YOU ARE HERE: LAT HomeCollections

Luxury Retailers Hurt as Consumers Scale Back

Shopping: Department stores also feel the crunch as shoppers turn away from malls to spend less at discounters.


Millions of Americans are avoiding malls, dismissing department stores and eschewing luxury goods--but that doesn't mean they've given up shopping.

Instead, they're weighing purchases more carefully and, in many cases, "downscaling," meaning they're bypassing pricier labels and retailers and heading to Target, Kohl's and other discounters.

"I have to be careful; the credit cards are maxed out," said David McNutt, 39, as he wheeled a desk and two bookcases--which cost him less than $100--out of a Target store in North Hollywood. "I haven't bought clothes since I got a bunch of new things at some nice stores six or seven months ago--except for underwear and socks, and those I buy here."

That kind of scaling back is one reason companies such as Neiman Marcus Group Inc. failed to meet quarterly earnings estimates. In addition, a host of analysts lowered profit expectations on Tiffany & Co. And many department stores reported slower sales as some customers moved back down the retail food chain.

Federated Department Stores Inc. brought down its sales numbers for May, then said because of even lower sales, the company may not meet even those revised expectations.

Meanwhile, Target Corp.'s namesake stores and Midwestern value-seller Kohl's Corp. picked up sales that added to the bottom line.

For the quarter ended May 5, Kohl's, which will begin opening Los Angeles-area stores in 2003, reported net income up 43% to $75.1 million, or 22 cents per diluted share, from $52.6 million, or 16 cents per share, last year.

Target Corp., which also operates the Mervyn's and Marshall Field's department stores, gained 6.3% in net income for the most recent quarter, to $254 million, from $239 million during the same period last year. The company said the gain, 28 cents per share, up from 26 cents, came on the strength of its namesake stores.

Consumers such as McNutt, suffering a buying hangover from the last couple of years, are letting retailers know they are pretty much shopped out.

And although women were lured to stores last month to buy capri pants and halter tops, men's fashion has largely been a bust, with nothing to replace the hot-selling cargo pants that were snapped up a year ago.

Those trends bode well for the value-conscious stores and not well for the big department stores--perhaps even beyond the current crunch.

"I don't think Kohl's loses customers who would trade down," said Ellen Schlossberg, a Kohl's analyst with William Blair in Chicago. "I think they have the opportunity to gain customers who trade down from the moderate department stores.

"The format is just clearly superior. They are more conveniently located in their own stand-alone stores, they have wider aisles, front checkout, shopping carts and they offer branded products at better prices."

With an offering that is 70% apparel, Kohl's has focused on a national brand strategy, unlike Target and Wal-Mart Stores Inc., which offer more private-label items. Between 80% and 85% of Kohl's mix comes from names that are long trusted by Kohl's shoppers, Schlossberg said.

The shift to more practical goods and away from jewels and other expensive symbols of the late 1990s is at least part of the reason for a rash of seemingly conflicting economic reports.

Wall Street had expected the retail sector to take hits because of higher energy prices and increasing layoff announcements.

But consumer confidence rose in May, according to a Conference Board report, aided by the Federal Reserve Board's five interest rate cuts this year.

A report due Thursday, on retail sales in stores open at least a year, is likely to again reflect a downward trend and mixed news, analysts said. Although consumers bought more in April than financial analysts expected, they had largely stayed away from the stores in March.

So far, analysts predict a decent May report, although spending last month probably will again reflect deep divisions between the priciest and thriftiest stores.

"The weekly sales data is extremely choppy; it's up, it's down, then it's up again," said Michael P. Niemira, an economist and retail analyst with Bank of Tokyo-Mitsubishi in New York. "It goes hand in hand with the consumer moving down on the pricing points, which to me says we're not out of the woods yet."

Tiffany & Co. demonstrates the downward shift within its own stores.

Though the company was able to report better-than-expected earnings for its most recent quarter--19 cents per share, a penny off of last year's number--analysts were given pause by the fact that customers were buying lower-priced items.

The famous jeweler actually increased the number of sales it made during the quarter. But the average receipt dropped between 10% and 15%, as shoppers passed up diamonds and gold and headed right for lower-cost sterling silver and other gift items.

Los Angeles Times Articles