Overcapacity Continues To Plague Us Retailers

Yet the industry continues to be plagued by overcapacity, leading to cut-throat price competition and poor margins. And Americans have still not regained the appetite for conspicuous consumption that characterised the spending boom of the 1980s.

Significantly, perhaps, one of the best performers in the quarter to July was Wal-Mart Stores, the discount store chain that has grown to become the world's biggest retailer by meeting the needs of today's more thrifty shoppers. It, however, has been a big contributor to the US retailing sector's problems. As each new Wal-Mart store opens, the extra floor space adds to the industry's problem of overcapacity; and the company's aggressive discounting over a wide range of goods has eaten away at other retailers' margins.

 

In last year's final quarter, even the mighty Wal-Mart stumbled when it reported its first profit downturn in 25 years. But since then it seems to have found its way again, posting a 12 per cent increase in net profits to $706 million in the latest quarter.

Another beneficiary of the trend towards thrift has been Dayton Hudson. The company's traditional department stores performed poorly in the second quarter, but its successful Target discount store division sparkled, lifting the group's net profits from $28 million to $101 million.

There were strong performances elsewhere in the superstore sector. Home Depot turned in another stellar performance as its chain of do-it-yourself stores continued to expand: net profits jumped by 27 per cent to $270 million.

And Toys R Us, the toy superstore group, improved on its recent weak performance as its efforts to eliminate poorly performing lines paid off: net profits rose from $15 million to $27 million.

Even Kmart, the struggling discount store group that has suffered badly from the competition from Wal-Mart and Target, managed to end its long stream of losses, reporting net profits of $34 million against a loss of $54m last time. Sales were slightly down, but cost-cutting helped the bottom line. Performances among more traditional retailers were mixed. The best story continued to come from Sears Roebuck, now the second biggest US retailer, which is benefiting from a big revamp of its department stores under new management. Net profits were up by 26 per cent to $274 million.

J C Penney, in contrast, suffered a 20 per cent fall in net profits to $93 million as sales growth in its department stores failed to keep up with cost increases. It also suffered higher bad debt losses, a symptom of the high levels of US consumer debt.

May Department Stores was another weak performer, barely increasing net profits, from $107 million to $110 million. But Federated Department Stores did significantly better as it continued to cut costs and improve margins: it said net profits would have risen from $2.7 million to $32.9 million without the cost of integrating recent acquisitions.

Away from the department store sector, the troubled Woolworth produced better figures than expected. Revenues fell, but thanks to the new management's efforts to slim down the multifarious retailing activities to a profitable core, net losses of $11 million a year earlier turned into net profits of $22 million.

In the clothing sector, some of the most impressive figures came Gap, which more than doubled net profits from $32 million to $66 million on the back of a 29 per cent increase in sales.

Clothing companies have been particularly badly hit by a loss of interest in fashion, but Gap is prospering because it caters for the trend towards more casual clothing. Another clothing retailer, The Limited, had less success in bucking the adverse trend. It increased net profits from $29 million to $33 million, but much of the credit went to its 83 per cent owned Intimate Brands subsidiary, with its Victoria's Secret, Bath and Body Works, Cacique and Penhaligon's stores: the clothing business turned in another loss.