What does gas at $4.50 a gallon mean for some mall-based department stores?

A downgrade by Goldman Sachs.

Goldman sharply raised its forecast for oil prices in the second half of this year, saying it expects U.S. crude to average $141 a barrel, up from a previous projection of $107. Goldman also forecasts prices will rise further next year to average $148.

That is not good news for retailers.

“Higher energy spending in the second half is likely setting the stage for a more challenging backdrop for consumer discretionary sectors, particularly for the department store stocks,” Goldman noted.

Goldman downgraded JC Penney and Nordstrom to ”neutral” from “buy.” It swapped its conviction list “buy” designation on Kohl’s with Wal-Mart. It upgraded off-price retailer TJX to “buy” from “neutral.”

Goldman also cut its second half same-store sales estimates for JC Penney, Kohl’s, Nordstrom and Macy’s.

“We believe companies will face an uphill battle against escalating energy prices offset by easier top-line compares and the anniversary of 2007’s extremely warm Fall season,” Goldman said about the second half of the year. ”In the end, we believe energy and constrained cash flow will win this tug-o-war causing same store sales to re-decelerate as the second half progresses.”
 
(Photo: Reuters) 

Check out the 50 percent drop in quarterly profit at JC Penney.

The mid-tier department store operator had warned in late March that its first-quarter profits would be hammered after a drop in store traffic and dismal Easter sales forced it to cut prices to clear out unsold merchandise.

Penney shoppers can expect more price cuts on future visits to the retailer. 

The department store operator said it is now trying to get inventory in its stores to better match the weak sales environment, meaning it will roll out more promotions and cut future merchandise orders.

Based on its forecast, Penney is expecting profits to decline yet again in its second quarter.

It forecast earnings per share of 38 cents–a dramatic drop from the 78 cents per share of earnings from continuing operations it reported a year ago.

Also in the basket:

Tiffany ups payout, sees 1st-qtr topping estimates

Tyson sees less, but more expensive, chicken

Blockbuster swings to profit in first quarter 

(Photo: Reuters)

On Tuesday, Wal-Mart Stores Inc, the world’s largest retailer said its first-quarter profit rose 7 percent. U.S. shoppers headed to the discount retailer to load up on basics, like groceries and health care items. They also bought electronics as they try to spend more time amusing themselves at home instead of burning through costly gas driving around town.

But Wal-Mart gave a cautious view for Q2. It forecast earnings per share of 78 cents to 81 cents, while analysts on average are expecting 81 cents. And it said second-quarter U.S. same-store sales could be flat to up two percent.

Wal-Mart’s finance chief, Tom Schoewe, told Reuters the retailer is being “appropriately conservative” with its forecast, unsure of how much tax rebate money will be spent in its stores or how well consumers will hold up amid the struggling economy.

But Wall Street is betting that caution now will mean upside in the future.

Here are some comments from analysts on Wal-Mart’s forecast:

Uta Werner, analyst, Sanford C. Bernstein, in a note: “Given WMT’s strong first quarter performance and management’s relative optimism and positive tone on the pre-recorded call, we are surprised by the company’s seemingly conservative 2Q09 outlook.  While we appreciate that it is difficult to quantify the precise impact of stimulus checks, we nonetheless would expect at least some benefit to sales at the stores and Sam’s, and find both EPS and comps guidance surprisingly conservative.”

Neil Currie, analyst, UBS, in an interview with Reuters:  “With positive traffic and improving momentum in apparel … and the stores looking better and better all the time, I think they’re in good shape to at least be on the higher end of expectations.”

Adrianne Shapira, analyst, Goldman Sachs, in a note: “We’d note 2Q EPS could prove conservative as it does not include the potential benefit from the fiscal stimulus package. Therefore, much like 1Q when on the heels of better monthly comps, WMT was able to raise guidance intra-quarter, we believe setting an achievable and potentially beatable bar in today’s tough environment is the prudent way to provide guidance. As such, we would view any pullback in shares as a buying opportunity as we believe WMT remains best positioned in today’s tougher macro with potential upside to EPS from the fiscal stimulus.”

(Reuters Photo: Schoewe has his costume torn away by members of the Anti-Gravity dance troupe before addressing theWal-Mart Annual Shareholders Meeting in Fayetteville June 2007) 

Tax rebate checks are in the mail and some of the rebate cash has already made its way to consumers’ wallets. But will this cash infusion give the economy (and struggling retailers) a boost?

According to interviews Reuters conducted with consumers across the United States over the past week, the answer seems to be that most of the extra money will be heading toward the basics — like food, fuel and credit card payments — with just a little left over for splurges.

Here are some comments we rounded up:

• “I will almost certainly save it,” Courtney Hancock said outside a shopping center in the Buckhead section of Atlanta. “At this point there isn’t anything that I’ve been waiting to buy.” Her expected $600 rebate check will likely be used for a bigger purchase later. 
• Lisa Hasson, 39, free-lance pianist and mother of twin, 2-year-old boys in Cincinnati. “I’m probably just putting it in a savings account — holding onto it for the summer. Lean living for lean times.” 
• Ava Lee, 34, has been out of work in Los Angeles since December and says she’ll use her rebate check to pay for “necessary expenses” like food and gas. ”I’d use mine for everyday spending. I would not go out and say, ‘Ooh! I have extra money’,” said Lee, who has turned off her heat and air conditioning to keep expenses down. 
• Sarah Ortiz of Houston said she decided early on to use the tax rebate to pay debt. “I’m trying to get down to one credit card. They say we’re in a credit-crunch,” she said. 
• Daniel Pillow of Houston said he planned to use his rebate to pay his American Express bill, but admitted he’d already used the card to buy some extra clothes in anticipation of getting a check. “I may have spent a little bit, knowing that I was going to get a check,” said Pillow, an employee of the Houston Public Library system. 
• Morgan Lawson, 58, works at the Time-Life Building in New York supervising newspaper deliveries. ”The likelihood of saving it is slim,” he said, adding that prices seem to be rising across the board. He thinks he will have to spend it on necessities, like food and higher energy prices and clothes for his children. ”It sure doesn’t hurt,” to get the extra cash, he said, “But, it’s not a huge boost.” 
• Sergio Rivas, a computer network administrator from Hialeah, Florida, said he would put his rebate toward a deposit on a new apartment.  He said he’s looking for “something a little bit bigger, hopefully with some kind of patio.” 
• Paula Goehe, 61, retired administrative assistant in Indiana: “I’m sorry to tell you I’m not going to spend it. We need the money for retirement. We’ve been retired four or five years and we spent a lot to put our children through college, so we’ll be saving it — even though there is no interest at all.” 
• Dana Bulan, a teacher who lives in Chicago, said she will use her $300 rebate check to pay for her regular tennis lessons and won’t bother trying to save it. ”It’s such a small amount of money, it’s not worth, I think, trying to put it someplace else,” Bulan said.
• John Barker, 57, who installs swimming pools for the “super-rich” in the St. Louis area, said that although his business had not been affected by slowing economic growth, spiraling costs meant he had few plans for his rebate check. ”I’ll put it into my checking account and no doubt it will go for gas or food,” he said in the parking lot of a branch of Bank of America on the outskirts of St Louis. “Looking at the price of oil, I think I’ll need it to fill up my truck.” 

(Click here to read full story) 

(Photo: Reuters)

Late Monday, Target said it would sell a 47 percent interest in its credit card business to JPMorgan Chase for an initial investment of $3.6 billion.

The news came almost 8 months after the discount retailer, under pressure from activist investor Bill Ackman, said it was exploring options for its credit card business — a move it had long resisted.

The final deal was a complicated one that Uta Werner, an retail analyst with Sanford C. Bernstein & Co, described in the following way: A “note sold to JPM, backed by a 47 percent undivided interest in Target’s receivables, in exchange for cash proceeds of approximately $3.6 billion and subject to a profit and risk sharing agreement.”

While the deal may have left some on Wall Street scratching their heads, wondering if the deal made sense, CFO Doug Scovanner could not say enough good things about the deal on a conference call on Tuesday.

“We expect to get hundreds of millions of dollars from profit from this venture unless we really screw it up,” he said. “Personally, I think this is what Dire Straits had in mind in the 1980s anthem, ‘Money for Nothing.’ I think this is wonderful.” 

And he balked at the notion of terminating the deal with JPMorgan if Target finds another partner interested in its full credit card portfolio. 

“We just announced that we’re intending to get married in a few weeks and you’re asking me what happens if I want to get divorced,” he said. “I’d far rather live for the moment with the happy ideas of what’s going to happen on this honeymoon than worry about how to unwind this deal.”

Check out fewer places to sip that latte or buy that power saw.

Late on Wednesday, Starbucks said it would slash U.S. coffee store openings through 2011 as it adjusts to slower U.S. growth.

The coffee giant blamed the domestic housing crisis for a significant quarter-over-quarter deterioration in U.S. customer traffic and said it saw early signs of a potential traffic slowdown in the United Kingdom, which may be related to economic problems there.

“Starbucks coffee and premium coffee experience has, over time, been an affordable luxury.  And at this time, it isn’t for some people,” Chief Executive Howard Schultz said.

Then on Thursday morning, Home Depot said it plans to close 15 underperforming stores and will curb future store openings. 

Home Depot said it will no longer pursue the opening of about 50 stores that had been in its new-store pipeline. New store spending will be cut by about $1 billion over the next three years, it said.

Announcements of store opening slowdowns or store closures are nothing new this year. Retailers’ growth plans, designed during a consumer spending boom, are being squashed by the consumer spending slowdown.

In fact, it’s not even the first time we’ve heard from Starbucks. In January, the coffee chain said it would close 100 underperforming U.S. stores and slow domestic store openings in the face of a likely consumer recession.

Also in the basket:

Clorox 3rd-quarter profit falls

Apple’s iTunes sells movies on DVD release date

CVS Caremark 1st-quarter profit rises

Disney buys back North American Disney Store chain

(Photos: Reuters)

Check out consumer product powerhouses including Procter & Gamble, Kraft and Colgate, inundating Wall Street with quarterly reports on Wednesday.

The reports largely showed that the companies are finding successful ways to navigate the consumer spending slowdown and the commodity price surge that has raised their cost of doing business.

P & G, world’s largest consumer products maker, with brands ranging from Pampers diapers to Olay skin-care products, posted higher quarterly profit. It said cost controls helped offset soaring prices for oil and other commodities.

Kraft, whose brands that include Oreo cookies and Oscar Mayer lunch meat, reported a drop in quarterly profit as the largest North American food maker company was hit by soaring costs for oil and ingredients such as wheat, and spending on new products and marketing. But the results were better than analysts were expecting as price increases and new products lifted sales.

Colgate-Palmolive posted a higher-than-expected quarterly profit, boosted by strong sales outside the United States and higher prices that helped offset soaring commodity costs. 

And Kellogg, the world’s largest breakfast cereal maker, posted higher-than expected profits as price increases helped offset soaring commodity costs.  The maker of Frosted Flakes and Keebler cookies also raised its dividend and stood by its full-year earnings forecast, though it said it expects commodity costs to rise more than originally planned. 

Also in the basket:

Reynolds American profit disappoints, stock dips

Penney CEO cautiously optimistic on better holiday

Dean Foods 1st-quarter profit falls

OfficeMax net up on one-time gain; sales fall

(Photo: Reuters)

Check Out investors waking up to a sweet deal on Monday morning.

M&M’s maker Mars Inc and Berkshire Hathaway Inc are buying Wm Wrigley Jr Co, the largest U.S. chewing gum maker, for $23 billion.
 
The deal will create a confectionary giant, bringing together Wrigley’s Altoids, Extra and Eclipse brands, with Mars’ M&M’s, Snickers, Starburst and Twix.

The newly announced deal could trigger a renewed push toward consolidation in the global candy business.
 
One potential deal that has been discussed previously, and could invite fresh interest, is that between London-based Cadbury Schweppes, known for its Dairy Milk chocolate, and Trident gum brands, and top U.S. chocolate maker Hershey Co.

The two companies are reported to have talked in the past, though the Hershey Trust, which controls about 78 percent of Hershey’s voting shares, has said Pennsylvania law requires it to maintain control of Hershey.

Also in the basket:

Tyson posts loss due to feed costs, charges

RadioShack posts lower quarterly profit

France plans retail reform to curb price pressures

(Photo: Reuters)

Food costs have been soaring worldwide, spurred by increased demand in emerging markets like China and India; competition with biofuels; high oil prices and market speculation. 

That situation has sparked food riots in several African countries, Indonesia, and Haiti. United Nations Secretary-General Ban Ki-moon has warned that higher food prices could hurt global growth and security.

But the effect of rising prices took a surprising turn this week– at least a surprising turn by U.S. standards — when it comes to sales of rice.

Rice prices in particular have surged this year as exporters curb supplies. Trade bans on rice have been put in place by India, the world’s second largest exporter in 2007, and Vietnam, the third biggest, in hopes of cooling domestic prices.

Worried that rice prices may soar beyond affordable levels and worried that shortages abroad would be replicated at home, U.S. shoppers began buying up large quantities of rice.

The move caused warehouse club operators Costco and Sam’s Club, which sell large bags of the staple item and have lots of small restaurant owners as their customers, to limits sales of rice.

Wal-Mart’s Sam’s Club warehouse chain said it was limiting sales of 20-pound (9 kg), bulk bags of Jasmine, Basmati, and long grain white rice to four bags per customer per visit, at all of its locations. It cited “recent supply and demand trends.”

Costco’s CEO Jim Sinegal said he thought the sudden surge in buying was being triggered by constant media reports highlighting food shortages and rising prices. He said the warehouse club was trying not to limits sales of the items.

“If it’s a Chinese restaurant who buys from us all the time we can’t tell them, ‘Why don’t you try french fries this week?” he said, “They need rice.”

If it does run out of supply, Sinegal said Costco is usually back in stock by the next day.

“We don’t want to create a panic situation,” he said.

Tell us … Have you been stocking up on certain items amid rising prices?

(Reuters photo and graphic)

Check Out a few bright spots in consumerville. 

McDonald’s posted a higher-than-expected quarterly profit on Tuesday, boosted by strong overseas sales. Coach also reported a higher-than-expected profit, helped by higher sales at stores in North America and Japan.

But the impact of a weak U.S. consumer and a weak U.S. economy was clearly on display as the earnings report began to  roll in this week.

Late on Monday, furniture maker and retailer Ethan Allen said its quarterly profit tumbled nearly 50 percent, hurt by restructuring charges and the weak economy. 

“Sales in March particularly slowed down due to broader economic concerns raised by the extraordinary intervention of the Federal Reserve to stabilize financial institutions, and to some extent due to Easter falling in March this year,” said Farooq Kathwari, the company’s chief executive.

McDonald’s sales fell slightly in March at U.S. restaurants open at least 13 months, prompting cautious investors to send its shares down 2 percent in premarket electronic trading.

There was also caution in the air at handbag retailer Coach.

“Due to the continued uncertainty in the economic backdrop, we believe that it’s prudent to wait until our fourth-quarter report to offer guidance for the upcoming fiscal year,” Coach’s Chief Executive Lew Frankfort said in a statement.

But Ethan Allen tried to infuse at least one positive note into its report:

“With a relatively calmer economic environment in April, and Easter behind us, the decline in sales so far has been considerably reduced,” the CEO said.

Also in the basket:

Sherwin-Williams posts lower quarterly profit

Kimberly-Clark sales up; interest expense hits net

(Photos: Reuters)