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BEHIND THE NEWS: Missing the market rally: state retailers slumping

May 28, 2007

It's a great stock market for many companies, but Hoosier retailers like The Steak n Shake Co., Finish Line Inc. and Shoe Carnival Inc. are being left in the dust.

You know a retailer's having a tough time when it says it was hurt by stormy weather, high gas prices and housingrelated woes-all at once.

Steak n Shake CEO Peter Dunn put it succinctly in a conference call with analysts this month: "As gas prices go up and as interest rates go up on people with assumable-rate mortgages, they have got to cut back somewhere, and the first place they cut back is their better dining-out experiences."

The company this month reported a 4.7-percent decline in same-store sales in its second fiscal quarter. It was the seventh consecutive quarter that samestore sales fell. That followed 10 straight quarters of sales gains.

Retailing is a complicated game, so those numbers don't tell the whole story. But the Indianapolis-based company provides a textbook example of what's dragging down the retailing sector at a time the overall economy remains healthy and the stock market as a whole surges.

Higher gas prices are bad news for all retailers. And the national housing slump has put an additional squeeze on stores hawking big-ticket items, from high-definition TVs to washing machines.

Hoosier retailers also face companyspecific challenges. Finish Line, for instance, has been struggling for months to rebound from a sharp fashion shift away from high-end athletic shoes. The company's stock has declined 47 percent since peaking in March 2005.

Meanwhile, the stock market roars ahead. The Dow Jones industrial average is up 8.6 percent this year and 22 percent from 12 months ago. The S&P 500, meanwhile, has advanced 7.5 percent in 2007 and 21 percent over the past year.

Don't expect Hoosier retailers to catch up anytime soon. A case in point is Steak n Shake. While company management has an impressive R&D effort-with an array of store formats and menu items in various stages of testing-the proof will be in the results.

Timothy Otte, a columnist on the investing Web site Motley Fool, noted that when the company rolled out second-quarter results, it scaled back fullyear earnings guidance 30 percent.

"I'd like to report ... that better times lie ahead, but there's no evidence to support this," Otte wrote.

Sweet times for Simon

You might think that weakness in the retail sector would be hammering shares of Simon Property Group Inc., the nation's biggest mall owner. In fact, the company is holding its own.

Why? For one, not all retailers are struggling, and some high-end chains are posting whopping gains. In the latest quarter, Seattle-based Nordstrom Inc. reported nearly a 10-percent increase in samestore sales.

Then there's the fact that Simon is a landlord, which partly shields it from the quarter-by-quarter tumult its tenants must endure. While Simon can take a hit when chains go out of business, there were no major retailer bankruptcies in the first quarter.

Simon shares are trading at $106.18, down 14 percent since February. But a little perspective is in order. The stock is still up 4.7 percent this year-and that's on top of a prolonged climb. Since the start of 2001, Simon shares have risen 330 percent. Including reinvested dividends, the appreciation tops 500 percent.

Expect more good times, according to David Fick, an analyst with Stifel Nicolaus in Baltimore. Fick believes Simon will get a big financial pop from its recent purchase of Maryland-based Mills Corp., the struggling owner of 37 retail properties, including malls and outlet centers. Simon teamed with San Francisco-based Farallon Capital Management on the $1.6 billion purchase.

The headline to Fick's new report on Simon says it all: "Great 2007 on tap; Mills portfolio to add spice to well-oiled machine."

Simon Chief Financial Officer Stephen Sterrett told an investor conference last month that Mills had underperformed over the past three years because its management was distracted by crises of the day.

"There's lots of work to be done, because it is, fundamentally, a company that was broken," Sterrett said.

But he added: "We think that we can bring a lot of resources to bear to make those properties better. ... We do think there's a fair bit of low-hanging fruit."
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