Happy days are here for merchants, but they still face an overabundance of stores and growing consumer debt

After one of its worst recessions in memory, retailing picked up slightly in 1996. A soaring stock market and low unemployment translated into improved consumer confidence. Apparel sales recovered, luxury goods continued to sell, and even specialty retailers showed signs of a comeback.

Industry experts and retailers expect those trends to continue through the first half of this year. But a weaker economy in the second half could slow sales again. James M. Zimmerman, president of Federated Department Stores Inc., predicts that 1997 "will be more of the same"--that is, moderately healthy.

Carl E. Steidtmann, chief economist at Management Horizons, worries about a possible economic slowdown and consumer debt. "It's sort of like termites eating away at the porch. The porch looks O.K. until you step on it." In addition, the industry still faces the long- term trend of having too many stores. Steidtmann estimates retail sales will rise 3.5% in 1997, compared with an estimated 5% jump in 1996, based on the assumption of a slower economy in the second half. Profit growth, he says, will be flat to lower after rising in 1996.

High-end retailers from the Gucci Group to Neiman-Marcus and Tiffany are expected to continue flying. Gucci's sales leaped 81% for the nine months through October, 1996, and should rise 26% this year, says analyst Janet Joseph Kloppenburg at Robertson, Stephens & Co. Tiffany CEO William R. Chaney also predicts 15% sales growth this year.

Isaac Lagnado, publisher of the Tactical Retail Monitor, an industry newsletter, expects apparel sales to remain strong through 1997. Specialty apparel retailers from Gap to The Limited to AnnTaylor Stores (box) are expected to benefit.

In a glutted retail market, most of the growth at Wal-Mart Stores Inc. will be in supercenters--combination grocery and general merchandise stores. International operations, with sales of about $7 billion last year, are still tiny relative to Wal-Mart's size and marginally profitable because of heavy startup costs. NatWest Securities Corp. predicts Wal-Mart's sales will grow 10% this year, to $115 billion. Kmart Corp. pulled itself out of a hole last year. Analysts like its debt restructuring, cost-cutting, and new merchandising strategy. Salomon Brothers Inc. says Kmart's earnings will more than triple, to $484 million, on a 6% sales gain, to $36.2 billion. Nesbitt Burns Securities Inc. in Chicago predicts Sears, Roebuck & Co. will see earnings rise 15%, to $1.5 billion.

Home furniture sales should slow as housing starts dip, but consumers are likely to continue spending on lamps, sheets, and mirrors. Pier 1 Imports Inc. expects its sales to grow 12% this year, to just over $1 billion, according to Southwest Securities Inc. As for electronics, the absence of a hot new gadget and slow growth of home-computer sales could continue to hurt the likes of Circuit City Stores Inc. and Tandy's Computer City. All in all, retailers will have to work hard for the money in 1997.

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