Giving Away the Store

Deep discounts could rule retail for the rest of the year

When Paula Fries shopped recently at some of her favorite spots in Jackson, Mich., she was blown away by the bargains. At Kohl's (KSS ), she bought a sleeveless tank top and cropped pants for $50, nearly 50% off the regular price. At Gap (GPS ) she got a tank shirt that was down to $6.97 from $20. "I'm seeing a lot of clearance sales -- markdowns on top of markdowns," she crows.

To the dismay of retailers and the delight of shoppers, the discounts keep getting deeper. Across the country, retailers are struggling with a stockpile of inventory after a dismal first quarter. The war, weak consumer sentiment, and lousy weather flattened sales, leaving inventories up 3.3%. Even the savviest players, such as Wal-Mart Stores (WMT ) Inc. and Kohl's Corp., were caught off guard. Now they and others are slashing prices on everything from apparel to DVD players.

That spells even more bad news for second-quarter profits -- especially since the economic gloom shows no sign of lifting. "I would stop short of saying it gets uglier, but I don't think it will look any better," says Jay J. Fitzsimmons, senior vice-president of finance at Wal-Mart. Retailers could be awash in excess goods for months. Analysts expect retailers to post 5.8% earnings growth in the second quarter, well below the 28% posted a year ago, according to Thomson Financial/First Call. For the year, profits are expected to rise 10%, half the 20% posted in 2002.

Hardest hit will be apparel retailers, particularly department stores, which have the most inventory to unload. Todd D. Slater, an analyst at Lazard Frères & Co., says apparel inventories rose 7.6% during the first quarter on a 4.3% sales gain. To move clothing and other excess merchandise quickly, analyst Emme Kozloff of Sanford C. Bernstein & Co. figures retailers likely will have to launch markdowns of 40% or more.

Discount retailers such as Kmart (KM ) Corp. and Target (TGT ) Corp. that compete head-on with Wal-Mart might have to mark down even more. Analyst Slater figures Wal-Mart has about $2 billion worth of discounts ahead of it. "When Wal-Mart sneezes, everybody else can catch a cold," he says.

Not everyone feels the pain. Off-price retailer TJX (TJX ) Cos. -- owner of T.J. Maxx Stores and Marshalls Inc. -- has benefited from other retailers' mistakes. During the quarter, its inventory shot up 25% on a 5% sales gain. But the company says it was able to get the goods at deep discounts and expects to move them quickly, even while maintaining strong profit margins. Home Depot (HD ) Inc. and Lowe's (LOW ) Cos. also are thriving, thanks to continued strength in the housing market. At Lowe's, inventories are 11.5% higher than a year ago, but that's roughly in line with sales growth.

For most retailers, though, the second quarter will be a wash. They'll have to hunker down and focus on the second half. That means a summer of great shopping for the likes of Paula Fries -- and another season of pain for the beleaguered retailing industry.

By Stephanie Anderson Forest with Wendy Zellner in Dallas, Ann Therese Palmer in Chicago, and bureau reports

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