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Consumers shop warily
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August 23, 2001: 2:36 p.m. ET
Lackluster 2Q results point to sluggish but stable spending, analysts say
By Staff Writer John Chartier
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NEW YORK (CNNfn) - Several retailers posted mainly lackluster results Thursday, evidence that jittery consumers held back on spending as they continued to worry about layoffs, volatile stock markets and high energy prices.
Kmart Corp. (KM: down $1.08 to $9.89, Research, Estimates) posted a loss in its second quarter compared with a profit a year earlier.
Apparel retailers Limited Inc. (LTD: down $0.09 to $13.84, Research, Estimates) and Intimate Brands Inc. (IBI: down $0.02 to $13.37, Research, Estimates), which is majority owned by Limited, both reported lower earnings in their second quarters, warning that fiscal-year results would fall "significantly" below Wall Street's forecasts.
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Retailers' sluggish 2Q results add further proof that consumers are being cautious (CNN/FILE) | |
But it wasn't all bad news. Consumers continued to spend money on books and doughnuts in the period, both relatively inexpensive items. That helped Barnes & Noble (bks: Research, Estimates) report breakeven results, ahead of the Street's forecast for a loss. Krispy Kreme also posted a higher profit. Krispy Kreme (KKD: up $1.31 to $33.42, Research, Estimates) said it sees 30-to-35 percent annual earnings growth during the next three years.
Such a mix of results combined with the fact that consumers have not altogether packed it in indicates that the rest of 2001, including the crucial holiday season, is likely to remain at current levels unless there is some major catalyst, analysts said.
"The outlook is for a muted third quarter, and also fourth quarter. It's not getting any worse in our opinion," said Kurt Barnard, president of Barnard's Retail Trend Report. "We believe that consumer spending has essentially bottomed out. That does not mean consumers are ready to go on a spending spree or a buying binge. Things are likely to remain at their current level."
The Federal Reserve has cut interest rates seven times this year in an effort to stimulate the economy. The hoped-for results have yet to kick in, however, and consumers, whose spending accounts for two-thirds of the U.S. economy, appear to be limiting their purchases to items considered essential or basic.
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Those purchases do include buying houses and repairing them. In addition, consumers appear willing to spend money on Main Street when they can find a good bargain. Many retailers logged modest sales increases in July mainly because of heavy markdowns that cut into profitability.
Unemployment has shown signs of slowing even though companies are still not taking on new hires, and gasoline prices have come down in recent months. Additionally, consumers are spending their tax rebate checks from the government's tax relief package.
The International Council of Shopping Centers forecasts a flat to 2 percent increase in holiday spending this season compared with a year ago.
"What we're seeing is discount department stores and warehouse clubs continue to do well based on the fact that consumers are just cautious," ICSC spokeswoman Patrice Selleck said. "Consumer confidence has dropped just a little bit. They're going out being cautious on their purchases."
The back-to-school season has proven sluggish so far, but analysts and industry watchers say it's still too early to write the season off as most children wait until school starts to see what their friends are wearing before running out to buy new clothes.
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My standard feel is it's too early to tell. It looks like things are starting to stabilize a little bit. They're not getting worse.
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Scott Krugman
National Retail Federation |
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In some respects back-to-school apparel sales are an early indicator of how consumers will spend in the holiday season, said Scott Krugman, a spokesman for the National Retail Federation. But merchants have not yet gathered enough information to get a strong read.
"My standard feel is it's too early to tell. It looks like things are starting to stabilize a little bit. They're not getting worse," Krugman said.
Barnard recommends that those thinking about investing in the retail sector carefully consider individual companies and not buy into the sector as a whole since many retailers are in various stages of restructurings and turnarounds.
"It is a good time if you're willing to accept slow growth and slow improvement," Barnard said. "We do not anticipate at this time that the foreseeable future will bring a real strong massive upturn in consumer spending." 
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