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Street turmoil spares retail

How are the accounting woes of WorldCom and Enron, and the wild market fluctuations they've caused, treating retail stocks? So far, market uncertainty has (again) delayed the IPO of Prada Group, the Italian luxury-goods merchant. But others aren't faring so miserably — some are doing quite well.

In fact, retail has held on ever since the current economic dip began. Inventories are being held to a minimum, and financing for big-ticket items has been extremely favorable.

Bernard Sosnick, an analyst with Fahnestock & Co. in New York, claims there is no correlation between the current mess on the Street and retail stock performance. “That's not to say that they don't have an overall effect on the market tone and direction, but retail stocks have not been as hard hit.”

Sosnick says even the bankruptcy of Kmart is not a factor. “Many retail stocks performed incredibly well in a declining stock market,” he explains. “That's not to say that all retail stocks have performed well, but Kohl's made a new high in May. Their earnings grew 30% per year for the past six years.”

While Kohl's remains a Wall Street darling, Sosnick sees Bed Bath & Beyond as another winner with similarly strong sales for the past eight years and 28% growth last year alone.

Despite what he calls the normal degree of difficulty in the industry and the Kmart bankruptcy, Sosnick is bullish on the retail industry. Small-cap stocks such as crafts retailers A.C Moore, Jo-Ann Fabrics and MothersWork deserve mention. “Take a look at these companies,” says Sosnick. “In certain instances retail stocks have had spectacular performance.”

More mainstream segments such as department stores are struggling to gain sales, explains Sosnick, “but they are controlling their inventories and maintaining a reasonable level of earnings.” (See page 16 for our cover story on department stores.)

Concerns about improper accounting don't relate to any one sector, says Marilyn Adler, who follows the supermarket and drug store industries as an equity analyst for Leman Brothers in New York. “It comes down to the question: ‘How can investors know what the real earnings and cash flow generating power of a company is if the financial statements are not accurate?’”

Admittedly, that's a broad question. “No business can be said to be above reproach or so simple to account for, that we can know the financial statements are accurate.” Cash businesses, like food and drug retailing are probably more trustworthy than others, she explains, “because it's hard to play with how you record revenue, but there are expense areas that can be fudged.”

While the story of New Economy stock slides continues to dominate Wall Street, the story on Main Street remains compelling. Retailers that have the right concept and the right execution, says Sosnick, are in many respects better growth companies than “new era companies that everybody was making a whole hoo-ha about. There are few companies that can grow six or eight years at 30% compounded rates.”

TAGS: News Retail
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