Retailers post profits, even as consumer doubts resurface

By Ylan Q. Mui
Washington Post Staff Writer
Wednesday, February 24, 2010; A10

Retailers have resuscitated their bottom lines after the dark days of the recession, thanks to heavy cost-cutting, inventory reductions and stabilizing consumer spending.

Three major chains reported solid quarterly earnings Tuesday, kicking off a week of retail-sector reports. Target's profit soared 53 percent on better-than-expected sales and "disciplined" expense controls. Macy's swung to a $466 million profit after losing $4.8 billion a year ago, despite an overall decline in sales. Sears profit more than doubled, to $430 million.

"We had thought early on . . . that margins would recover significantly and numbers would accelerate pretty dramatically," said Todd Slater, an analyst with Lazard Capital Markets who covers Target. "The question from here on is when do revenues really begin to fill the gap."

Retailer results this week will be particularly significant because they cover the all-important holiday selling season. Many chains were expecting a weak holiday and had prepared by closing poorly performing locations, reducing the amount of merchandise on the shelves and keeping their staff levels lean. That helped ensure their profits remained intact even if sales remained slow. The pruning is ongoing: West Elm is closing its downtown Washington store next month.

But even as retailers celebrated strong profits, new data released Tuesday show renewed consumer fears about the economy that could impede future sales growth.

The Conference Board's monthly index of consumer confidence fell by 10.5 points in February after rising the previous month. Consumers reported they were particularly concerned about their present circumstances, and the drop coincided with the Dow Jones industrial average's plunge below the psychological benchmark of 10,000 early this month. C. Britt Beemer, chairman of America's Research Group, which studies consumers, said the volatility of the markets can wreak havoc on shoppers' and retailers' mind-sets.

"Retailers are obviously much more focused on Wall Street than Main Street," he said, citing many stores' reductions in staffing and other services to cut expenses.

At Macy's, revenue dropped 1.1 percent, to $7.8 billion, during the fourth quarter. But the chain has been consolidating its organizational structure and focused on reining in expenses. It slashed inventory by 3 percent compared with a year ago.

Macy's executives said the changes have made the retailer more efficient and better able to respond to the needs of customers in each market. It also got an unexpected boost from a 27 percent spike in online sales and a rebound at its higher-end Bloomingdale's division. But executives said even as they position the company for growth, they weren't counting on consumers to come roaring back to life anytime soon.

"Business feels better, there is no question about it," chief executive Terry J. Lundgren told analysts in a conference call Tuesday. "But still we have high unemployment, and I see tightening credit on consumers. . . . A company of our size must recognize that macroeconomics do matter."

At Target, customer traffic increased 2 percent during the fourth quarter, helping the cheap chic chain deliver double-digit earnings growth. The company also said sales of home and apparel merchandise improved, indicating that consumers may be more willing to spend on some discretionary items.

"This is truly remarkable profit performance in light of the economic challenges and top line pressure we faced over the last two years," chief financial officer Douglas Scovanner said in a conference call.

Target had stumbled during the height of the recession as weary consumers traded down to lower-priced competitors such as Wal-Mart and cut out unnecessary purchases. But last week, Wal-Mart reported that traffic at its U.S. stores remained flat and that its heavy emphasis on groceries dragged down sales as food prices fell. Target said on Tuesday it intends to open 13 stores this year and is remodeling many of its existing locations to include more grocery products. It also outlined plans to create smaller, urban stores and said it hoped to expand internationally within three to five years.

"We believe that the company's strong franchise and solid customer loyalty remain intact," Robert S. Drbul, an analyst at Barclays Capital, wrote in a research note on Tuesday.

Sears chief executive Edward S. Lampert wrote in an open letter to shareholders Tuesday that he has been willing to invest in areas that could bring long-term growth, including its service business, e-commerce and new store concepts. But the company also shuttered 27 stores in the fourth quarter, and Lampert wrote that many retailers had overextended themselves during better economic times.

Sears stock fell 1.9 percent, or $1.86, to $93.80. Macy's finished the day up 1.1 percent, or 20 cents, at $18.67, while Target dropped 1.2 percent, or 58 cents, to close at $50.06.

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