Chain Stores Land In The Bargain Bin

Weak stocks mean it's shopping season for others

On Wall Street, as in retail, there are deals--and then there are steals. Based on their recent stock performances, it seems department store chains qualify as the latter. How else to explain financier Carl C. Icahn's recent interest in J.C. Penney Co., which, at 18, is trading well below its $26 book value? Icahn, the notorious bottom-fisher, plans to buy more than $15 million of the retailer's stock. "What I like to do is find undervalued companies," says Icahn, who gained a reputation as a corporate raider in the 1980s.

Penney is not alone. Shares of major department store chains have stumbled badly in recent months, with most trading at or near 52-week lows. And after another round of disappointing quarterly earnings reports from some department store chains on May 16, the prospects of a recovery for the sector seem slim. That's left many retail gurus speculating about a new wave of consolidation. "Department store valuations are the lowest in 15 years," notes analyst Jeffrey Edelman of PaineWebber Inc.

Just why have department stores fallen out of fashion on Wall Street? For one, investors fear that rising interest rates will dampen consumer spending. But there is a much bigger problem: Despite a booming economy and the best consumer spending ever, department stores continue to lose share to discount chains such as Target and Wal-Mart, as well as specialty retailers like Gap. "Department stores have chronically underperformed the rest of retail," says Carl Steidtmann, chief retail economist at PricewaterhouseCoopers.

Many of the wounds have been self-inflicted. At chains such as Saks, Dillard's, and Penney, management missteps have been the main culprit in their stocks' downfall. The three, along with Charlotte (N.C.)-based Belk Inc., are now seen as primary acquisition targets. Not only are the prices right for consolidation, but retail experts say competitors might buy their rivals to get their hands on the real estate--a precious asset in a time when few new shopping centers are being built. Penney, for one, owns some 1,140 mall-based stores in the U.S., Puerto Rico, and Mexico.

Who might want all or a piece of these companies? Federated Department Stores Inc. and May Department Stores Co. come to mind. Both companies declined to comment, but retail analysts and consultants say they are in the best position to capitalize on their rivals' problems. Although their stock prices are down, too, both have strong balance sheets, and, perhaps more important, experience integrating acquisitions.

That hasn't been the case lately for either Dillard's or Saks, which changed its name from Proffitt's Inc. following the 1998 $1.5 billion acquisition of Saks Holdings Inc., owner of Saks Fifth Avenue. On May 16, Birmingham (Ala.)-based Saks reported an 18.6% drop in first-quarter income, to $32.4 million. Says retail consultant Howard Davidowitz of Davidowitz & Associates Inc. in New York: [Saks] has absolutely no credibility with the Street."

Penney's standing on Wall Street has also been shaken. On May 16, it reported a $118 million first-quarter loss vs. net income of $167 million in the year-ago period. That's the kind of showing that has cost the nation's fifth-largest retailer nearly two-thirds of its market value in the past year.

Observers agree that neither May nor Federated would want to buy Penney outright. There's too much overlap--and Penney owns the Eckerd drug store chain, an unattractive sideline for both. But as Carl Icahn might tell you, anything is possible when a stock is selling below market value.

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