The Real Problem with Job Growth
The next time you're in a mall and need help buying shoes at a Finish Line store, you might have to wait a bit. That's because Finish Line (FINL), the nation's No. 2 athletic shoe retailer and operator of Finish Line, Man Alive, and Paiva stores, is hiring fewer employees now than it did during the same season last year.
Execs are concerned about weakening sales, which they expect to decline by 4% to 6% over the next fiscal year. "We have to work hard to keep our labor and hiring in check given our outlook in same store sales," says Mike Marchetti, Finish Line's executive vice-president of store operations.
Around the country, retailers are echoing similar sentiments, and many are holding off on their hiring plans. Their actions coincide with a surprising third consecutive month of job losses in the retail sector, according to last week's job numbers. The U.S. Labor Dept.'s job report on July 7 showed that retailers had shed 7,000 jobs in June, after a loss of 71,000 jobs in the previous two months combined (see BusinessWeek.com, 6/9/06, "Behind The Retail Jobs Numbers").
A STRANGE TREND.
It's unusual that retailers are trimming their workforces when the rest of the economy is growing. For years, retailers have been the source of significant job creation in the U.S. During the 1990s, department stores, groceries, and other retailers added 2.3 million jobs, or an average of almost 20,000 a month, according to the Bureau of Labor Statistics.
Now, the concern is that retailers, who are positioned to detect the pulse of consumers more quickly than many other types of companies, are sensing trouble ahead. "Something is screamingly wrong with consumers, and retailers are reacting," says Richard Hastings, economic advisor to the Federation of Credit and Financial Professionals and a senior retail analyst at Bernard Sands, a retail credit rating firm.
The outlook for the U.S. economy, in its fifth year of expansion, is already weakening. The Federal Reserve, under new Chairman Ben Bernanke, is trying to stem concerns about inflation and raised interest rates last month for the 17th consecutive time (see BusinessWeek.com, 6/30/06, "Bernanke's Timely Balm"). At the same time, the housing market is sagging, and gasoline prices have soared in most states to more than $3 a gallon. That has economists predicting that the U.S. economy's growth will slow to less than 3%, vs. 3.5% in 2005.
GROUCHY ABOUT GAS.
Retailers, from home-furnishing stores to large discount chains, are skittish that the prospects could get even worse. They worry that consumer spending may suffer from the pile-up of adverse affects. With home prices flat or on the decline, fewer consumers will be able to take out home equity loans to finance other purchases. Rising interest rates will make it tougher for people to buy cars and other large-ticket items on credit.
And consumers are finding it tough to avoid spending more on gas in the short term, since it's difficult to switch quickly to a more fuel-efficient car or shorter commute. Instead, they may trim expenses elsewhere, at restaurants or department stores, so they can fill up the tank.
The world's largest retailer, Wal-Mart Stores (WMT), has been one of the most outspoken on the issue. Sales at its stores open at least a year rose 1.2% for the five weeks ended June 30—its smallest gain in more than a year, despite discounts to lure customers. "Traffic was down during the month," says Tom Schoewe, executive vice-president and chief financial officer of Wal-Mart.
Wal-Mart continues to see customers consolidating their trips, and its research of shoppers shows increasing concern over the rise in gas prices. "In June, we reinforced Wal-Mart's low prices and value throughout the store by highlighting rollback prices on approximately 500 products," says Shoewe.
Overall, sales at retail stores open at least a year—a key barometer for the retail sector—rose 2.6% in June. That's down from the 3.8% average for the first half of the year, according to a tally of 56 retail chain stores by the International Council of Shopping Centers.
Still, many of the retail job losses are a result of consolidation and poor performance. Starting in June, national grocer chain Albertsons started shutting down the first of the 100 stores it plans to close this year. These stores represent 16% of the more than 600 stores purchased by private equity firm Cerberus Capital Management in January.
Also starting in March, Federated Department Stores (FD), the parent of Macy's and Bloomingdale's, started the process of eliminating 6,200 jobs as part of its takeover of the May Department Stores Company. Radio Shack (RSH) is also in the process of closing up to 700 underperforming stores around the country. "Clearly, as these stores close around the country, it will impact head count issues," says Rick Cobb, executive vice president at Challenger, Gray and Christmas, a jobs outplacement firm.
MANY STORES CONCERNED.
But even stores that have had robust sales are nervous. Ethan Allen Interiors (ETH), the home-furnishings store chain, saw solid gains in same-store sales of 15.2% in the quarter ended Mar. 31. But "The consumer is somewhat more cautious," warns CEO Farooq Kathwari. The chain is in the process of redefining its business as more than just a furniture store and providing design solutions to consumers.
Competitor Bombay Company (BBA) is already seeing customers pull back. "For the past several weeks we have seen continued declines in customer traffic," says Steve Woodward, executive vice-president at The Bombay Company. Though neither store has talked of any changes in its hiring, it's unlikely that a hiring spree is in order.
Right now, the most worried retailers are the discount store chains, because consumers with lower incomes tend to be the first to pull back when tough times hit. This is especially important because inflation is slowly climbing—consumer prices rose by 4.1% in the 12 months to May. Discount store operator Family Dollar Stores (FDO), of Matthews, N.C., reined in its expansion plans this year to 350 new stores, from its typical 500.
Other dollar-store chains are also wary. "We continue to be concerned about the impact the current economic pressures are having on our customers, particularly high gasoline prices, increasing interest rates, and rising personal debt," says David Tehle, CFO of Dollar General Corp. (DG), which has 8,000 stores in the U.S.
Meanwhile, Finish Line, the Indianapolis-based shoe retailer, is trying to strike the proper balance in hiring this year. Its same-store sales fell 7.2% for its first fiscal quarter ended May 27 and the company expects sales to fall 4% to 6% for the fiscal year ending in February. The chain recently disclosed that it would slow previously planned growth of its Finish Line stores this fiscal year from 50 new stores to between 40 and 45.
Spokeswoman Elise Hasbrook says the company's total employee count of 13,000 is higher than it was last year because it has opened new stores. Still, Hasbrook says that Finish Line is staffing stores with fewer people and will be doing less hiring in the back-to-school season, which starts next week and runs through Labor Day.
Consumers may just have to help themselves when they go shopping in the coming months—if they decide to make a trip to the store at all.