Retailers surprisingly upbeat as they head into holidays

November 14, 2009

You’d expect many retailers to be feeling a sense of dread as they enter the crucial holiday season.

The nation appears to be stumbling slowly out of a deep recession. Consumer confidence is low, and unemployment is hovering above 10 percent—leaving many consumers no choice but to rein in gift-giving.

That pessimism is reflected in a host of sales forecasts. South Carolina-based market researcher C. Britt Beemer says “this Christmas could be a retail train wreck,” while Columbus, Ohio-based Retail Forward predicts flat sales this holiday, making it the second-worst for retail in 42 years. (The worst was 2008, when sales sagged 4.5 percent.)

But those in the trenches running stores or shopping malls have a hint more optimism. No way this will be a blockbuster Christmas, they say. But it won’t be horrid, either.

“We believe our retailers will have a decent holiday season,” David Simon, CEO of Simon Property Group Inc., told analysts Oct. 30.

Two factors should boost results: A wave of retail bankruptcies and retrenchments has resulted in the closing of thousands of stores, thinning competition. Retailers also have cut back on inventories, a move that trims expenses but also increases the risk they’ll run out of hot items.

Leslie Wexner, CEO of Limited Brands Inc., operator of the ubiquitous Victoria’s Secret and Bath & Body Works chains, told analysts Oct. 27, “There’s generally momentum in the business.”

Many retailers and shopping center owners are picking up the same trend. Simon, the nation’s largest mall operator, noted that while same-store sales did fall in September compared with a year earlier, the monthly decrease was by far the smallest this year.

HHGregg Inc. executives struck a bullish tone in a Nov. 5 conference call. Jerry Throgmartin, the executive chairman, said, “I’m encouraged by the trends we’re seeing in our business and am becoming more optimistic about the environment.” The company noted that the number of customers visiting its stores is on the upswing.

Those shoppers aren’t necessarily dropping big sums on merchandise. In the second fiscal quarter, which ended Sept. 30, the company reported the average selling price of its TVs fell.

That’s not all bad, CEO Dennis May noted on the call, because it partly reflects that consumers are buying smaller flat-screen TVs for rooms in their homes that previously might not have had a television.

“You’re going from a world where you had 1.9 TVs per household to a world where you have three TVs per household,” May said. “And if you think about that, that’s very, very exciting.”

Better yet, he added, “These products [eventually] will break, and they’ll need to be replaced.”

Of course, one reason retailers aren’t hanging their heads is the sales bar is low, given last year’s dismal performance.

Sales levels that in a surging economy might have sent investors in publicly traded retailers to the exits yield only a shrug now.

HHGregg proves the point. Investors have bid up the company’s shares past $18, up 110 percent for the year—even though the company has reported six straight quarters of declining same-store sales.

Chasing Centaur

Executives of Louisville-based Churchill Downs Inc. might be thankful they no longer own Hoosier Park, given the venue’s financial woes. But that doesn’t mean they’re going to avoid a financial hit.

A Securities and Exchange Commission filing shows that when locally based Centaur LLC negotiated to buy out majority owner Churchill Downs in December 2006, it agreed to pay up to an additional $15 million if Hoosier Park eventually operated slot machines.

The Legislature approved slots in 2007, and Hoosier Park’s so-called racino opened a year later. Because the contract called for payment 18 months after the racino’s launch, the check is due soon.

But it isn’t clear whether Centaur is good for the money. The company is weighed down by heavy debt, much of it stemming from the $250 million slots licensing fee the company paid the state.

Late last month, Centaur defaulted on a $13.4 million interest payment. The company is trying to negotiate new terms with lenders, including MH Equity, Steve Hilbert’s private equity firm.

An SEC filing says Churchill’s “management has determined that the collectability of amounts due [from Centaur] is not reasonably assured.”•


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