2005 Industry Report: Retail

Recovery lets shoppers lap up some luxury items

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TREND: Personal income in North Carolina grew at a record rate between June 2003 and June 2004, boosting retail sales in 2004.

OUTLOOK: Sales growth will continue but at a lower rate than in 2004.

Shop until you drop. It’s the American way, says James F. Smith, professor of finance at UNC Chapel Hill’s Kenan-Flagler Business School. “When income goes up, spending goes up.”

And income has been going up in North Carolina. Personal income increased to $249.1 billion in the second quarter of 2004, a 6% jump from the second quarter of 2003, according to the U.S. Bureau of Economic Analysis. “That’s an all-time record for growth in personal income for North Carolina,” Smith says.

Retail sales rose 5% during the fiscal year that ended in June, according to the state Department of Revenue. Smith projected 7% growth for calendar 2004. Michael Walden, an economist at N.C. State University, projected an 8% increase. Sales grew just 1% in 2003. “I think 2004 will be the year when we turned the corner and paved the way for more economic growth,” Walden says.

Economists attribute the income gain to changes in employment: Job losses slowed in the state’s traditional manufacturing strongholds — textiles, furniture and tobacco — while job creation was ahead of the national pace. At the same time, interest rates remained low, making borrowing for large purchases more attractive.

Those with money found many more places to spend it in 2004 as high-end retailers such as Saks Fifth Avenue, Burberry, Louis Vuitton and Kate Spade opened their first stores in North Carolina. Birmingham, Ala.-based Saks opened an 80,000-square-foot store in Raleigh at Triangle Town Center in September. Though that store was doing 50% more business than it expected, Saks, discouraged by a developer’s delays, backed away from plans to open one in Charlotte (Tar Heel Tattler, January).

Charlotte shoppers weren’t without opportunity to buy pricey wares. SouthPark mall opened a cache of upscale shops as part of a $100 million renovation and expansion. Nordstrom opened its second North Carolina store there in March, two years after opening one in Durham. “Getting a Nordstrom is the mark of a metropolitan area that has advanced,” Smith says. “It says it’s a good market, and people want to be in it.”

Despite ongoing construction of shopping centers, retail vacancy rates fell during the first half of 2004, says Brian Reece, managing partner of Karnes Research in Raleigh. The Triangle rate was 4.7% for the period, down from 5.2% the year before. Charlotte’s rate was 5.5%, down from 7.3%. Both figures could rise as new stores and shopping centers open. The biggest under construction is the 1.2-million-square-foot Northlake Mall, scheduled to open in September near Lake Norman, an affluent, fast-growing region north of Charlotte.

While upscale retailers appealed to those with money to spend on luxury and status symbols, bargain and big-box retailers continued to compete on price. Penny-pinching shoppers helped deliver a good year for Matthews-based Family Dollar Stores. The discount chain reported sales of $5.3 billion for the fiscal year that ended in August — 11.2% more than 2003. Net income was up 6.1%. Family Dollar opened 500 stores in 2004, giving it more than 5,480 in 44 states.

Mooresville-based hardware giant Lowe’s saw revenue rise 18% to $27.9 billion during the nine months ending in October. Net earnings rose 14% to $1.7 billion. Chairman and CEO Robert L. Tillman planned to retire in January and turn over the reins to President Robert Niblock. The company plans to add 150 stores this year.

Statewide, sales are expected to grow at a lower rate in 2005 — just 5%, Walden says — mainly because most of the pent-up demand from 2003 has eased.

One high-profile Tar Heel retailer hoping to rebound from a bad year is Winston-Salem-based Krispy Kreme Doughnuts. After three years of rapid growth and soaring stock values, investors pushed away from the table in 2004. And their reluctance wasn’t only a shunning of carbs. The company lost $18.7 million during the six months that ended in August and delayed filing its third quarter report while it sorted out accounting issues. By December, the combination of red ink and a formal investigation of its accounting practices by the Securities and Exchange Commission had driven down the company’s stock price more than 70% from its 2004 high of $39.74.