From diamonds to drill bits, retailers are set to restock

Companies from Tiffany & Co. to Home Depot Inc. are restocking shelves in a move that will boost economic growth and may keep the recovery on track through 2010.

Tiffany, based in New York, is planning for a high single-digit percentage increase in inventories this year as the world s second-largest luxury jeweler retailer opens new stores, Chief Financial Officer James Fernandez told analysts March 22. Home Depot, the largest U.S. home-improvement retailer, will be building inventory this year in support of stronger sales, Carol Tome, chief financial officer of the Atlanta-based company, said on a Feb. 23 analysts call.

We re moving into the restocking phase, said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. We ll see successive additions to growth in the first quarter, second quarter and third quarter.

JPMorgan advised clients in an April 2 note to stick with a recovery trade that favors stocks over bonds and is overweight cyclical shares that will rise in an economic rebound. The XLY, or Consumer Discretionary Select Sector SPDR Fund, has risen 112 percent since the March 9, 2009, low. The exchange-traded fund includes Home Depot and Beaverton, Oregon- based Nike Inc., the world s largest maker of athletic shoes.

The particular area of the economy which people are not putting enough focus on is how significant this rebound of inventories is going to be, former Federal Reserve Chairman Alan Greenspan said in an April 4 interview on ABC s This Week program, adding that the odds of a double-dip recession have fallen very significantly in the last two months.

The chances of a relapse into recession this year are 15 percent, according to a survey of 46 economists by Bloomberg News this month, down from 25 percent in September 2009.

The economy expanded at a 5.6 percent annual rate in the fourth quarter, the most in six years, with inventories providing the biggest boost by adding 3.8 percentage points to gross domestic product, based on data from the Commerce Department in Washington.

GDP will grow 4.5 percent in the second quarter, with inventory restocking contributing 2 percentage points, predicts Joseph LaVorgna, chief U.S. economist for Deutsche Bank AG in New York. The median forecast of 60 economists in the April Bloomberg News survey is for 2.8 percent growth.

Manufacturers added to stockpiles in March following 46 months of contraction, based on a factory index compiled by the Institute for Supply Management in Tempe, Arizona. Truckers benefited, as their business increased on a seasonally adjusted basis in the first quarter, according to a survey of about 25 companies by Stifel Nicolaus & Co., a regional broker and investment banker based in St. Louis.

The most frequently cited reason for the improvement in volume was inventory replenishment, Managing Director John Larkin and his fellow analysts said in an April 6 research note to clients on companies including Celadon Group Inc. in Indianapolis and Heartland Express Inc. in North Liberty, Iowa.

Companies reduced stockpiles during the recession as demand for their products nosedived. Business inventories fell to $1.3 trillion in September from a record high of $1.51 trillion in August 2008, according to the Commerce Department. They have since risen to $1.31 trillion in January and are forecast to show another 0.4 percent increase in February when the data are released on April 14, according to a survey of 37 economists by Bloomberg News.

Sales Bottomed

Sales bottomed sooner than companies expected, so businesses now have fewer goods than they need, Hensley said. He projects the economy will expand 2.5 percent in the first quarter and 4 percent in both the second and third quarters, with the inventory cycle boosting GDP by 0.5 percentage point, 1 percentage point and 0.4 percentage point respectively.

The ratio of business inventories to sales was 1.25 in January, just above a 29-year low of 1.24 set in 2006 and down from a recession high of 1.46 in January 2009. The ratio averaged 1.3 in the last economic expansion, from 2001 to 2007.

As sales rise, businesses will have even more reason to add to their stocks, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

Nike reported on March 17 that future orders for delivery from March through July rose 4 percent in North America from a year earlier.

We will certainly need the inventory to support that business, Chief Financial Officer Don Blair told analysts.

Long Delivery Times

Companies also will feel compelled to boost stockpiles because it s taking longer to get the materials they need to run their plants, Greenspan, 84, said in the ABC interview.

They re going to have to build inventories to protect their production lines at an ever-increasing pace, he said. And that is a self-reinforcing process.

Manufacturers reported that deliveries from their suppliers slowed in March from February, according to an index compiled by the Institute for Supply Management. It rose to a more than five-and-a-half year high of 64.9 last month from 61.1 in February. The higher the index, the slower the deliveries.

The shift in the inventory cycle will lead to more hiring as companies increase production, LaVorgna said. Manufacturing payrolls rose in March for the third consecutive month, which hasn t happened since 2006.

Home Depot is hiring more workers at its stores for the first time in four years in anticipation of a rebound in sales.

Lean Into Our Skis

We have already added to our payroll this year, Chairman and Chief Executive Officer Frank Blake said in an April 5 interview. As you have positive transaction growth, you need more associates to handle that in the stores. We are going to lean into our skis a little bit.

The danger is that sales won t rise as much as companies expect, leaving them with more workers and inventory than they need and setting the stage for an economic slowdown later in the year. The U.S. faces a significant risk of a double-dip recession, Harvard University Professor Martin Feldstein said in a March 23 interview with Bloomberg Television.

The consumer is going to have a very hard time, he said. Unemployment remains an enormous problem. The rate has been 9.7 percent since January.

It is premature to declare an end to the slump that began in December 2007, although most indicators have turned up, the Business Cycle Dating Committee of the National Bureau of Economic Research said in a statement on its Web site today. The committee, which is responsible for determining U.S. economic peaks and troughs, said many of the indicators are quite preliminary at this time and will be revised in coming months.

Growth will slow to 2 percent in the second quarter and 1.5 percent in the second half as final sales falter and the boost from restocking fades, according to Jan Hatzius, chief U.S. economist for Goldman Sachs Group Inc. in New York. Even so, he told clients in an April 7 note that he has become a little less confident of his forecast, partly because of the strength of consumer demand.

Gap Inc. in San Francisco, New York-based Saks Inc. and TJX Cos. in Framingham, Massachusetts, posted March sales gains that exceeded analysts estimates as retailers benefited from an early Easter and bounced back from last year s revenue declines. Chain-store sales rose 9 percent, the biggest one-month gain since March 1999, according to the New York-based International Council of Shopping Centers.

The risks for growth are shifting to the upside, Richard Berner, co-head of global economics, and David Greenlaw, chief fixed-income economist, at Morgan Stanley in New York wrote in an April 7 report. That s a sharp contrast with a consensus that is still worried about downside risks for growth.