Sifting Through Retail's WreckageToddi Gutner
In a stock market that has been defying gravity, many retailers can't get off the ground. So a number of companies are taking action to shore up their businesses and get their share prices back on track. The Limited is buying back nearly one-quarter of its shares, Toys `R' Us is restructuring, and Dayton Hudson is implementing an aggressive cost-reduction program at its Mervyn's discount-apparel chain.
Retailing experts are mixed as to whether these efforts will work. But it's tough to imagine that this sector could do much worse. For 1995, total return for the Standard & Poor's 500-stock index rose nearly 38%, while the broad S&P retail-stores index was up just 12%. For January, the retail index fell almost 2% while the S&P 500 returned more than 3%. "Never has retailing done so poorly in an expanding economy," says Frank Cappiello of Cappiello-Rushmore funds in Bethesda, Md.
In the past few years, massive store overbuilding fatally crossed paths with record consumer debt levels and an aging population that is reining in spending. As a result, a shakeout is under way. "Witness the conga line at the bankruptcy courts," says retail consultant Alan Millstein. Discounters Bradlees and Caldor and apparel retailers Today's Man and Edison Brothers Stores are but a few to file recently for Chapter 11. Then there are the store closings. In the past three months, retailers have shuttered about 3,500 stores, according to Walter Loeb of Loeb Associates, a retail consulting firm.
The good news is that all this is going to brighten the picture for the stronger merchants. "Retailers learned a harsh lesson last year," says David Poneman, an analyst at Sanford C. Bernstein. "They have taken a more austere look at expenses and inventories, which should produce better operating results this year."
Still, retailing is only for the long-term investor. Don't expect significant changes in profitability for six to nine months. By then, Toys `R' Us hopes to see a payoff. With its decision to shrink inventory, redesign stores, and introduce Babies `R' Us, the former powerhouse "is doing more than ever to improve performance," says Dorothy Lakner of Oppenheimer. The stock is now near its 52-week low of 20 1/2.
Dayton Hudson has the albatross of underperforming Mervyn's around its neck. But Marian Kessler, co-manager of Crabbe Huson Equity Fund, is still buying because she likes the company's other assets, and she's betting management will get Mervyn's in gear or dump it. Dayton also owns the well-performing Target discount chain and a department-store division, which includes the growing Marshall Field stores. "The earnings potential for Target alone makes this stock cheap," says Kessler. Dayton's price-to-sales ratio is 0.26, compared with the company's historical average of 0.35 and 0.46 for the S&P department-store index. The stock is 10 points off its two-year high of 86 7/8.
Federated Department Stores and The Limited are both companies for the risk-minded investor. The verdict is still out on whether Federated can successfully digest its acquisitions of the Broadway and R.H. Macy department stores. But value-seeking fund manager Cappiello thinks the five Broadway stores being converted to Bloomingdale's in California will take off as the state's economy expands. The stock is trading a few points off its 52-week high of 30 1/8 but has potential for gains, says Cappiello.
LIMITED GAINS. Last fall, The Limited sold 17% of its Intimate Brands division, which includes Victoria's Secret stores and Bath & Body Works, to the public. More recently, it announced it would buy $1.6 billion worth of stock, signaling management's faith in better times to come. "I think The Limited has turned the corner, and the changes are taking hold," says Gregory Weiss of the newsletter Investment Quality Trends.
Investors who are looking for less risk might consider two well-capitalized companies with strong management and excellent performance. Sears Roebuck and Kohl's, the Midwestern department-store chain, are two retailers that have caught the eyes of money managers. Sears has made a strong comeback since 1992. It closed underperforming stores and renovated the remainder, adopted brand-name merchandise, and started its "Softer Side of Sears" push. Although Kohl's sells at a heavy premium to the market multiple of 14, it is enjoying strong growth as department stores nationwide find their niche.
Retailers will continue to be battered. But the strong companies are making the necessary changes to survive and prosper.