1st half sales okay for discounters; more mixed results forecast for rest of '94 - discount chains

Discount Store News, Sept 19, 1994

NATIONWIDE DSN REPORT -- Discount chains had a decent first six months and should perform fairly well over the second half of the year.

But no one is leaping for joy either. For the first time in years, department stores are giving discount chains a run for the money and continued economic uncertainty portends more mixed results for the remainder of the year.

The Conference Board, a global business membership organization, predicted the U.S. economy will grow at its present 4% rate through 1995.

"The effect of higher interest rates will be to stabilize the nation's growth rate rather than depress it," said vp and chief economist Gail D. Fosler. "Still we have to remember the consumer is not leading this expansion. The consumer is providing the ballast that is keeping the economy afloat, but most other sectors are growing faster."

Officially, the Conference Board forecasts future increases in both inflation and interest rates.

The first half of '94 "was not bad for mass merchants," said Peter Monash, a Columbus, Ohio-based consultant to the discount store.

Chains such as Wal-Mart, Target and Toys "R" Us that had a good first half will have a good second half, Monash predicted. With Wal-Mart melding in the results of the Pace Club units bought from Kmart and the Woolco stores bought from Woolworth, it particularly will have a good second half, he said.

For those chains, "Christmas should be respectable," he said.

Kmart, which had a "lousy first half, will struggle in the second," he said. Sears, which had been enjoying double-digit comp store increases, will now face tough comparisons with high increases in the last six months of '93, he added.

But Christmas '94 remains "a wild card" and could be very different from the first six months of the year, cautioned George Rosenbaum, chief executive officer of Leo J. Shapiro and Associates, a retail market research firm in Chicago. "Christmas won't be disastrous," though, he predicted.

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The recovery stopped after March, he said, and increases since have been flat to modest, he said.

Discounters must recognize the continued comeback of department store chains, which are closing the gap on discounters in terms of comp store gains, he cautioned. The industry now has fewer department stores, and the survivors are doing a better job of competing, he said.

In specialty apparel, the industry suffers from having too many stores and stiffer competition, Rosenbaum added.

Retailers entered the August back-to-school season with lower inventory levels, noted Oppenheimer & Co. analysts Bernard Sosnick and Dorothy Lakner. Therefore the threat of clearance markdowns is not as great.

"By going into the fall season with sober sales projections, retailers have positioned themselves to minimize the damage should sales disappointment occur and to increase the leverage on earnings should sales exceed expectations," they wrote in August. "Although the economy may slow during the second half to a 3% real GDP growth rate, that should be good enough to enable retailers to produce satisfactory earnings for the period."

Based on a reading of 11 discount store chains, comp store sales gained 4.9% from February through July, said Patrick McCormack, senior vice president and retail analyst for Dean Witter. Excluding the same store sales declines for the Sam's Club chain at Wal-Mart, comp store sales rose 5.3%, McCormack said.

Although first half results for discounters were "pretty good," they, nonetheless, trailed the 5.6% increase for a composite of 44 retail chains McCormack tracks. Those include 11 department store chains, 11 specialty apparel chains and 11 specialty hard-lines chains, in addition to the 11 discounters.

Specialty chains, including Bed Bath & Beyond, Circuit City and Best Buy, recorded sizzling same store sales growth figures of 15.9%, McCormack said.

A sampling of discount store same store sales for the first half showed gains that range from 13.8% at Dollar General to 8% at Target, 7.1% at Hills to 6.4% at Wal-Mart--held down by continued declines at its Sam's Club division--5.1% at Pamida, and 4.9% at Caldor.