Merrill Lynch bearish on retailers
September 2, 2002,
With consumers holding on tight to their wallets and retail sales weakening throughout the summer, Wall Street powerhouse Merrill Lynch turned sweepingly bearish on the retail sector, slamming 10 of the nation's best-known retailers — from Target to Saks to Neiman Marcus — with downgrades.
"Retail sales have deteriorated sharply since early July," said Merrill analysts. "Our concern is that the resilience of general merchandise sales over the past two years may be cracking. In addition to a possible slowing economy, sales momentum in the second half will be pressured by forecast poor fall weather, Sept. 11 anniversary disruptions and six fewer Christmas shopping days."
At the same time, Merrill Lynch recognized a handful of "top dog" retailers, those most likely to meet their sales and earnings targets, and kept a "buy" or "strong buy" rating on J.C. Penney, Kohl's, Wal-Mart and the dollar retailers.
Slowing sales, said Merrill, are a major cause for concern, and "sales have deteriorated since early July. While weather has been a factor, especially in August, there appears to be an underlying slowdown in consumer spending. Retailers are saying that traffic is holding up, but discretionary spending is slowing."
And polishing up its crystal ball, Merrill said, "Looking forward, the sales outlook is not good." According to its weather consultant, "unseasonably warm weather will continue through early September, penalizing the Back-to-School season, particularly apparel. Although retailers face easy comparisons after Sept. 11, we believe that Sept. 11 memorial services and the general tone of the country will depress retail sales below normal levels."
As if that weren't enough, said Merrill, Thanksgiving falls late in the calendar this year, making this year six shopping days shorter than last year. "Nervousness about second-half sales is already showing up among retail managements," said Merrill, and a number of stores, notably Federated, Target and Wal-Mart, recently reduced sales guidance for the back half of the year.
With profits uppermost on the mind of Wall Street, Merrill said, "After posting first-and second-quarter earnings that were generally better than expected," retailers may now be headed into a period of profits. "The share of wallet spent at stores soared after Sept. 11 as consumers reduced spending for travel, eating out and other non-retail purchases," said Merrill. But this pattern has now reversed itself, and the amount left over for retail stores "should steadily diminish," Merrill cautioned.
"Because this pattern is not generally perceived by investors or by the retailers themselves, sales expectations may be too optimistic and the risk of sales disappointment is high."
Another big concern to investors, said Merrill, is that "seasonally, retail stocks underperform in the last four months of the year."
Investors fled the stocks stigmatized with a "sell" rating, pushing them sharply down in value. ShopKo's stock was slammed down by 9.8 percent, to $14.95; Dollar Tree stock was pushed down by 6.3 percent, to $26.33; and luxury retailer Nordstrom was down by 5 percent, to $19.11.
Merrill Lynch downgrades 10 retail stocks
|BJ's Wholesale Club||Neutral|
|Neiman Marcus Grp||Neutral|
|Barnes & Noble||Neutral|
They have the strongest chance of meeting earnings targets
|Source: Merrill Lynch
|Dollar General||Strong Buy|
|Family Dollar||Strong Buy|
|99¢ Only Stores||Strong Buy|