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Recession-proof stores
Analysts say these retailers won't lose in an economic downturn because consumers will want to, or have to, shop at them.

By Parija B. Kavilanz, CNNMoney.com senior writer
January 23 2008: 4:08 AM EST
NEW YORK (CNNMoney.com) -- There's no arguing that retailers have to strap in for a very tough 2008. But it won't be gloom and doom everywhere.

Analysts say consumer frugality during tough economic times can actually be a boon for some merchants.

"When you're not making more real dollars, the only other option (for consumers) is to control expenditures," said Stevan Buxbaum, analyst with consulting firm Buxbaum Group.

One way to save money is by what retailers call "trading down."

This means that more mid-income Americans will try to stretch their dollar by migrating to discount stores, value-priced retailers and wholesale chains in the months ahead.

Such activity will benefit discounters and wholesale outlets, including Wal-Mart (WMT, Fortune 500), Costco (COST, Fortune 500) and BJ's Wholesale Club (BJ, Fortune 500), Buxbaum said.

To his point, Wal-Mart and Costco recently reported better-than-expected December same-store sales.

Same-store sales are an important retail metric that measure sales at stores open at least a year.

However, Wal-Mart's rival Target (TGT, Fortune 500), isn't getting the same boost to its business and warned of weaker sales this month.

"Target performance is a good example of why we have to be careful of predicting that an entire segment will do well," said Love Goel, chairman and CEO of Growth Ventures Group, a specialty retail private equity firm. "Our view is that there are individual retailers that will outperform in each segment."

He said Wal-Mart has done better than Target in recent months because it sells more low-cost staples such as toothpaste, detergent and groceries.

"More than 50 percent of Target's sales come from apparel and home goods. Softlines are higher margin goods but the category is taking a hit in this environment," Goel said.

Still, Buxbaum spotted a potential recession-proof seller among clothing chains in teen specialist Aeropostale (ARO).

"Aeropostale is the price leader in the teen space. That's why it had a double-digit (percentage) sales jump over the holiday season," Buxbaum said, adding that consumers traded down to Aeropostale from Abercrombie & Fitch and American Eagle Outfitters.

Rebates: No big deal for stores
Even in a recession, dogs will be fed and kids will get their toys. This bodes well for pet supply stores and toy sellers.

"Americans love their pets. Pets have to eat. The problem [for retailers] is that people don't have to buy other accessories like a fancy collar. But accessories are where the profit margins are," Buxbaum said

Experts say pet stores - among them, Petco (PETC) - will probably continue to generate sales volume but their profits will contract.

And cash-strapped parents will dig deep to buy birthday toys for their children no matter what.

"You just can't explain to a 4-year-old that he won't get the toy he wants because there's a recession," Buxbaum said.

However, Goel expects some trading down in how consumers buy toys. He said parents would likely head to Wal-Mart or Target for better prices and only head to specialty toy stores for hard-to-find products.

Analysts also expect quick-service restaurants such as McDonald's (MCD, Fortune 500) and Wendy's to withstand a recession-inspired spending pullback as families pick more affordable fast food over pricier menus in casual dining chains.

To that end, Buxbaum said McDonald's "Dollar Menu" is ideal for the frugal customer.

Goel is betting that a recession won't stymie the surge in online sales.

"Online sales will continue to grow as consumers surf the Web for better deals," he said.

But analysts are divided on the outlook for luxury sellers. Sales of luxury items held steady for most of 2007, partly buoyed by a weak dollar that attracted dollar-rich tourists to the United States to bag high-end bargains.

"The luxury sector has seen some [sales] softness over the last three, four weeks but we think luxury will rebound," Craig Johnson, president of retail consulting group Customer Growth Partners.

Johnson cited a CEO from a leading high-end chain as saying that the retailer's customers weren't suddenly running out of money, but instead blamed negative headlines about a recession for forcing customers to rethink that extra purchase.

Goel wasn't convinced.

"I had a feeling that luxury was immune from a recession, but now I'm not sure," he said, citing a profit warning from Tiffany earlier this month.

"Luxury sellers are beginning to feel the pinch," he said. Worse, he said this week's global market selloff would likely result in a pullback among overseas shoppers as well.

Fears grow as consumers pull back further
 

 

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