The retail sector has had a lot of news to digest as of late.
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Salomon Smith Barney's
Fremont Investment Advisors'
Leeb Capital Management's
T. Rowe Price's
Last week many companies in the sector turned in same-store sales figures for
April that easily beat Wall Street's expectations. So far this week,
Federated Department Stores
and a handful of other retailers have reported their quarterly sales and earnings figures.
What do all these numbers mean for the retail sector and do they show evidence for a second-half recovery? David P. Brady, the portfolio manager of the
Stein Roe Young Investor Fund and a former retail analyst, thinks the week's news has been encouraging and envisions a stronger second half for retailers. Brady also co-manages the
Stein Roe Focus Fund, the
Liberty Global Young Investor Fund
Stein Roe Capital Opportunities Fund.
TSC: Same-store sales figures for the month of April blew away most analysts' expectations. Of the 21 companies followed by Thomson Financial/First Call, 16 beat estimates, and many by substantial margins. Does this signify that the sector is starting to turn around quicker than analysts' expectations, or do the numbers just look good in comparison to Wall Street's bearish estimates?
No, the retail sales to me signified the likelihood that the sector is getting control of its inventories. Almost across the board, I was concerned about the inventory positions for these companies. I was concerned the consumer might be slowing down a little bit.
The retail sales report wasn't a big signal that the consumer is in great shape or anything, but it did tell me that maybe the books are clean and that as we get into the second half of the year -- when the
rate increases begin to kick in and when we get our tax rebates -- these companies are going to be in position to take advantage of it and bring their sales to the bottom line, which is very important.
TSC: Historically and in comparison to April and March, what do you see the numbers indicating in May. Was April just an aberration?
Going into next month, I am hopeful that the sales numbers will stay strong. The reason I am hopeful is that the year-over-year comparisons, while they're not painfully simple, they are somewhat easy. For the most part, for many retailers, they remain easy and get easier as the year goes on. My expectation is that the retail sales number will be good, perhaps even better than expected, due to the easy comparison and the fact that wages have really held in there very well. Of all the indicators of what consumers are going to do, I think the wage number is the best. If they have the money and it's available, they can spend it. So as long as wages hold up, I am going to remain confident and optimistic about the consumer.
TSC: Wal-Mart posted earnings in line with the Street's slightly lowered estimates for the first quarter and provided a second-half recovery scenario. Since this company usually is seen as a barometer for the health of the entire sector, what do you think its results mean for the retail sector?
Wal-Mart is a bellwether company, and I was pleased to hear that their guidance calls for some sort of recovery in the second half of the year. That's really predicated on the fact that the actions of the Fed
will be a potential fiscal stimulus and the fact that the average hourly wages are holding up. That, on top of easy comparisons, is very positive for the sector. Plus, with clean inventories that means that the profits are going to drop to the bottom line. More merchandise is being sold at full prices as opposed to sale prices, and when that happens that's good for margins.
TSC: What's your timeline for the recovery of the sector?
I am really looking for the numbers to start looking materially better in the month of September, so in
the October quarter we'll begin to see an acceleration from where we were. I think we'll begin to see an acceleration in that quarter and that acceleration should continue through most of 2002.
TSC: Home Depot, Wal-Mart, OfficeMax (OMX) and J.C. Penney (JCP) - Get Report have already reported quarterly earnings this week. From what you've seen from these companies, what do you expect to see from other retailers that are going to report during the remainder of the week, such as the Gap (GPS) - Get Report.
I think the story is going to be fairly consistent across the board. There are some companies like the Gap that had bigger issues other than just the slowing economy. Gap had worked its way through some management issues. They've worked their way through some inventory issues, too -- just not having the right product at the right time. So I think many investors will be paying attention to what the Gap has to say about their merchandising and about their inventory position, but I think the macro guidance that they will give will be very similar to what you've heard out of Wal-Mart or Home Depot or J.C. Penney.
TSC: So you're not expecting any real surprises from the Gap today.
I'm hoping for an upside surprise. I am hoping to hear, "Hey, our inventory position is great and we've got the right merchandise in the right stores" after a year of that not having been the case. And Gap's year-over-year comparisons get easier as the year goes by.
TSC: There's been a lot of talk of inflation recently. How do you think this might affect the retail sector?
I don't think there's any inflation out there at all. Clearly the rising oil and gas prices will eat into the consumer's pocketbook, but that's on a regional basis. Just think about how the people in the South, people in Texas, are going to be and how well off those economies are going to be due to higher oil prices.