquainted with an old emotion: hope. "Everybody's a little more optimisatic," says Questrom, CEO of Federated Department Stores Inc., the $7 billion giant that emerged from bankruptcy in 1992. "Our salespeople tell us the consumer feels better. And we feel better than we did six months ago." Questrom's observations echo those of most retailers, who expect sales growth of 6.5% in 1993, says David Kelly, a senior economist at Boston Co. That would match 1992's in crease, which was surprisingly strong thanks to a robust fourth quarter of holiday spending.

Such projections reflect several converging factors. The economy is recovering, inflation remains low, and consumer confidence is rising. Discretionary income is up, too, partly because homeowners have been refinancing their mortgages at lower interest rates. "That extra $200 or so that people get each month is going to go into spending," estimates Jared E. Hazelton, director of the Center for Busi ness & Economic Analysis at Texas A&M University.

MODEST UPTURN. So is the retail slump over after two terrible years of less than 2% annual sales growth? Maybe so, though most retailers and analysts still sound a note of caution. "There are no substantive job-growth projections," notes Janet Mangano, a retail analyst at Burnham Securities Inc. So, "there still isn't confirmation that the recovery in spending will be robust." Inflation-adjusted consumer spending will certainly be healthier than in 1991, when it fell 0.6%. But Boston Co.'s Kelly expects only a modest upturn of 2.5% in 1993, on top of a 2.1% uptick in 1992.

Still, such trends will leave stores with decent prospects. Tactical Retail Solutions, a retail consulting firm in New York, predicts that discounters such as Target Stores and Kmart will record above-average sales gains of 8% to 10%, on top of similar gains in 1992. For department stores, which sell prider items than the mass merchandisers, analysts estimate sales increases of 4% to 6% in 1993, vs. roughly 4% in 1992.

Chains that want to boost profits will still have to contain costs. Retailers have shut down enough stores to cut many jobs-620,000 from June, 1990, to November, 1992. And many chains are installing labor-saving automation. Federated, for example, has combined back-office operations and set up new inventory-control systems. As a result, Solomon Brothers Inc. analyst Jeffrey M. Feiner says its operating margins will grow from 3.9% in 1991 to 6.8% in 1993, on an estimated 5.1% sales increase.

The new efficiencies are crucial, since pricing is the key to competing with discounters. Take Spiegel Inc., the catalog company with an estimated $1.9 billion in 1992 sales. Spiegel suffered a surprising 3% drop in 1991 revenues. So for its 1992 catalogs, it adopted a version of what retailers call everyday low pricing. Spiegel's new "Best Bets" program now aggressively prices key items in every category, from bedspreads to blouses, and analysts think its sales rose 12% in 1992 and will jump 14% this year. For the entire $65 billion catalog industry, look for roughly 6% growth in 1993, says mail-order consultant Arnold Fishman of Marketing Logistics in Highland Park, Ill. That will be up from 4% in 1992.

Another price-conscious strategy is to build category-killer stores-giant stores featuring a wide selection of items in a single category such as toys or hardware. This lets retailers demand lower prices from suppliers, which is central to Kmart Corp's plan for competing with Wal-Mart Stores Inc., the market leader with $55 billion in sales. Kmart, now at $38 billion, has acquired Borders, a Midwest chain of huge, low-price bookstores. And its Sports Authority superstores are grabbing, share in the fragmented athletic-gear business. Jack Smith, CEO of the $420 million Sports Authority Div., expects to add 25 new stores and increase same-store sales 10% this year while earning $20 million in operating income, well up from an estimated $9 million in 1992. Says Smith: "There are things you deprive yourself of when times are tough, but sports isn't one of them."

Middle-aged consumers are also expected to spend more on couch-potato activities. "We've seen a pickup in big-ticket TVs compared to the past two years," says Herbert J. Zarkin, president of B. J.'s Wholesale Club, a $18 billion division of Waban Inc. "This year, home-oriented merchandise is going to outstrip apparel sales," adds Kurt Barnard, president of retail consultants Kurt Barnard Associates. "People are having families and finding it's cheaper to entertain and play at home."

BIG TICKETS. Three specialty-store chains that focus on relatively inexpensive home items-furniture retailer Bombay, housewares chain Lechters, and Bed Bath & Beyond-posted sales gains of 20% or more last year. Robert E. M. Nourse, CEO of Bombay Co., says increasing numbers of people are working at home, which also boosts the home-item business. No. 3 retailer Sears, Roebuck & Co. reports a similar trend. "Our big-ticket businesses-home appliances, home entertainment, home office equipment, and furniture-are all doing well," says Matt Howard, senior vice-president of marketing at Sears Merchandise Group.

Even retailers of some pricier home items say they're noting brisk sales growth at last. "All of our stores have better increases in home than apparel right now," says Federated's Questrom. Sales of furniture, housewares, electronics, and china at Federated grew roughly 8% last year, while overall comparable store sales rose 4%.

There's one other sign of strength: Cataloger Eddie Bauer Inc., for one, reports surprisingly strong demand for its various packages of flower bulbs, which sell for $8 to $95. If people are springing for stuff like that, it could be a that retail sales will blossom in 1993.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE