The Daily Interview: The Outlook for Retailers

As the earnings season for the nation's retailers winds down, the picture that emerges is one of an industry grappling with its most difficult period in recent years. Consumer spending has slowed considerably, and bankruptcies, store closings and an exodus of executives have pockmarked the sector.

Kurt Barnard President Barnard's Retail Consulting Group

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Yet, retail stocks have performed relatively well amid a time of bearishness on Wall Street, mainly on hopes that falling interest rates will be a boon for the sector. The Federal Reserve began slashing rates on Jan. 3, and since then the S&P Retail Index has declined but done considerably better than the broader market, as measured by the S&P 500. But with rates expected to come down further, retailers could start to post gains, as historical data shows the sector is one of the best performers six months after a cycle of Fed cuts begins.

With most major retailers having already reported quarterly results, investors will be keying on the all-important same-store sales figures, which measure sales in shops open at least one year. February data will be released March 8, the same day warehouse store Costco(COST) and apparel retailer AnnTaylor(ANN) will close out the earnings season for the country's top retailers.

For a review of the earnings season and a look ahead we spoke with Kurt Barnard, a long-time retail guru who runs Barnard's Retail Consulting Group and publishes an industry newsletter titled Barnard's Retail Trend Report.

TSC: Give me your postgame analysis of the retail earnings season thus far.

Barnard: The earnings have not been too bad. We find that some of the earnings were OK, some of the earnings were really good, but some of them were also quite poor. It is very much a mixed bag. It depended very much on the kind of store we are dealing with, and how far they were ready to shave gross margins. By and large, I think the fourth quarter of the year was a very difficult one for many, many retailers. It started with a slow Christmas and continued into January, which was really not bad at all. January was very good simply because consumers found unbelievable tons of wonderful merchandise that retailers had to get rid of. But at the sacrifice of gross margins.

TSC: One company that stood out -- for the wrong reasons -- this earnings season is the Gap(GPS). The company disappointed investors again and lowered its guidance, yet many sell-side analysts stand by the company. Do you think the Gap can ever regain its luster?

Barnard: In our judgment, it is very difficult for the Gap to expect to be able to recover lost glory. The Gap is essentially a very mature company. It is past its peak, and it is going to be very extremely difficult for the Gap to regain lost ground without reinventing itself. And how it can reinvent itself, only [Gap CEO] Mr. Drexler can know. They certainly were able to accomplish it once about six or seven or eight years ago with the creation of Old Navy. But Old Navy, too, is very much mature, and very much past its prime. There is no question in my mind that the Gap today needs a completely new twist, a new tweak to regain its former standing of great, great success.

TSC: Two Companies -- Target (TGT) and Staples (SPLS) -- posted surprisingly strong results amid one of the most difficult times for retailers in recent memory. Are there any lessons we can learn from either of them?

Barnard: Yes, we certainly can. In the case of the Target Corporation, we have seen that the Target discount stores were mostly responsible for the showing of the Target Corporation. We expected it. We were not disappointed. As far as the Target discount store division is concerned, I can tell you right now the discounters, generally speaking, and moderately priced stores, generally speaking, will end up the winners in the first half and the entire year of 2001.

TSC: Do you buy the conventional wisdom that says we can expect a rebound in consumer spending by the second half of this year?

Barnard: We will see somewhat better comparisons with last year. I'm not going to tell you that consumers are suddenly going to unzip their pockets and start throwing money at retailers the way did back in 1999. But there's also no question that the second half of 2000 was one in which consumers began to cut back on their expenditures. Which simply means that in the second half of this year, we will have much easier comparisons than we will have in the first half of this year. It will appear that consumers are beginning to spend a little more, and maybe they will. Much of that will depend on one thing: If the unemployment rate continues as low as it is now, and if we begin to see fewer announcements of layoffs appearing in newspapers, I will tell you that it is likely that consumers will begin to put their concerns and cautions behind them and will begin to once again start to be a little more generous in spending money.

TSC: How does this slowdown compare with past slowdowns in the consumer sector?

Barnard: It is more muted. The slowdown is not very pronounced, at least at the present time. We have seen, certainly 10 years ago, that there was a rather sharp, severe pullback. And we are not seeing that kind of a pullback at this time. What we are seeing is primarily a cautious attitude on the parts of American consumers. People have jobs, they are earning money. They are relatively well-off -- many earn very good money. But in the back of their minds there's this one nagging question -- all these announcements of layoffs.

TSC: On Thursday most major retailers will report February same-store sales figures. What do you expect we will see?

Barnard: February is going to be a very mixed bag for most retailers. First of all, February is not a good month. February at best is a sort of testing month. On the one hand, the remainder of what was left over from Christmas is going to be disposed of in February at very deep markdowns. And in February, we also see fresh spring merchandise moving into stores and many retailers will use that period to test the spring merchandise in their stores. But by and large, February of last year was a very strong month -- something like 4% to 5% above the year before on a same-store basis. But this year, we think it's at best going to be 2% to 3%.

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