Economics Growth the Retailer Sector Was Lately Term Paper
- Length: 8 pages
- Subject: Business
- Type: Term Paper
- Paper: #93111117
Excerpt from Term Paper :
Growth The retailer sector was lately affected by the back-to-school shopping season, which did not start so well, as midprice department stores, discounters and specialty-apparel retailers announced disappointing sales results during August, which reinforced the already much debated concerns that consumers are not comfortable with the current state of the economy and are reluctant to consume, considering the shaky and uneven economic recovery.
However, luxury department-store chains managed to post significant earnings, as they benefited from the help of an important number of upscale shoppers. Still, the effects of higher gas prices and the rising value of grocery bills, combined with lackluster job growth were severely felt by moderate- and lower-income shoppers.
Michael Niemira, chief economist and director of research at the International Council of Shopping Centers feels that "There's weaker-than-expected performance," due to the fact that "there was a slowdown in spending, but some results are exaggerated by other factors,." Mr. Nemira referred to the fact that Labor Day came late this year, and that pushed some back-to-school purchases into September, although they are usually accounted for in August.
The country's economic recovery is currently losing momentum, and the soft retail sales are a is a hallmark of that reality. Actually, retailers aren't the only ones affected. Car manufacturers stated recently that slowing sales determines them to cut down fourth-quarter production estimates.
In order to have a clearer picture of the retail sector during the last month, an analysis is necessary.Sales at stores open at least a year, which is known in the industry as same-store sales, i. e the most important measure of a retailer's health, got up 1.1% in the July 28 - Aug. 28 period, according to ICSC, which has compiled an index of 72 major U.S. chains. The index's value was well below the 3.1% rise in July, and recorded the slowest pace since March 2003, when sales went down 0.02%.
Actually, all retailers, including Wal-Mart, had to face difficult year-to-year comparisons regarding last month's sales. Results in 2003 were affected by federal tax rebates and Labor Day sales. Another factor that diminished sales at several retailers this year was hurricane Charley.
Forecasts regarding growth in the retail sector look undecided. Mr. Niemira believed that a conservative sales gain of 2% to 3% was to be expected in September. Some analysts had estimated that retailers should have an optimistic attitude regarding sales in the next few months, considering the late Labor Day, lean inventories and appealing new fashions. However, forecasts on the medium and long-term remain mute.
As for Wal-Mart, the company lowered its estimate from 2% to 4%, instead of a target range of 3% to 5%, as initially expected, for third-quarter sales gains. A decrease of the profit for the same period was also announced; the report estimated that that the profit will barely reach the low end of the 52 cents to 54 cents a share forecast.
Discounters posted the softest sales overall in August, with a 0.7% overall gain. Wal-Mart, Bentonville, Ark., posted a 0.5% increase in same-stores sales, as modest growth at its membership-warehouse Sam's Club unit largely was offset by disappointing back-to-school sales and temporary closures at some Wal-Mart stores because of Hurricane Charley. The nation's largest retailer said same-stores sales in its Wal-Mart Stores division crept up 0.1% in August, while its Sam's Club unit, which has sharpened its focus on catering to small-business owners, saw a 2.7% gain. Wal-Mart reported total sales for the four weeks ended Aug. 27 of $21.2 billion, an 8.8% jump from the year- earlier period." (Wall Street Journal, Sep. 3, 2004)
As for the competition, Target Corp., Minneapolis, reported surprisingly better results, which represent the effect of its capacity to use its "cheap chic" merchandise in order to attract new higher-end customers. The rise in same-store sales reached 1.8% and the forecast for a September same-store sales ranges from an increase of 2% to 4%. Costco Wholesale Corp., Issaquah, Wash., which also focused its attention on higher-income shoppers visiting its membership warehouses, announced a 4% same-store sales gain, although analysts initially forecasted a 7.3% increase.
The majority of upscale department stores announced important gains. For instance, Neiman Marcus Group Inc., Dallas, posted 15% gains for its same-store sales for its Neiman Marcus Stores together with Bergdorf Goodman units, due to a rise in designer handbags sales. The same indicator for Nordstrom Inc., of Seattle, went up 7.2%, because of the rising demand for accessories.
However, midprice department were heavily hit and continued to post dissapointing sales. Lower same-store sales reports came from Federated Department Stores Inc. (Cincinnati), Sears, Roebuck & Co. (Hoffman Estates, Ill)., and Dillard's Inc. (Little Rock, Ark). The only exception was represented by J.C. Penney Co., (Plano, Texas), who announced a same-stores sales wise of 3.8%, due to strong sales of back-to-school equipment.
Mixed retailers had mixed results. AnnTaylor Stores Corp.,(New York), for instance, stated that same-store sales plummeted 4.5% because of lower-than-expected sales at Ann Taylor stores. However, TJX Cos., (Framingham, Mass) announced a same-store sales rise of 4%, which exceeds the 2.7% gain forecasted by Wall Street.
The presentation above intended to prove than an estimation of the future growth in the retail sector is difficult to make. Wal-Mart, just like its competitors, is facing tough economic conditions, mainly because of the instability of the economic recovery and the general rise of oil prices on the global market. Higher gas prices mean lower consumer confidence, since people are inclined to save more and to spend less. The situation of the retail sector in the next 18 months is to be decided by the evolution of the oil prices and by the way the government handles the economic issues at hand (the victor in the November elections is also a big unknown).
President Bush and senator Kerry have different economic policies in mind. Should president Bush win the elections, it will depend on the swiftness wherewith the situation in Iraq will be solved. A large quantity of Iraqi oil on the market might stabilize prices and herald the start of new economic development, corroborated with rise on the emerging markets, such as China and Russia. Wal-Mart might also want to invest in that direction.
If senator Kerry wins, the involvement of the government in domestic economic policies might also be a good sign for retailers such as Wal-Mart. Lower unemployment and higher consumer confident may boost retailers' sales.
However, these are optimistic approaches to the issue of Wal-Mart's growth forecast. Its modest earning, compared with its competition are not a good sign for its shareholders. The company is not losing money but is not making money either. The most probable thing that will happen in the next year and a half is that, if the general economic picture remains more or less unchanged, Wal-Mart will remain on the brink of profitability, with considerable chances that it might record losses.
Inflation and Real Money Inflation is probably not going to be heavily influenced by retailer sales in general and Wal-Mart sales in particular. Inflation is usually influenced by consumer spending during times of economic expansion and boom, when consumer confidence reaches all-time highs, credit is cheap and people tend to spend more money. Unfortunately, such times are not foreseeable in the near future. Economic recession is still felt, consumer confidence is low and unemployment is not so low as hoped, so retail customers do not spend so much in shops such as Wal-Mart. Although inflation by consumption has been induced in the past by spending in retail stores, this period and the one ahead does not fulfill the necessary conditions for such a phenomenon to appear. Still, inflation might rise because of oil prices, which are on the move. As for real money, since inflation is not to be felt in an acute way, there are no significant changes to be expected with regard to the real value of a monetary unit.
Consumer confidence also declined more than expected in August, because concerns regarding the labor market are on the rise. The trend of consumer confidence is a fine indicator for the general state of the economy. Macroeconomic figures are not great, the much awaited recovery failed to produce expected results and a similar evolution is to be expected in the next year and a half.
Retail sector growth and consumer confidence are very strongly connected, the latter being the cause of the former. Wal-Mart is the nation's largest retailer and cannot afford to concentrate its management and marketing strategies on upscale shoppers, which are less affected by negative modifications of the economic environment. The mass of Wal-Mart customers is formed by middle-class folks who are highly dependent on gas prices, heating cost, evolution of the job market, interest rate, banks' desire to grant further credits and so on. A worsening of these factors shall lead to continuous consumer confidence deterioration, and therefore to lower sales for Wal-Mart.
From this point, the general picture indicates that consumer confidence…