Retailers procure goods in large quantities directly from
manufacturers or wholesalers and sell them in smaller quantities to
customers through retail shops or online platforms. As consumer
spending is the key to the viability of any economy, the health of
the retail industry becomes an important economic indicator.
As a leader in the retail business, the United States provides
ample growth opportunities for all types of retail companies. The
retail industry covers everything in its scope, ranging from
internet catalog sales, auto dealers, convenience stores, vending
machines and clothing -- thus dividing retailers into numerous
categories. Retailers of all sizes, including individual direct
marketers or direct sellers, small- to medium-sized franchise unit
owners, and large "big-box" store operators compete in the U.S.
From a labor intensity perspective, the retail industry ranks among
the dominant U.S. industries and employs an enormous workforce.
Retail sales represent approximately 30% of consumer spending,
which itself accounts for more two-thirds of the economy.
Correlation with the Economy
Although the U.S. economy commenced the year on a sluggish note,
the stock markets have shown momentum so far. The S&P 500 has
gained roughly 7.0%, The Nasdaq Composite Index jumped about 6.6%,
while the Dow Jones Industrial Average rose 3.1% year-to-date.
The economic outlook for 2014 remains positive based on favorable
economic data and an improved consumer and business outlook.
According to the data from Bureau of Labor Statistics, the
unemployment rate for June declined to 6.1% from 6.3% in May, and
reached its lowest level since September 2008.
The recent Conference Board's data on Consumer Confidence Index
reflected a 3.0 points improvement to 85.2 in Jun 2014, following a
rise in May to 82.2. Meanwhile, the University of Michigan's
Consumer Sentiment survey showed a 0.7% sequential improvement to
82.5. However, it declined 1.9% year-over-year.
Another data by the Commerce Department shows that consumer
spending for May 2014 was up 0.2% after being flat in Apr 2014.
Despite growth in personal income during May, spending remained
cautious. Looking ahead, the Federal Reserve has been projecting
stronger growth as it winds down its bond-buying program designed
to stimulate the economy.
With economic activities gradually gaining traction, the Federal
Reserve has so far reduced its monthly bond purchases to $35
billion, in 5 rounds of $10 billion tapering each month. The
minutes of the latest Federal Reserve meeting indicate that it will
likely reduce the pace of asset purchases in further measured
The Federal Open Market Committee (FOMC) now plans to end its
bond purchase program in October with a final reduction of $15
billion provided the economy stays on track. Till that time, the
Federal Reserve plans to trim its bond purchases by $10 billion at
However, the central bank said the decision to end bond purchases
in October shouldn't be interpreted as a sign that a hike in key
interest rates is likely to begin sooner. The central bank plans to
keep the rates near zero for a considerable period.
The strengthening manufacturing sector and improving labor market
are positive indicators no doubt, and the retail sector is likely
to hog all attention. These feel-good factors have abated fears of
a derailed economy that arose after the first quarter of 2014, when
GDP data revealed a 2.9% decline. While the BEA is expected to
release the Real GDP 'Advance estimate' for the second quarter on
Jul 30, market analysts' continue to suggest about 3% economic
growth (GDP) in 2014.
The key data in the retail industry analysis is comparable-store
sales (comps), as it excludes sales at newly opened and closed
stores. The sales data of most retailers reveal that the industry
has been picking up with better-than-expected comps reported for
the fourth straight month, owing to huge promotional activities,
favorable weather, Easter Sales, Memorial Day weekend sales and the
recently improved employment and consumer credit data.
The latest key metrics data released last week reflect a positive
sentiment with all but 2 of the 11 retailers that report monthly
comps emerged as winners. The improved results in June were mostly
attributed to a rise in traffic resulting from the positive
economic factors like a 0.2% decline in unemployment rate and 7.4%
rise in consumer credit as well as heavy promotions and favorable
The list of gainers in June was led by drugstore operator
), which posted a 7.5% rise in comps and an 8.9% increase in total
sales. This was followed by
Costco Wholesale Corp.
) which posted a 6% rise in comps for June. The warehouse retailer
Costco Wholesale's sales grew 10% to $10.89 billion.
Drugstore chain retailer
Rite Aid Corp.
) occupied the third spot with 3.9% growth in comparable-store
sales for Jun 2014, while total drugstore sales climbed 3.5% to
$1.995 billion for the month.
Moving forward with the list, Washington-based retailer of
sports-related teen apparel
) reported a 3.1% increase in comps while sales improved 11.1% to
$65.3 million from $58.8 million in the year-ago period. Apparel
and accessories retailer
) reported a 3% rise in comps along with a 7% improvement in net
Further, off-price retailer of apparels, footwear and accessories,
) registered a 2.6% increase in June comps, while total sales rose
3.8%. Comps of the clothing retail chain
L Brands Inc.
) rose 2% with a 7% improvement in sales to $1.176 billion.
Meanwhile, warehouse club operator
) posted a 1% increase in comps for June whereas sales for the
month rose 4%.
The Buckle Inc.
), a retailer of casual apparels, footwear and accessories for men
and women, reported a 0.7% rise in comps while net sales increased
2.8% to $84.8 million.
On the other hand, the aggrieved retailers list for the month was
The Gap Inc.
), which posted a 2% fall in comps and 1% increase in net sales to
$1.54 billion for June. Another downer on the list is discount
), which reported a 0.6% fall in comps as against an increase of
4.5% last year. Net sales for Jun 2014 were up 2% to $191.2
Though the comps and sales performances in June are encouraging,
the recently lowered second quarter earnings forecasts by retailers
Tractor Supply Company
Lumber Liquidators Holdings Inc.
) indicate that there still remain concerns for retailers with the
back-to-school selling season just around the corner. Retailers are
worried about the low traffic trends in the second quarter as
shoppers nowadays are more inclined toward online shopping which
has led to a decline in store walk-ins. Furthermore, despite a rise
in employment the low-income group still shy's away from spending
Trends to Rule 2014
The retail industry has evolved drastically with a dramatic change
in consumer buying habits. Consumers today are knowledgeable, more
inquisitive and choosy. Moreover, today's customers have numerous
shopping options at their disposal like in-store, online, mobiles,
social media and so on, that influence their purchasing decision.
Satisfying customers and enriching their buying experience require
new strategies. Modern retailing, interestingly enough, is a new
game with new rules.
The U.S. retail and food services sales data for May 2014 showed
slight improvement. According to the U.S. Census Bureau, the retail
and food services sales rose 0.3% sequentially and 4.3% year over
year to $437.6 billion.
Some of the trends that are expected to rule the retail sector
going forward include increased technological solutions,
incorporating customer feedback and targeting additional audiences
with products and services.
Omnichannel Retailing the New Norm:
The sluggish U.S. economy and continued weakness in Europe have
driven retailers to focus on the buyers' needs and lure them with
innovative products, attractive discounts, free shipping and the
ease of shopping through smartphones and tablets. As these efforts
failed to pay off, retailers felt the need for a better channel to
connect with customers and engage them by all possible means.
This gave rise to the "omnichannel" approach, which focuses on
providing more touch points and multiple channels to customers.
This approach facilitates the use of all possible mediums to engage
consumers, including brick and mortar stores, online and mobile at
the same time or alternatively.
This strategy provides customers the ease of selection, purchase
and exchange of a product through multiple channels. For example, a
customer may select a product online, buy it through his phone and
will have the option to exchange the same by visiting a store
without any hassle. Some retailers who are already benefiting from
this strategy include
Chico's FAS Inc.
Personalized In-Store Experience:
With evolution to the .com era and advancement of consumers,
retailers are pulling up their socks to reinvent their marketing
style, evolving from the previous mass advertising and promotions
format to a more personalized method, which will impress today's
The consumer today seeks a more direct communication through an
app on their smartphone or an Internet chat with an executive on
the company's website. Moreover, the customers prefer tailored
offers and recommendations online as well as in stores.
Increasing Use of Mobile Wallet Technology:
With everything in retail undergoing a sea change, the modes of
payment used when shopping have also evolved drastically. The
increasing use of smartphones, tablets and mobile technology has
given rise to a new mobile application called 'mobile wallet,'
through which customers can be make payments instantly using their
smartphones or tablets. Though cash and credit cards will remain
the primary payment methods, the use of mobile wallet is catching
up quickly among mobile users for the convenience it offers.
The popularity of this app among customers is driving retailers to
adapt this payment mode by collaborating with some of the mobile
wallet providers available in the market like PayPal, Google
Wallet, Square Wallet, Dwolla, and more.
In a recent stride in this direction, leading car rental company
Avis Budget Group Inc.
) fused its express rental service "Avis Preferred" with the Google
Wallet application. Moreover, the PayPal app has gained recognition
with a wide array of retailers including
Abercrombie & Fitch Co.
Advance Auto Parts Inc.
American Eagle Outfitters Inc.
Barnes & Noble Inc.
Foot Locker Inc.
), Guitar Center,
) Jamba Juice,
J.C. Penney Company Inc.
Nine West, Office Depot Inc.
), Rooms To Go, Tiger Direct and Toys "R" Us.
Technology-Friendly Brick & Mortar Stores:
With shoppers increasingly becoming tech savvy, the brick and
mortar stores need to brace themselves and move from their
old-fashioned layouts adopting innovative in-store technologies.
The simplest way to do this is the adoption of in-store mobile
devices, through which customers can make payments, see product
demonstrations, gather information and connect to social networks.
This was recently demonstrated by
), which equipped its associates with iPhones enabling them to
assist customers and receive payments anywhere in the store. This
reduces billing queues and ensures efficient management of space,
making stores less congested.
Further, retailers are exploring new ways to use mobile devices
in-store. They are looking for mobile apps that track customers as
they shop, sending them tailored offers related to the store's
section they are in; recommending items based on past purchases; or
allowing shoppers to program automated shopping lists.
In-store technologies, that customers look for these days include
mobile point of sales, price checkers, self-checkout payment lanes,
information kiosks, digital signage, etc. Other innovative
technologies that will prove effective to engage customers both
in-store and elsewhere are smart shelves, Wi-Fi hot spots,
point-of-sales (POS) systems, virtual storefronts and endless
Reinvention of Loyalty Programs:
Loyalty programs offer an edge to retailers as customers come back
for more offers. However, the age-old reward programs are losing
popularity among shoppers as the offers are sometimes irrelevant
and benefit accumulation is slow.
With the trends changing in retail, retailers are now perking up
their loyalty programs replacing loyalty cards with customized
offers based on social information, behavioral patterns of
shoppers, frequently bought items and other such details. Retailers
who have shown stringent focus on enhancing rewards on their
loyalty schemes include Nordstrom, Rite Aid Corp., Office Depot and
Impact of Social Media on Shopping Decisions:
With the growing use of social networking sites by the masses,
business firms have also entered social media to promote their
business. Through the social platforms retailers can advertise
their brand and launch new products and campaigns. Companies also
offer mobile coupons exclusively through these platforms, largely
influencing the buying decisions of shoppers.
Additionally, these social platforms provide an insight into what
the customers will buy in the stores based on the interest shown by
them regarding products featured on these sites.
Investing in Big Data to Track Shoppers:
With the growing need for giving personal attention to shoppers,
retailers are widely investing in analysis software like "Big Data"
that help accumulate information regarding the behavioral patterns,
history and background of customers. The analysis of this data
facilitates the prediction of customer reaction, formulating
pricing strategies, offering shopper-specific discounts and
providing personalized recommendations to shoppers.
) is one retailer which has been involved in data analysis for
quite some time now, offering tailored product recommendations
based on the customer's previous purchases.
Growth of Retail in Emerging Markets:
Having tapped most of the potential in the domestic markets, a
pattern recently noticed among retailers is their venture into the
emerging markets. Most retail chains are witnessing growing demand
for their products in countries like Brazil, the Middle East, China
and India and aims at growing their exposure in these countries
over time. Some of the retailers venturing into these markets
include The Gap,
The Clorox Company
Ralph Lauren Corp.
Tiffany & Co.
Challenges and Some Remedial Measures
The retail industry is highly competitive and encounters
significant challenges. With a slow economic recovery in the U.S.,
consumers remain exposed to macroeconomic factors such as interest
rate hikes, increase in fuel and energy costs, credit availability,
unemployment levels and high household debt levels, which may
negatively impact their discretionary spending and eventually
adversely affect growth and profitability of retail companies.
Retail is no different from other U.S. industries, and is highly
dependent on the economy to prosper. Such heightened dependence on
the economy and factors like job growth and interest rates indicate
that a speedy recovery of the economy is vital to the retail
industries' health. While the unemployment rate has decreased
considerably over time, consumers are now beginning to draw out
their savings to spend, anticipating economic recovery in the
Lack of Focus on Research & Development:
Despite the shift of focus on consumers in retail, there still
remains a conservative approach among retailers when it comes to
research and development budgets. Looking from another perspective,
given the rising use of digital and social media, retailers lag
behind from customers when it comes to adopting new technologies
The ever-changing technological scenario demands continued
investment in research & development to remain updated. For
example, the mobile point of sales technology introduced some years
back as a new innovation has now become a must-have in retail
To prosper in this high-tech era, retailers need to hold back on
the adoption of every new technology and focus only on the ones
that will help enhance their brand proposition. Identifying the
best options and investments in that direction will help fetch
More Data Analysis Raises Consumer Privacy Risk:
Though the tracking systems developed to study consumer behavior
are doing well for retailers, their sustainability is questionable
as customers might get irked by such tracking over time. As a
result, they may register for 'Do Not Track' systems to prevent
In order to address this issue, companies should educate shoppers
on the benefits of such data analysis. Customers need to be
informed that the tracking systems installed in the stores are
solely for data collection and will not hinder their privacy in any
Zacks Industry Rank
Within the Zacks Industry classification, Retail/Wholesale (one of
16 Zacks sectors) is divided into two categories -- Nonfood
Retail-Wholesale and Food/Drug- Retail/Wholesale under the Medium
(M) Industry Group and further sub-divided into 14 industries at
the expanded (X) level -- Building Products-Retail/Wholesale,
Internet Commerce, Retail/Wholesale Auto/Truck,
Retail-Apparel/Shoe, Retail-Consumer Electronic, Retail-Discount,
Retail-Drug Store, Retail-Jewelry,
Retail-Miscellaneous/Diversified, Retail-Restaurants, Retail-RGN
Department, Retail-Supermarket, Retail/Wholesale-Auto Parts and
We divide the 16 Zacks sectors into 60 M-level industries and 250
X-level industry groups. We rank all the 250 plus industries in the
16 Zacks sectors based on the earnings outlook and fundamental
strength of the constituent companies in each industry. To learn
more visit: About Zacks Industry Rank.
As a point of reference, the outlook for industries with Zacks
Industry Rank #88 and lower is 'Positive,' between #89 and #176 is
'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for Retail/Wholesale Auto/Truck #1,
Retail/Wholesale-Auto Parts is #11, Retail-Jewelry #11, Retail-RGN
Department #29, Retail-Restaurants #89, Retail-Drug Store #178,
Retail-Consumer Electronic #183, Retail-Apparel/Shoe #189, Internet
Commerce #200, Retail/Wholesale CMP #202, Retail-Discount #213,
Retail-Miscellaneous/Diversified #227, Building
Products-Retail/Wholesale #247 and Retail-Supermarket #247.
On analyzing the Zacks Industry Rank for the constituent industries
in this space, it is apparent that the overall outlook for the
Retail/Wholesale sector is Negative.
The Q2 earnings season has just started with only 14% of the
broader Retail/Wholesale companies releasing their financial
results. Though it is difficult to arrive at a precise trend for
the quarter at this time, the earnings and revenue growth rates are
broadly in-line with the trend seen in the first quarter of 2014.
So far, the earnings "beat ratio" was 16.7%, while the revenue
"beat ratio" was 66.7%. Total earnings for this sector improved
2.7% year over year, while total revenue improved 5.2% in the
With a large chunk of the results yet to come up earnings and
revenue projections for Q2 stand at 2.6% and 5.0%, respectively,
for the Retail/Wholesale sector. This is compared with a 2.2%
earnings decline and 3.8% revenue growth registered in the first
quarter of 2014.
Looking at the consensus earnings expectations for the quarter
ahead, the picture looks slightly bright with earnings expected to
grow 8.7% in the third quarter of 2014, registering full-year 2014
growth of 8.5%. Going into the next year, earnings expectations
look encouraging with projected earnings growth of 14.0% for the
For more details about the earnings of this sector and others,
please read our '
Retailers are trying to remain competitive primarily by shifting
focus to the long-term horizon and finding innovative solutions to
create value, reduce operating costs and mitigate risks throughout
Right-sizing inventories, enhancing efficiency and competence and
bringing in technological advancements are the key agendas that
retailers are focusing on. Moreover, cost-containment efforts and
merchandise initiatives to improve margins are top priorities.
Retail, owing to its huge spectrum, remains a lucrative investment
avenue for investors. The sector reflects consumer spending trends,
an important parameter to gauge the health of the economy. Thus,
identifying future winners from this sector would be a good
We recommend few stocks in the sector at this point, as these
companies are showing significant growth despite the secular
headwinds. The stocks in our coverage with a Zacks Rank #1 (Strong
BJ's Restaurants Inc.
Brinker International Inc.
), Tiffany & Co.,
Restoration Hardware Holdings Inc.
Sonic Automotive Inc.
The Men's Wearhouse Inc.
Christopher & Banks Corporation
Citi Trends Inc.
Under Armour Inc.
Columbia Sportswear Company
Michael Kors Holdings Ltd.
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
Big Lots Inc.
), Zumiez Inc., Gap Inc., Nordstrom Inc., Foot Locker Inc.,
Five Below Inc.
), Barnes & Noble Inc.,
Finish Line Inc.
The Children's Place Inc.
), J. C. Penney Co. Inc.,
The Kroger Company
Signet Jewelers Ltd.
Ulta Salon, Cosmetics & Fragrance Inc.
On the other hand, there are stocks that do not hold promise in the
near term, and carry a Zacks Rank #4 (Sell) and Zacks Rank #5
(Strong Sell). These include Amazon.com Inc.,
Bebe Stores Inc.
), Chico's FAS Inc.,
Chuy's Holdings Inc.
CST Brands Inc.
Darden Restaurants Inc.
Dick's Sporting Goods Inc.
Lululemon Athletica Inc.
), Lumber Liquidators Holdings Inc.,
Stock Building Supply Holdings Inc.
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