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Drug channel may see happier holidays

BY Antoinette Alexander

NEW YORK —Consumers may have a tighter grip on their slimming wallets this holiday season as high energy costs and housing concerns loom overhead, but in the drug store channel the front end could benefit from a stronger flu season and from a consumer who doesn’t mind paying a little more for convenience, according to a preliminary 2007 retail holiday outlook by Lehman Brothers.

“There is a chance we will see some benefit from their convenience as people change their minds about holiday gifts at the last minute and decide to spend more money,” said Lehman Brothers analyst Meredith Adler during the holiday outlook conference call in late September.

In fact, Lehman Brothers estimates that drug stores will see holiday comps of between5.5 percent and 6.5 percent this holiday season, higher than last year’s 4.5 percent.

The 2007 holiday season has 32 shopping days versus 31 days in 2006, which analysts view as a positive as the extra shopping day falls on a Monday. However, analysts warned of monthly sales volatility due to the 53-week calendar shift. This calendar shift causes November to gain a high-volume sales week at the expense of December.

The holiday outlook presentation, featuring more than a half dozen Lehman Brothers analysts, took a macro-level look at the retail landscape, addressing such channels as restaurants, the Internet, retail softlines and department, specialty, dollar and convenience stores, as well as pharmacy retailers.

With seasonal aisles brimming with stocking stuffers, toys, health and beauty baskets and gift-wrap, drug stores typically see their front-end sales climb 10 percent to 20 percent between November and December. The bulk of the sales usually occur late in the season, given how convenient the stores are for last-minute purchases. Adler does not expect this trend to be impacted by a weakening economic environment.

Also helping to drive sales are the significant promotions that usually occur the day after Thanksgiving, such as Walgreens “hot product” sales for six to eight hours on Black Friday, Adler noted.

Will upcoming holidays be bright for retail?
The Lehman Brothers Retail Team expects a more modest holiday selling season this year than in 2006, and forecasts same-store sales to increase 2.6 percent versus 2.9 percent in 2006.

Holiday Comps*EstimatesSource: Lehman Brothers estimates
  2007* 2006 2005
Broadlines/dept. stores 0.2% 2.1% 2.6%
Dollar stores 2-4 3 2.2
Drug stores 5.5-6.5 4.5 6.5
Restaurants 2-3 2.1 3.9
Softlines 0-2 2.1 8
Specialty 0-2 3.6 2.6
Total 2.6 2.9 4.3

Even though the flu season is always a wild card, Alder said, this year is expected to be more a normal season compared with last year’s weak flu season. If that is the case, it will likely bode well for front end/general merchandise because patients will already be in the stores buying medication and will probably buy other products, as well.

While food retailers do not generate a disproportionate percentage of their annual sales during the holiday season, the sales mix does tend to shift to higher-margin items like perishables and general merchandise.

“Kroger has a bit more exposure because they have their big 153 multi-department stores, basically their version of a supercenter, and 406 jewelry stores and those obviously do very well during the holiday season,” Adler said. “And Safe-way has Blackhawk, its gift card subsidiary. We are expecting Blackhawk to grow very quickly and that has been a focal point for investors, but still only represents about 5 percent of Safeway’s net profit.”

Speaking of gift cards, analyst Bob Drbul said that gift cards will continue to be a popular holiday purchase.

“We estimate about a 25 percent increase in gift card sales this year to about $35 billion,” said Drbul. “We believe the transactions involving gift cards are generally larger than the amount of the gift card’s face value and what we would use is about a 25 percent premium.”

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Fred’s reports both monthly and quarterly record sales

BY Allison Cerra

MEMPHIS, Tenn. Fred’s Inc. reported record sales for the five-week and eight-month periods which ended Oct. 6, 2007.

The company said Friday that its total sales for the month increased 2 percent to $161.4 million compared to the same period last year. Total sales for the year-to-date period increased 5 percent to $1.157 billion.

Same store sales for the month rose 1 percent on top of a 5 percent increase in September last year. On a comparable store basis, sales increased 1.3 percent through the first eight months of fiscal 2007 compared with a 2.7 percent gain in the year-earlier period. Same-store sales are a key predictor of how well the company performs in stores that have been open for several years, and how well the newly open stores will do in the future.

“September sales came in at the low end of our forecasted range of a 1 percent to 3 percent increase, affected by unusually warm weather across our markets and the disruption caused by the updating of 98 stores under our refresher program,” said Fred’s Stores chief executive officer Michael J. Hayes. “We look forward to finishing our refresher program in October with the last 60 stores and to a better economic environment for our customers going forward, as the benefits of the minimum wage increase and the focus of Federal Reserve Board on the credit crunch take hold.”

Fred’s opened four stores at the end of September, bringing total store openings to 22 for the year-to-date period. These new store openings have been balanced by the company’s decision to close underperforming stores. In the remaining months, Fred’s Stores said that it plans to open 14 additional stores, with no further planned closings, which will result in a net increase in stores of 2 percent for the year.

Fred’s Inc. operates 702 discount general merchandise stores, including 24 franchised stores in the southeastern United States.

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Target to open another 61 stores nationwide

BY Allison Cerra

MINNEAPOLIS Target announced that it will be opening an additional 61 Target stores, the company said Friday.

The stores, which will all open Oct. 14, will open in 22 different states. The majority of the stores are making their debut in Arizona, California, Ohio and Texas.

In addition to offering the latest in trend-right merchandise, Target also brings a 44-year tradition of community involvement. The retail chain commits itself to local communities donating more than $3 million each week to area nonprofit organizations, becoming involved in local volunteerism efforts through Target Volunteers, and orchestrating other special projects that help meet area social service, arts and education needs.

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