Byline: THOMAS J. RYAN
NEW YORK -- Discounters are beginning to feel the heat from increasingly competitive prices, not only within the mass market, but from moderate-priced giants May Department Stores and J.C. Penney.
Low-price strategies at department stores appear to be directed right at the billion-dollar discounters and could lead to continued price wars in apparel through the second half and into 1995, according to Wall Street analysts.
After a slow first half, discounters are expected to rely on hard goods for their growth for the rest of the year, with soft goods gradually improving next year, analysts project.
Wal-Mart and Target, in particular, are expected to have strong results in 1994, stemming from hard line sales.
The third discount giant, Kmart, could also have a good second half if consumers respond to its attempts to revitalize its core discount store business, analysts said.
Most analysts feel that regional discount chains, such as Bradlees, Caldor, Venture, Hills Department Stores and Family Dollar, which all have a large share of apparel in their sales mix, could have a good second half with sharp pricing and some improved demand for apparel.
"There's tremendous pricing pressure on the apparel side, from the department stores and mass merchants," said George Strachan, an analyst at Goldman Sachs. "You have a consumer who's very value-oriented and retailers have to be sharp on price points to do well."
Pricing pressures, which resulted in generally weak apparel sales among discounters in the first half, also came from warehouse clubs and junior department store chains. In addition, analysts said, discounters are getting hammered by the sharp prices offered by May and revitalized apparel operations at Sears Merchandise Group and Penney's.
"Discounters don't have access to those middle-market labels that are so important to a Sears or Penney's. It's making it very difficult for [discounters] to compete," Strachan said.
"The price variance is not that great," added Philip W. Abbenhaus, an analyst at Stifel Nicolaus.
"Companies like Penney's and May Co. are all very promotional, and it compresses pricing. So now, instead of shopping at Wal-Mart for blue jeans, you can go to Penney's."
In the first half, discounters had poor sales results and often blamed them on shoppers holding back from buying apparel.
In the 22 weeks ended July 2, same-store sales at Kmart rose just 1.4 percent, Venture Stores inched ahead 1.6 percent, Bradlees was flat, Ames Department Stores was up 0.2 percent and Caldor rose 4.1 percent. Stronger sales trends at Wal-Mart Stores and Target were attributed to robust sales of hard lines.
While second-half apparel sales are expected to remain difficult for discounters, Abbenhaus expects a gradual improvement starting in 1995 and continuing for a while. Department stores, spurred by an expected increase in demand for apparel, should feel fewer pricing pressures and return to higher-priced items. This will leave the low-price strategies to true discounters, he said.
Wal-Mart is back on Wall Street's favorite list. The discount stores returned to a double-digit same-store sales pace this year after slipping into single20digits in 1993. Same-store sales at the chain barreled ahead 12.9 percent in the five months ended July 2, dwarfing gains of 2 to 5 percent at most other discounters in the same period.
Soft lines made up only 27 percent, or $12.2 billion, of Wal-Mart's discount store sales in 1993.
"As a percentage of sales it is relatively low, but on a per-door basis, they're selling an awful lot of apparel," said Goldman Sach's Strachan. While the apparel trend at Wal-Mart and other giant discounters has been off this year, Strachan said, "On a relative basis, they're doing better than the rest of the industry." Janet Mangano of Burnham Securities also expects Wal-Mart to gain better leverage from the strong performances of its supercenters. She sees a lot of potential in international expansion opportunities. The company operates 13 stores in Mexico and plans to enter South America and Canada.
Analysts expect Wal-Mart to earn $1.19 to $1.21 a share this year against $1.02 last year.
Wall Street considers Target, a unit of Dayton Hudson Corp., the apparel expert among discounters. Analysts cite the chain's stronger displays and private label program.
In addition, Burnham's Mangano said Target successfully customizes its stores to cater to local markets, and also makes the stores easy to shop with wider aisles and good signage.
"It's expanding at a nice pace while maintaining good profitability, and I think it is really differentiated in the marketplace," she said.
Analysts look for Dayton Hudson to earn around $5.60 to $5.65 this year, up from $4.35 last year.
Analysts expect changes at Kmart, which is reviewing its operations, to revive its struggling U.S. Kmart stores division.
"I expect to see a major cultural change in the way the company is run," said Wayne Hood, an analyst at Prudential Bache Research.
Kmart's apparel sales were not as strong as its hard lines in the first half, but some of that reflects the company's decision to substantially slash apparel inventories last year, which led to shortages in the first half of 1994. Mangano said apparel sales should improve in the second half as a result of inventory realignments and a national advertising campaign that emphasizes soft lines.
Analysts project Kmart will earn about $1.50 to $1.55 a share this year against a depressed $1.15 from continuing operations in 1993.
Edward F. Johnson of Johnson Redbook Service said Caldor and Bradlees were hurt by a slowdown in women's apparel. He said the pace improved in June and should be sustained.
Johnson expects Caldor to earn $3 a share in 1994 against $2.50, and sees Bradlees making $1.75 this year, up from $1.38 from continuing operations in 1993. He said Caldor continues to gain market share in its markets.
"Caldor keeps cutting costs, expanding stores, and I think they have an alert management," Johnson said.
Bradlees is accelerating its store opening program with 11 new units planned this year, including its first entries in New York City -- including a store on 14th Street in Manhattan -- as well as others on Long Island and in Rhode Island.
Mangano said Hills Stores, which emerged from Chapter 11 in October 1993, is benefiting from its large apparel offerings and its strong franchises in local markets. "I'm particularly impressed that they're able to hold onto that franchise despite competitive pressures from Kmart and increasing pressure from Wal-Mart," she said.
Mangano expects Hills to net $2.55 this year, up from $2.05 in 1993.
Venture Stores has been hurt by Target's entry into the Chicago market but has done well with new stores in Texas. Estimates for 1994 on Venture range from $2.64 to $2.75 a share against a depressed $2.43.
Dollar General is maintaining its momentum, with profits up 61 percent in the first quarter. Sales in the five months ending in June are running ahead 26.8 percent with same-store sales up 13.4 percent.
Hood said Dollar General continues to benefit from an improving merchandise replenishment system and an effective import program, particularly its own D.G. brand. Hood expects Dollar General to earn $1.15 this year versus 90 cents in 1993, a 28 percent gain.
Family Dollar Stores, which registers 43 percent of total sales in soft lines, has felt margin pressure from weak sales of its higher-priced apparel. It's also felt pressure following a decision last December to cut prices on basics at 400 stores in more competitive markets.
Hood said the company, which has 2,100 stores, plans to roll out the price-reduction program to 1,000 stores. To offset the lower price, Family Dollar is cutting expenses, including reducing circular mailings per month.
Hood expects Family Dollar to earn $1.20 for its year ending August, slightly ahead of $1.15 earned in 1993. For 1995, he looks for Family Dollar to net $1.45.
-- Fairchild News Service