Right-sizing inventories and enhancing efficiencies through
greater use of technology were the key agenda items on retailers'
to-do lists most of last year. Progress on those fronts has paved
the way for the retailers to enter fiscal 2012 with a more
BEST BUY (
So far this year, the broader markets have showcased signs of a
better pace of recovery and have thus infused hopes of a better
economic scenario going forward. One might debate or disagree with
this statement, but markets' significant recovery is reflected
through the benchmarks' record-setting gains in the first quarter.
The Dow and S&P 500 scored gains of 8.1% and 12.0%,
respectively, in the first quarter, their biggest first-quarter
gains since 1998. Meanwhile, the Nasdaq increased 18.7% in the same
period, enjoying its best-first-quarterly performance since 1991.
These market gains are not baseless. Domestic economic data have
mostly been encouraging since the fall of 2011. Labor and housing
markets, two of the key indicators of the economy, have put up
decent numbers in this period, notwithstanding some recent slips.
This has helped improve the outlook for the consumer sector as
well. Therefore, joining the bull ride, retail stocks started the
year on a strong note as the S&P Retail index handily
outperformed the Dow and S&P 500 and jumped over 18% during the
Retail, owing to its huge spectrum, remains a lucrative investment
avenue for investors. Moreover, the sector also reflects consumer
spending trends, an important parameter to gauge the health of the
economy (consumer spending accounts for approximately 2/3rd of the
economy). Thus, identifying future winners from this sector would
be a good idea to make an investment decision.
Looking at the comparable store sales data would simplify the
investment strategy as it is an important indicator for retail
industry, providing an insight into future prospects.
Strong March Comparables
Easter holiday and warm weather led a majority of the retailers to
register healthy sales in March. The continuous effort to
offer innovative products and value pricing coupled with their
adaptability to the buying habits of the consumers and strengthen
loyalties helped them post strong results.
Costco Wholesale Corporation
) registered growth of 6% in comparable store sales, while the
topline increased 10% to $9.1 billion. A differentiated product
range enables Costco to provide an upscale shopping experience to
its members, resulting in market share gains and higher sales per
Moreover, the company continues to maintain a healthy membership
renewal rate. Costco also remains committed to opening new clubs in
domestic and international markets. The company's diversification
strategy is a natural hedge against risks that may arise in
), reported same-store sales growth of 7.3%. Total sales were up
6.9% to $2,358 million. Macy's has been taking prudent steps to
increase sales, profitability and cash flows. These include
integration of operations, consolidation of divisions and
customer-centric localization initiatives. To help drive traffic,
Macy's continues to focus on price optimization, inventory
management and merchandise planning.
), a leading fashion specialty retailer in the U.S., offering high
quality apparel, shoes, cosmetics and accessories for men, women
and kids, registered a 8.6% increase in same-store sales for March
2012. Total retail sales were $1,029 million, up 14.7% from $897
million in March 2011.
Ross Stores Inc.
), the largest off-price apparel and home fashion chain in U.S.,
marked a 10% increase in same-store sales in March 2012. On the
back of strong comps performance, the company raised its earnings
forecast for the first quarter of 2012. The company now expects
earnings per share to come in the range of 89 cents to 90 cents,
compared with the prior guidance of 82 cents to 86 cents. This
represents a 20% to 23% increase from previous year's earnings of
79 cents per share.
), the operator of general merchandise and food discount stores in
the United States, marked an increase of 7.3% in comparable store
sales for March 2012. Net retail sales rose 7.9% to year over year
to $6,427 million.
Target's efficient marketing, multi-channel strategy, product
innovation, compelling pricing strategy and new merchandise
assortments, will drive comparable-store sales and operating
margins in the long term. We expect the company to gain market
share, and believe that more focus on consumable items should boost
sales and earnings in a sluggish environment.
Limited Brands Inc.
), a specialty retailer of women's intimate and other apparel,
beauty and personal care products posted an 8% increase in
comparable-store sales for March 2012. Net sales for the period
came in at $840.9 million for the period. Limited Brands' sustained
focus on cost containment, inventory management, and merchandise
initiatives has kept it afloat in a sluggish environment.
), a value-oriented specialty department store offering moderately
priced brand apparel, shoes, accessories, beauty and home products,
reported that company's comparable-store sales for March 2012
increased 3.6% with total sales rising 5.3% to $1,815 million.
), a premier international specialty retailer offering a diverse
range of clothing, accessories, and personal care products,
reported an 8% increase in same store sales, a significant recovery
from the prior year quarter. The company reported a 10% increase in
net sales for the period.
The Road Ahead
Although the U.S. economy has started witnessing a recovery, we
still believe that 2012 will not fully mark the return of the
retail market. Consumers are slowly regaining confidence and
cautiously increasing their spending power.
'Transformation' is the new mantra among the retailers. The
companies are coming up with strategic initiatives to bring in
operating efficiencies, drive growth and enhance shareholder's
value. Most of the retailers are focusing on abridging costs
drastically to ensure competent operating channels. We believe that
such measures are necessary to gain competitive advantage over
peers. However, focus on improving the top-line should be
prioritized to gear long-term growth.
Take the example of
J.C. Penney Company Inc.
). With the implementation of new pricing strategy, fresh logo,
strategic merchandise initiatives, reduction in costs and
enhancement of the shopping experience, management left no stone
unturned to bring the company back on the growth trajectory.
The company aims to reduce costs by $900 million in the first
couple of years of its transformation, resulting in lowering
expenses below 30% of sales. The company targets expenses to be 27%
of sales by the end of the transformation process.
Moreover, the leading specialty retailer of consumer electronic
Best Buy Company Inc.
) will pull down shutters on some stores which are not contributing
to its growth, while modifications of others are also in the
cards. Best Buy, through its cost reduction program, intends
to generate $800 million in costs saving by fiscal 2015, including
$250 million in fiscal 2013.
The company plans to open 100 U.S. Best Buy Mobile small format
stores in fiscal 2013 and intends to increase the total number of
such stores to 600-800 by fiscal 2016. The strategic redirection
will likely need to wait for a new management team following the
recent resignation of the company's CEO. The stock's initial
positive reaction to the CEO resignation news appeared to reflect
the market's lack of confidence in his abilities.
As a result of the uncertain economic environment following the end
of the Great Recession, the retail industry has been experiencing a
shift in consumers' shopping behavior. For understandable reasons,
shoppers are spending the greater size of their wallet to buy
primarily essentials and are looking for value-adds.
Across all income levels, shoppers are ranking value-for-price as
the most important reason for store choices. To be competitive in
this environment, the retailers are offering trend-right and
well-designed assortments at compelling prices, without
compromising quality, in order to drive traffic.
Starting from enhancing the supply-chain management to going
global, from improving their productivity through operating
efficiencies to using technology, retailers are trying to cover all
bases, strategically. Retailers are focusing on cost
containment, inventory management and merchandise initiatives to
Retailers are largely concentrating on buyers' needs, which in-turn
will likely positively augment sales in the long run.
Moreover, considering the current macro-economic environment, it is
a smart move as it better positions companies to attract consumers.
The technological advancement in marketing, such as e-commerce and
m-commerce, creates a win-win situation for both the retailers and
shoppers, as it enables the companies to generate additional sales
and broadens the company's existing customer base throughout the
Moreover, this strategy also enhances the visibility and reputation
of the retailer as a global firm. Shoppers get the benefit of
purchasing researched products at better price-points, as they can
compare prices being offered by various companies.
International turf and emerging markets provide ample opportunities
for retailers to widen their growth prospects and help the
companies to hedge against economic cycles.
In order to enhance the shopping experience of customers, retailers
felt the need to adapt to the demands of time and consider
), in order to tap the urban markets where real estate remains a
constraint, plans to introduce smaller-format stores called City
In a similar move,
), one of the leading specialty retailers of hunting, fishing,
camping, and related outdoor merchandise, unveiled its new
'Outpost' store format. The relatively smaller size store will
provide shoppers with Cabela's retail experience and will
facilitate the company to capitalize on the under-penetrated
Business on the Rise
Dollar Discount Stores:
The dollar discount stores have performed well when the recovery in
the economy seemed tough, generating top and bottom line growth.
Family Dollar Stores Inc.
), the operator of self-service retail discount store chains,
remains successful in luring consumers to its stores.
We believe that the company's effective pricing and inventory
management, private label offering, expanded operating hours and
merchandise initiatives should drive sales. The company's
point-of-sale technology and store realignment initiatives better
position it to drive traffic, meet customer-oriented demand and
improve in-store shopping experience. Family Dollar now expects
fiscal 2012 net sales to jump by 9% to 10%.
Retail is highly competitive and has significant challenges.
Although the economy is showing signs of improvement, it still
lacks clear visibility. The sense of uncertainty will continue to
weigh upon consumers' sentiment.
Moreover, consumers remain sensitive to macro-economic factors
including 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 in turn adversely affect the growth and profitability of
Beyond the macro factors, rising inventory levels and higher input
costs remain a drag on the margins of retailers. Further, fashion
obsolescence remains the key concern for retailers as this may
lower the comparable-store sales and deplete margins.
The Final Verdict
The players who will be able to cater to the needs of consumers
will grow volumes by ensuring foot falls and margin expansion.
Further, the ratio of converting shoppers to buyers will also rest
on the continued economic recovery and improvement in the job
market. This will ultimately boost consumer confidence and increase
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GAP INC (
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PENNEY (JC) INC (JCP): Free Stock Analysis
NORDSTROM INC (JWN): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
LIMITED BRANDS (LTD): Free Stock Analysis
MACYS INC (M): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
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