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2006 industry report: retail

Tar Heel shoppers find reasons to keep buying

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TREND: Consumers have more money to spend. Personal income in North Carolina rose about 3% to $266 billion during the first three quarters of 2005.

OUTLOOK: Growth in income will continue, and economists predict another record year for retail sales.

With energy costs, personal debt and bankruptcies rising, Tar Heel shoppers could be excused for leaving their money under their mattresses this year. But Jim Smith, a finance professor at UNC Chapel Hill’s Kenan-Flagler Business School, thinks merchants will ring up more sales. “It’s all functions of income and confidence.”

A surprisingly strong economy boosted personal incomes 3% in the state through the first nine months of 2005, according to the U.S. Bureau of Economic Analysis. Still, Smith says, some households will have to make changes because of rising energy costs, and few economists would be surprised by volatile prices in 2006, similar to those of 2005. Gasoline prices in North Carolina averaged about $2.30 at the end of December, up about 30 cents from a year earlier. “Obviously for people who are carefully watching their budget, it’s way above a year ago,” Smith says. “They’ll have to cut back to some degree.”

Consumer confidence got a boost when gasoline prices dipped before Thanksgiving. That helped many families decide they could spend a little more on Christmas gifts. “It was right in time,” Smith says. Some Tar Heel retailers were having a good year even before Christmas. Sales at Lowe’s, the Mooresville-based hardware chain, were up 16.2% to $32.4 billion through the third quarter. Sales for stores open longer than 13 months were up 5.5%.

But the good fortune didn’t extend everywhere, including to the nation’s top retailer, Bentonville, Ark.-based Wal-Mart. The company said its national same-store sales increased only 2.2% in December, less than analysts had expected. Other retailers that reported disappointing December sales included San Francisco-based Gap and Hoffman Estates, Ill.-based Sears Holdings, the parent company for Kmart and Sears, Roebuck and Co. Minneapolis-based Target and Seattle-based Nordstrom were among the national retailers that did well.

In the year ahead, N.C. State University economist Michael Walden expects retailers to contin-ue efforts to lure older shoppers, who often have more money than younger ones. Some stores, including Charlotte-based Belk and Menomonee Falls, Wis.-based Kohl’s, have offered discounts to customers who can prove they’re at least 55 years old. Belk sales grew more than 15% to $1.9 billion during the first three quarters, partly because it bought 47 Proffitt’s and McRae’s stores from Birmingham, Ala.-based Saks in July and opened 12 stores. Comparable-store sales grew just 0.4%. Net income fell more than 27% to $37 million. “We expect to return to our normal levels of profitability once the initial integration costs for the Proffitt’s and McRae’s stores are behind us,” CEO Tim Belk says.

At the other end of the spectrum, penny-pinching shoppers, new stores and coolers that permitted the sale of perishable foods helped Matthews-based Family Dollar Stores boost sales more than 10% in the fiscal year that ended in August. Comparable-store sales for the discount chain grew more than 2%. About 1,000 of its 6,000 stores got coolers in fiscal 2005, and 2,500 more will get them in fiscal 2006.

Internet sales continued to grow more than 10% a year in 2005, but economists don’t consider them a major factor yet. They account for about 5% of retail sales in North Carolina. “They’re a godsend for people who can’t get out of their homes,” Smith says. “But for the most part, people use the Internet to see what’s available, then go to the store and buy it. It’s the same way catalogs used to be used.”

Walden expects stores to reach out to the burgeoning Hispanic population. In January, a study by the Frank Hawkins Kenan Institute of Private Enterprise, affiliated with the Kenan-Flagler Business School, estimated that more than 600,000 Hispanics live in North Carolina and concluded that they generate about $9 billion for the state economy. Some stores are wooing Latinos by emphasizing ethnic holidays such as Three Kings Day in January. That trend, Smith says, represents the one unchanging aspect of retail sales. “It’s a very dynamic industry. It always has been.”

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