Battered Retailers Have Harbor Overseas

International sales, and a weaker dollar, can help the sector stay afloat.
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SAN FRANCISCO -- Though retailers are hunkering down for a downturn in the U.S. economy, many are poised to ride out the storm with growth overseas.

Just as international demand has stoked profits for multinational blue-chip giants like

Caterpillar

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,

General Electric

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and

Coke

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amid a tough U.S. climate, retailers have seen solid sales abroad help protect their overall business from troubles at home.

Companies like

Best Buy

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,

Costco

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,

Starbucks

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and

McDonald's

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all have been reporting strong growth in international sales while at the same time facing pressure in the U.S. brought on by a housing slump and credit concerns.

Moreover, the weak dollar is helping to improve retailers' numbers, since they have to translate those big overseas sales back to U.S. dollars.

"Sales look so good because they report in dollars, not local currencies," says Mark Husson, an analyst for HSBC. "This is a time that it's working out for U.S. retailers."

With retail stocks trading near 52-week lows and sales in the U.S. in a slump, as evidenced by the latest round of weak monthly chain-store sales reports Thursday, these international results stand to be the one bright spot for the sector.

Nike

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, for instance, has seen big rewards from its overseas investments. In the U.S., it reported only a 2% increase in sales in its latest quarter, but in Europe, sales leaped by 16%. In the Latin America region, they grew by 15%, and in Asia Pacific, they jumped 22%.

McDonald's last month reported an 11.4% increase in third-quarter same-store sales for its Asia/Pacific, Middle East and Africa region -- the region's best performance in 10 years. In Europe, same-store sales for McDonald's were up 6.5%. In the U.S., same-store sales rose a still-healthy 5.1%, but trailed the international results.

Carl Sibilski, managing director of Oyster Capital Management in Chicago, points out that when he first started tracking McDonald's as an analyst in 2002, the dollar had been strong against the euro, and that in turn hurt the chain when sales in Europe got translated back into U.S. currency. Now McDonald's is enjoying a favorable rate, as well as general robust demand.

Smaller companies are benefiting from this overseas demand as well. Last week, apparel chain

Guess?

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lifted its full-year profit forecast for the year, noting that revenue has exceeded its expectations.

The company pointed to double-digit growth in same-store sales, or sales at stores open at least a year, in North America. But analyst Christine Chen of Needham & Co. sees much strength also coming from abroad, particularly Asia.

"We are not surprised by

Guess?' increase in guidance as we recently raised our estimates in October after our trip to China, which left us feeling more confident about the strength of the international business," she wrote in her latest research on the company.

Independent retail analyst Jennifer Black expects international sales to be a big force for retailers in the future.

"As we have been saying, we believe the successful companies will be those companies that can adapt to a changing retail environment, which is difficult in the United States with demographics and economics working counter to consumption, in our opinion, and which seems to be opportunity-laden in international markets," Black wrote in a recent report.

She added that retailers that have not already made the transition abroad, or are in the process of doing so, are now suffering in terms of stock prices.

"We would look for opportunities in this market to increase exposure to those retail stocks that we believe do have longer-term opportunities in terms of offering a superior, distinctive product that does have a competitive advantage or those that have a competitive advantage in the international area," she wrote.

New Expansion Plans

The overseas growth has led retailers to shift their focus to expansion abroad. Discount behemoth Wal-Mart has said that it will slow down its domestic growth, cutting its capital expenditures to $15 billion this year from $15.7 billion last year . At the same time, it plans to offset the declines with stronger growth internationally, spending $14 billion to $15 billion in each of the next two years.

"The international growth will be concentrated in emerging markets with strong growth potential, as well as established markets which can deliver consistently strong returns," said Mike Duke, vice chairman for Wal-Mart International, in a recent statement.

HSBC's Husson points out that international sales account for approximately 20% of Wal-Mart's business, which is about the same for wholesale club Costco. Both companies will likely increase their reliance on overseas markets in the future.

"The percentage growth is faster and so it's becoming more important," Husson says.

Starbucks, whose U.S. revenue grew by 18% in its most recent quarter compared with a 28% increase internationally, is also setting its sights on a big overseas expansion. The company's long-term goal is to operate 40,000 stores, 20,000 of which would be in the U.S. and the other 20,000 abroad.

As of the end of June, Starbucks was operating about 10,000 stores in the U.S. and 4,000 abroad, which means the bulk of the coffee chain's future expansion will happen internationally.

Spokesman Brandon Borrman says Starbucks will focus much of its expansion on China, where it had about 400 stores as of the end of June.

Mike Niemira, chief economist for the International Council of Shopping centers, says that overseas expansion makes the most sense for retailers that are starting to max out their presence in the U.S.

He says it's "a key next step for retailers who feel like they are strained by the saturation of the market."

But that doesn't mean all retailers have a place in the international arena, much less every part of the international arena. Some concepts just don't translate well from market to market. What works in the U.S. does not necessarily work in other countries, as Wal-Mart found out when it eventually pulled out of Germany and South Korea.

"You may not be able to take your product offering and simply transport it," Niemira says.

But with so much untapped potential still left overseas, it's hard to imagine retailers turning their backs on it, especially given their headaches at home.