Mass retail stocks mixed in April

MMR, May 31, 2004

NEW YORK -- Mass market stocks ended mixed in April as analysts continued to predict that strong economic growth for 2004 and 2005 will mean good news for retailers.

From March 31 to April 30 MMR's discount chain store stock index was hit by profit taking and slid by 4.2%, to end the period at 3,328.8. MMR's supermarket stock index advanced 4.7% to 747.1, while the chain drug stock index rose 5.4% to close at 1,946.8. In the same period the Dow Jones industrial average slid by 1.3%.

At the end of April Winn-Dixie Stores Inc. said it planned to jettison 156 stores and eliminate 10,000 jobs over the next year as it struggles to turn around its slumping business.

Burt Flickinger III, managing partner at Strategic Resource Group, a New York food industry consultant, says Winn-Dixie faces a tough fight because of competitive pressures from Wal-Mart Stores Inc. and other grocery competitors. "Because of Wal-Mart, Costco [Wholesale Corp.] and Kroger [Co.], they can't be the low-price leader, and they have never been perceived as a purveyor of premium products," comments Flickinger.

Winn-Dixie's problems have been brewing for years because it was the most vulnerable grocery chain in Wal-Mart's crosshairs, says Jason Whitmer, a research analyst with Midwest Research Securities Corp. in Cleveland. Both businesses target middle-class customers. And about 80% to 90% of Winn-Dixie's stores are within 10 miles of Walt-Mart Supercenters. No other grocery chain approaches that geographic overlap with Wal-Mart, Whitmer said.

Larry Puglia, head of the $7.6 billion T. Rowe Price Blue Chip Growth fund, has found that the best companies in which to invest are often among the most cautious. "We've placed more of a premium on knowing the business model, and having a strong sense that management is honest and conservative, and has strong accounting and internal control systems," says Puglia.

A top fired holding is Target Corp., which plans to sell Marshall Field's and Mervyn's. "Shedding lower-growth businesses gives investors a chance to assign a higher value to the flagship core business," Puglia adds.

Recent steps by J.C. Penney Co. and Target to sell off noncore assets are the retail sector's latest symptoms of Wal-Mart disease. The operations being jettisoned are not alike. Penney's Eckerd unit is a chronically underperforming drug store franchise with margins that were flattened by cutthroat competition, while Target's Mervyn's and Marshall Field's divisions have seen their high-end offerings fall out of favor with hurried bargain hunters.

Analysts generally expect both stand-alone Penney and Target stores to succeed as separate entities from the units that were hold log them down. A stripped-down Penney may be up for the fight, according to Richard Hastings, an analyst at Bernard Sands, citing the chain's ability to quickly adapt to changing consumer tastes.

Merrill Lynch Global Securities analyst Dan Barry calls Penney the "turnaround of the decade" and believes that the company's new centralized distribution center will enhance gross margins.

Over the long term Robert W. Baird & Co. analyst J. David Cumberland expects 15% annual sales growth from Target, minus Marshall Field's and Mervyn's.

And Prudential Financial Research analyst Wayne Hood points out that Target's core monthly same-store sales gains have been above Wal-Mart's core results for the past eight months.