Analysts urge end to comp reporting

Don Hogsett, Staff Staff, January 20, 2003

Breaking ranks with Wall Street colleagues, three top retailing analysts are calling for an end to the time-honored practice of releasing weekly and monthly same-store sales results by large American retailers, saying it triggers stock market volatility; misplaces management focus on short-term performance; and stifles risk-taking and innovation.

Indeed, home fashions superstar Bed Bath & Beyond, which long ago abandoned the practice, was singled out as "the role model for the retailing industry" by Lawrence Haverty, managing director of State Street Research Management Corp., Boston, during a National Retail Federation seminar here.

"They don't release monthly sales; they take no questions in their quarterly conference with investors; and they give only vague earnings guidance. That's the role model, the way everybody ought to be doing it," Haverty said.

Italicizing his point, he told retailers, "If you know anyone at Target or Kohl's or Federated, tell them to follow that example and do themselves some good."

Haverty took aim at the Wall Street practice and said the release of the monthly numbers plays to some of the Street's bad habits.

Haverty explained, "There are a couple of things you need to know about Wall Street that Wall Street doesn't want you to know. Right now, program trading on Wall Street accounts for roughly 35 percent of all the trading volume. This has nothing to do with fundamental analysis or fundamental value. And the other thing you should know is that for some big brokerage houses, two-thirds of their business is done with hedge funds, and that's just a form of gambling."

The release of weekly and monthly same-store sales numbers plays to the hedge funds, he said, creating market volatility. "It attracts the wrong kind of investors — investors who surf the comps, who don't care anything about a company's fundamental performance or value. It creates volatility, it's a form of gambling. It forces management to apply a short-term focus to everything it does. It discourages vision, risk-taking and innovation, It's short-sighted and ultimately destructive."

Haverty added, "But don't expect Wall Street to tell you that," he said, because Wall Street "makes a lot of money trading on the comps."

And Haverty wasn't alone in his indictment of the practice. "I couldn't agree more," Richard Jaffe, research analyst, apparel retailing, at UBS Warburg, New York. "It's a volatile market on Wall Street, and it has absolutely nothing to do with retailing. That practice serves no valuable purpose."

Said veteran retail analyst Walter Loeb, formerly of Morgan Stanley and now a consultant, "No argument from me. I've been saying that for a long time."

Haverty delivered a second broadside at another venerable Wall Street institution — organized store tours hosted by retailers themselves. "I am increasingly skeptical of analysts who go on scripted store tours organized by retailers. What can you tell from a retailer putting its best foot forward at a dog and pony show? I'm more in favor of unauthorized store tours, at 8:30 on a Saturday night, when an analyst can see what a customer sees."

As they are each year at the NRF convention, analysts were asked to identify emerging high-growth retailers. And for one, at least, State Street's Haverty, home goods suppliers got the nod. "Your house has been nice to you, be nice to your house. When you've got an asset as valuable as a house, take care of it. Bed Bath & Beyond and Lowe's, [are] real growth stories.."

For Jaffe of UBS Warburg, the growth story is Urban Outfitters. "A great core business and their Anthropologie format fits a great niche."

Their individual stock picks?

Jaffe: "TJX, the market leader in off-price retailing. Pacific Sunwear of California, which targets the teen market. And a lot of good things are happening at The Gap."

Haverty: "PetSmart: dogs don't know from bargain-hunting or gross margins. Bed Bath & Beyond and Lowe's: they execute within an inch of their lives. Kohl's, Wal-Mart and Best Buy: they're better mousetraps. And Chico's because they've got a great story."

Loeb: "JC Penney, because I believe in Allen Questrom and Vanessa Castagna and the whole team. Federated, with its private-label program has a shot at becoming more profitable. And Lowe's. I like Wal-Mart, but I prefer Target. And I like Gymboree."

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