Martini Chat: The Shape of Retail to Come

As the holiday shopping season gets under way, we get the inside line from two analysts.
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The following is an excerpt from this week's Martini Chat, an hour-long, online program on market and current events at 5 p.m. every Thursday, hosted by TheStreet.com columnist Chris Edmonds and reporter Eric Gillin. To participate, visit TheStreet.com just before the show begins, and click on the invitation. To read the entire Martini Chat transcript, click here.

Eric Gillin:

Today we take a sneak peak at the outlook for holiday retailing with two gurus of the trade.

Jeff Klineflter is senior retail analyst at U.S. Bancorp Piper Jaffray. Jeff's analysis focuses on the softline and mass merchandisers from Abercrombie & Fitch to Target.

Also joining us is Kurt Barnard, a longtime retail pundit who runs Barnard's Retail Consulting Group and publishes an industry newsletter titled

Barnard's Retail Trend Report.

Joining me in the questioning is Lisa Meyer, our own personal finance editor, and staff reporter Tim Arango, who covers the retail beat.

Kurt, let me begin with you. What's the early line on holiday season sales?

Kurt Barnard:

At best, they are looking very subdued.

Lisa Meyer:

How come subdued?

Kurt Barnard:

There are a number of reasons. Consumers are not in a spending mood. They are very cautious these days.

1. Consumer spending is down.

2. People are charging less on their credit cards. Total credit card debt stands at seven hundred billion dollars! They spend only what's in their checkbooks and pockets.

Lisa Meyer:

Mr. Barnard, how does the economic downturn impact the retail landscape? Do consumers seek out lower prices at a Target or a Kmart, taking market share away from traditional department stores like Macy's?

Kurt Barnard:

You bet your bottom dollar and then take it to a discount store. Absolutely true. Discount stores like Kohl's are doing very well because of the shift in consumer spending from traditional department stores and special stores.

Lisa Meyer:

What about niche retailers?

Kurt Barnard:

Niche retailers, to the extent of what they carry, are doing very well. Take for example Michaels. It is selling a lot of things you can do at home. A lot of home projects. It is selling a lot of patriotic things in red, white and blue, and the store is cashing in on that.

Tim Arango:

Jeff, today Abercrombie & Fitch reported a huge 20% drop in same store sales in October. I was on your holiday call today. Do you blame that drop on a lack of promotions and think the store can do well going into the holidays? Isn't this holiday going to be different? Aren't shoppers going to be out there looking for bargains? Could the store continue to falter?

Jeff Klinefelter:

All of those comments are relative and based on the current environment. This year back to school quickly became promotional -- particularly after the initial rush in the beginning of August. Because of that, and their resistance to start marking down through the months, that was to their disadvantage. When you get to a gifting psychology during the holidays, you back away from a purely price-point sensitivity.

Tim Arango:

Do you think that money otherwise spent on travel will instead go towards gifts? Have you factored that into your sales projections?

Jeff Klinefelter:

We have. It's an excellent point. A lack of traveling to see relatives or take holiday vacations could in fact be redirected into product sales. It's hard to quantitatively factor it into our specific monthly sales estimates.

Lisa Meyer:

Mr. Barnard, America is an aging nation. Baby boomers are nearing retirement. How might this age shift change the competitive landscape among retailers. Will spending patterns shift?

Kurt Barnard:

The aging consumer is responsible for major changes in the retail marketplace. Mainly in apparel. People don't have the same figures that they had when they were 20 years old, now that they are 40 or 50 years old. A lot of the retailers that are doing what they call "private label" are doing extremely well. I'd like to add something to the previous question about Abercrombie & Fitch. The store is also victim of a sharp drop in attendance in malls. All of their stores are in malls.

Lisa Meyer:

The Internet and e-commerce were full of hype and promise, but the reality is that they have had little financial impact on traditional retailers. What is the best use of the Internet in retailing -- I-commerce, the gathering of market information -- or e-commerce? And are there any retail sectors where e-commerce has and can have a material impact?

Kurt Barnard:

We are convinced that what's happening is that a lot of the so called e-commerce operations are little more than advertisements for brick and mortar stores. People go to the site, see what they like or don't like, then go to the store to convince themselves that they really want this.

Jeff Klinefelter:

I would add that we've figured out in the last two years e-commerce is not a replacement for a normal channel of distribution. It's an additional channel of distribution. It will serve as an I-commerce and an e-commerce function. I-commerce is the current buzzword. It will hold and serve the same purpose. We talk about convergence commerce, which is taking traditional media to encourage commerce. Whether it's TV or magazines, you can use content to drive interest.

Tim Arango:

Kurt, how surprised were you today about the massive warning from Barnes & Noble? Weren't books supposed to be more resilient than other categories?

Kurt Barnard:

Not at all. I would have been surprised if it had been otherwise. Simply because America has been riveted to their TV sets since Sept. 11. People are glued to the TV screen and have little time for anything else. They have given up on reading newspapers.

Lisa Meyer:

I've been wondering about Amazon.com recently. What type of value or use does the company offer as more brick and mortar companies bring technology for Net-commerce in house? Amazon's only assets are brand name, technology and distribution system. Do they lose value as we go forward?

Jeff Klinefelter:

That's an interesting topic right now, particularly in light of the company's recent announcement for a strategic partnership with Target. Amazon is clearly moving back towards an outsourced service model. The company would take on the responsibility of maintaining and upgrading the technology.

After testing internally, Target management decided that it would be too much of a drag on its own expense structure to have a staff maintain a Web site. Other companies are coming to the same conclusion. There may in fact be a future, but then you have to question what type of consumer brand Amazon would be. Would it be a b-to-b or a business service concept? That has yet to be determined. I would imagine it would put less value on the consumer front going forward.

Lisa Meyer:

It is shaping up to be a very interesting holiday season as we go into our economic downturn. What can we expect? Are we going to see decreased spending? Are consumers going to return stores?

Kurt Barnard:

No. It's going to be very subdued. Consumers will spend far less money than they spent years ago, preferring to buy things for the home and things that can be done at home. They'll avoid fashion apparel.

Eric Gillin:

What names do you like in retail?

Kurt Barnard:

Wal-Mart. Target, Kohls, DollarGeneral and a little company like Michaels.

Jeff Klinefelter:

I differ a bit. I follow teen retailers. I found in the last six months, teens have increased their spending on an average monthly basis. They spend on fashion and accessories. More teens are working in part-time jobs and are spending. They will cushion what will likely be a reduction on spending by adults.

I like Target and the value it brings. But investors are going to look at who has value, who has a strong balance sheet and can open a lot of new stores. Finally, who has a different type of brand? That's what the teens want.

Eric Gillin:

Kurt, do you buy this? Do you think that teen spending will help?

Kurt Barnard:

Yes. The teen market is very important. The teens are not deterred from going into malls. They very clearly have money to spend. They have part-time jobs. Whatever money they earn is theirs to spend. They don't have any other expenses to pay.

Eric Gillin:

My big question then is what about Alloy online? It targets teens exclusively. It has no brick and mortar stores and no plans to have them. The company is showing decent growth in the teen market.

Jeff Klinefelter:

I follow them. It has evolved into a far different business model from where it started. The company is focused on teens. It is going after a media presence. It is going after media properties such as school newspapers or high school/college periodicals. Then the company will leverage its sponsorship relationships with a Revlon or a Ford that wants to go after the teen market. That's where the bet is.

Eric Gillin:

The stock has done well?

Jeff Klinefelter :

Yes. The company has met its objectives. It has met its earnings and growth and the company is close to profitability.

Eric Gillin:

We have a reader question.

Question:

How are retailers advertising this holiday season, and any early signs on which strategies might work?

Kurt Barnard:

They are advertising major price breaks. They think that will drive the consumer to the stores to at least look.

Jeff Klinefelter:

I agree. There are two forces. There will be a possible cutback on advertising to protect the bottom line. When companies do advertise, it will be to promote price breaks. It is a profit preservation.

Kurt Barnard:

The problem is that companies that don't continue to advertise will lose market share to those who do.

Eric Gillin:

That's very interesting, and we'll keep tabs on the shopping and hope to have both of you back soon.

Our guests have been Kurt Barnard, who owns a consulting group, and Jeff Klinefelter, senior retail analyst at U.S. Bancorp Piper Jaffray.