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The smaller chains, however–Bon-Ton, Broadway, Gottschalks, Jacobson’s, and Crowley, Milner–all recorded negative earnings, during what is usually one of the more profitable quarters for department stores. And Proffitt’s and Younkers’ profit margins declined to 1.8 percent, from significantly higher levels a year ago and well below this quarter’s department store sector composite of 3.4 percent. A warmer-than-usual autumn, which depressed seasonal apparel sales, was the main cause cited for the declines.
Weather was also a factor for Sears, in the only exception to the big-good/small-bad trend this quarter, in spite of the chain’s relatively good comp store sales performance. Sears’ earnings declined by $18 million in the third quarter compared to last year. Its profit margin of 2.5 percent fell below even its second quarter results.
Furniture and Home Decor
Retailers in the furniture and home decor sector generally had a good quarter. Bed Bath & Beyond turned in a strong summer (quarter ended Aug. 30, 1994), with sales and profits growing 41 percent and 39 percent respectively over last year. Its 7.8 percent profit margin was the highest of the 67 companies reported here.
Heilig-Meyers and Williams-Sonoma also recorded significant sales and profit increases. After mediocre profit performances over the last couple of years, Williams-Sonoma finally appears to be on track. Its stock now trades at over $30 per share (Nov. 29 close), a P/E ratio of 48, versus a 12-month low of $12.38. Read more about Furniture and Home Decor …
Home furnishings retailers reported profit and sales that surpassed the general retail industry during the third qtr 1994, with consumer electronics retailers leading in sales and home improvement centers leading in profit. Lowe’s and Home Depot recorded 36% and 40% sales growth respectively. Larger department stores, such as Nordstrom’s, J.C. Penney and Dillard’s, reported better results than smaller chain retailers, such as Milner, Bon-Ton and Crowley.
Based on third quarter sales and earnings results, home furnishings retailers continue to outperform the retail industry as a whole. The public companies comprising the consumer electronics and home improvement sectors increased sales over 30 percent.
Department stores, furniture and home decor retailers, and home improvement centers delivered both high profit growth and solid profit margins. The only weak performers for the third quarter were discount stores (excluding Wal-Mart) and non-store retailers, whose profit margins were well below retail medians.
Super CE Stores
The fastest growing sector continues to be consumer electronics. All 11 reporting companies registered double-digit sales growth. The usual suspects, Best Buy and Circuit City, grew by 66 percent and 43 percent, respectively. But smaller, regional companies also did well. Ultimate Electronics, Campo, and computer retailer and cataloger ELEK-TEK recorded 85 percent, 43 percent and 43 percent sales growth, respectively.
These retailers are expanding the fastest with their superstore formats–with the smaller retailers’ growth funded primarily by recent initial public offerings. The CE superstore format is today estimated to have an 18 percent share of total U.S. consumer electronics store purchases and 10 percent of all consumer electronics product purchases. And in highly competitive markets such as Dallas, the superstore share is estimated to be in excess of 50 percent of the consumer electronics market. Read more about Home Improvement Centers …
Additional economic uncertainty comes from the credit markets. More than other lines of retail trade, the outlook for home goods retailers is very closely tied to the direction of interest rates and the availability of credit.
Having raised interest rates six times in the past year, the Fed seems far from done. Despite the absence of inflation, the Fed is focused on keeping interest rates high and the pace of growth low. Their purpose is to reduce the outflow of capital, protect the value of the U.S. dollar and preempt any possible inflationary pickup.
Over the past 25 years, the Fed has continued to raise interest rates until it precipitated a financial crisis. Whether it was the Mexican debt crisis in 1982, Continental Bank in 1984 or the Savings and Loan crisis in 1990, the only thing the Fed fears more than rising inflation is failing banks.
The likely source of a financial meltdown this time is the derivative craze. Some large financial institution will get in trouble with them. The problem will spread like the plague to other financial institutions and the Fed will be forced to ease credit and bail them all out.
Still more uncertainty can be found in the changing capabilities of competition. More than in any other segment of retailing, home goods retailing has witnessed an explosion in competitive activity. New concepts abound. New players are entering the business. The net result has been the emergence of a new economic model for the home goods business. Read more about Home Furnishings Industry perspectives …