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B.A., M.A.,

Brown University.

George Strachan covers department stores, discount stores and warehouse clubs at

Goldman Sachs

, which he joined in 1990. Before that, he held a similar job at

Drexel Burnham Lambert

for four years.

Industry Outlook and Style

Strachan is cautious about the department and discount store industries in the near term. In fact, he refrained from adding any of these retailers, also known as broadlines, to his firm's recommended-for-purchase list throughout 2000. "We downgraded retailers in the beginning of May, expecting to see a deceleration in consumer spending and in earnings growth," he observes. "That's what has happened. And that's what we think will continue for the next half year."

By mid-2001, however, the Goldman Sachs analyst expects top-line and bottom-line growth to accelerate.

His view of the business cycle leads him to underweight the department-store group and marketweight the discount-store group. Still, he is willing to place a market-outperform rating on two discount stores,


(TGT) - Get Target Corporation Report



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(WMT) - Get Walmart Inc. Report

, and on one department store, midsize


(KSS) - Get Kohl's Corporation Report

. He believes that all three will gain market share at the expense of most of the nation's department stores.

Strachan regards Target, whose stock has fallen 12% this year, as the best bet to outperform, because, as he puts it, "they're reinventing the whole concept of discounting. Their business mix is aimed at middle-to-upper-market customers, and much of their appeal is derived from the fact that they present department-store-type fashions -- both apparel and home -- at excellent prices." The analyst is predicting 2000 earnings of $1.40 a share (up from 1999's $1.27) and a 20-cent increase next year, but he has set no stock target price.

Strachan names Wal-Mart his No. 2 pick because of the discounter's "extraordinarily well-developed hypermarket concept," in which general merchandise and food are sold under one roof. By year-end Wal-Mart will have added 170 of these supercenters, and Strachan estimates that by the end of 2001 it will have opened another 180, bringing the total to 1,070.

"Its supercenter business," he says, "has been taking market share in food, household chemicals, and health and beauty aids away from grocery stores, and at the same time taking market share in nonfood products away from the few regional discount department stores left and from middle-market operators such as




." On the basis of this share-grabbing, Strachan forecasts an EPS increase for Wal-Mart, from $1.28 last year to $1.45 this year and to $1.67 in 2001.

The third broadline Strachan suggests will outperform the sector is Kohl's, a Midwest department store that has "blue-sky expansion opportunity" and is "essentially a discounter in disguise," he argues.

Specifically, says Strachan, "Kohl's sells middle-market brands but has the cost structure of a regional discount chain, which permits them to promote brands aggressively and offer great value to the consumer." Moreover, Kohl's is growing its square-footage at a 20% clip, while same-store sales growth averages 7% to 10%.

This dynamic combination will fuel top-line growth of 25% or more, he believes. What this means for the bottom line, in his estimation: An EPS increase from 78 cents last year to $1.01 this year and to $1.25 next year. (Goldman Sachs has investment banking relationships with all three companies mentioned here.)

Stock Pick

Favorite stock for next 12 months:


"Where can you buy Crest toothpaste and EasyOff oven cleaner at prices competitive with Wal-Mart's, along with Robert Abbey lighting, exclusive Michael Graves-designed items for the home and -- soon -- edgy Mossimo apparel lines for everyone in the family? The answer is Target, a store that has made discount shopping convenient, exciting and cool. The upbeat Target shopping experience has removed any remaining stigma attached to buying in a discount store and is attracting a higher demographic shopper than either Wal-Mart or Kmart draw. Fortunately, Target stock is also available at a discount -- selling at a 25% to 30% discount to the S&P 500 multiple, based on current estimates. That is why, although we remain cautious on retailers in general, we believe that over time Target stock will yield generous returns."

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