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U.S. retailers cutting inventories — and prices

Upscale stores bearing brunt of the downturn

SHARE U.S. retailers cutting inventories — and prices

NEW YORK — Nordstrom Inc. is slashing prices on clothes, shoes and accessories by as much as 60 percent in the next week, the first early autumn sale since the company started selling apparel almost 40 years ago.

"We have too much inventory," spokeswoman Brooke White said. The upscale retailer is cutting jobs and business became "much tougher" following the Sept. 11 terrorist attacks, she said. Saks Inc. is trimming inventory, and Levi Strauss & Co. said some customers reduced orders.

The U.S. economy may be in a recession, analysts said, and some retailers anticipate a holiday shopping season more dismal than the last, which was the worst in five years. The National Retail Federation chopped its fourth-quarter sales-growth forecast by almost half to 2.2 percent as consumer confidence fell to a 5 1/2-year low and job losses mounted.

"The economy was already weak and then (the attacks) happened," said Maria Azari, portfolio manager with Cambiar Investors, which owns shares of Nordstrom and Limited Inc. "If you are afraid you might lose your job, you might not want to go out and spend tons of money."

Retailers had been curtailing inventory to guard against a repeat of last year's holiday season, when merchandise gluts prompted profit-eroding clearance discounts.

Saks, owner of the Saks Fifth Avenue chain, ended its fiscal second quarter with 2 percent less inventory than a year ago. The company said it's working with suppliers to further tighten controls on inventory this fall. Store closings from the terrorist attacks will lead to a 12 percent to 15 percent drop in September same-store sales, Saks said.

As companies gird for slower demand, just how slow the holidays may be is starting to become clearer: Federated Department Stores Inc., owner of Macy's and Bloomingdale's, said sales since the attacks have been running 20 percent below forecasts and that profit estimates may have to be trimmed.

"After the events of Sept. 11, our business fell apart," said Jeffrey Stone, chief executive of electronics retailer Tweeter Home Entertainment Group Inc.

U.S. retailers' same-store sales fell 0.8 percent last week, compared with a 3.3 percent gain the week before the attacks, according to an index compiled by Bank of Tokyo-Mitsubishi Ltd. and UBS Warburg.

"I don't think we have to wait to see what happens," said William Fries, portfolio manager and managing director at Thornburg Management Co., which owns retail shares. "It's highly probable we won't have a good fourth quarter."

Analysts say discount chains and warehouse clubs like Wal-Mart Stores Inc. and Costco Wholesale Club Inc. will fare the best. Unlike other merchants, those chains sell food and household goods — basics people will need regardless of political, military or economic developments.

"The high end is going to get hit the hardest," Cambiar's Azari said.

Wal-Mart shares have risen 7.1 percent since Sept. 10, the last day of trading before the attacks. In the same period, the Standard & Poor's 500 Index dropped 4.7 percent, led lower by Dollar General Corp., Kmart Corp., Toys "R" Us Inc. and Tiffany & Co.

Bank of Tokyo economist Mike Niemira said retailers shouldn't throw in the towel just yet. He's maintaining his forecast of a 4 percent increase in same-store sales for the November-December period.

The estimate is "reasonable" because of an expected rise in discretionary income from tax rebates and any travel plans canceled because of terrorism concerns or flight cutbacks, he said.

Last year's 2.3 percent same-store sales gain for the two-month period was the smallest since a 2.1 percent increase in 1995, Niemira said.

Other analysts are less upbeat.

"Wartime has never been a great time for people to run out and buy a lot of things," said analyst Marty Bukoll at Northern Trust Corp., which owns shares of Wal-Mart, Kohl's Corp. and Gap Inc. "Even those who were distracted minimally, they can't ignore the economy, they can't ignore the layoffs."

Since the attacks, airlines alone have eliminated more than 92,500 jobs. The number of U.S. workers filing new claims for unemployment benefits rose by 58,000 to 450,000 last week, the Labor Department said. That was the largest gain and the highest level since July 1992.

Gross domestic product rose at a 0.3 percent annual rate from April to June, the slowest pace since 1993, according to the Commerce Department. The U.S. economy may contract for the rest of the year, analysts said.

"We're in a recession," said Bank of Tokyo's Niemira.

Solomon Kidd, a 30-year-old Web designer from Oakland, Calif., said he hadn't felt like shopping for more than life's necessities since the terrorist attacks. That feeling may carry over to the holidays, he said.

"I don't think people are going to be in that festive of a mood," Kidd said.

Companies left holding the bag on inventory face the prospect of disappointing fourth-quarter earnings.

Since the attacks, analysts have slashed their forecasts for third-quarter earnings growth for the industry to 1.5 percent. Forecasts for the fourth quarter have slipped to 18 percent from 22.3 percent, according to Thomson Financial/First Call, which tracks estimates for 136 chains. Retail earnings fell 12 percent in last year's fourth quarter.

"If sales get hit, profits get hit as well," said Thornburg's Fries. "The surprise would be this year that we have a good holiday season. I don't think anyone is expecting it."