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 growth perspective, the retail industry is among the
dominant U.S. industries, and employs an enormous workforce.
Correlation with the Economy
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 in the second half of the year and beyond. One
could contest this economic outlook, but the stock market's strong
recent gains show clearly which way investors think the economy is
headed. The S&P 500 index has clocked gains of roughly 14.3%,
while the Dow Jones Industrial Average has gained approximately
15.2% so far this year.
The belief in economic recovery is reflected in measures of
consumer confidence hitting new multi-year high. The recent
Conference Board's Consumer Confidence Index improved to 81.4 in
Jun 2013 from a revised 74.3 in May 2013. The index notched its
highest level since Jan 2008, when it had touched 87.3. This
prompts a sense of optimism about steady increase in consumer
spending going forward.
The recovery in the housing market, stock prices gaining momentum
and improving labor market conditions played vital roles to help
the consumer confidence move north.
According to the Census Bureau and Department of Housing and Urban
Development, sales of new houses jumped 2.1% sequentially in May
2013 and surged 29% from May 2012. Additionally, unemployment rate
is currently hovering around 7.6%, reflecting an improvement from
7.9% in the beginning of the year.
Meanwhile, Fed Officials hinted that it might gradually roll back
the $85 billion monthly stimulus program in the later part of the
year and said that they might discontinue the program by the middle
of next year if economy improves further.
Fed Officials look quite optimistic about the unemployment rate
going down to a range of 7.2% to 7.3% in 2013 with expected
economic growth of 2.3% to 2.6%. Moreover, they see the
unemployment rate between 6.5% and 6.8% next year, driven by
economic growth in the 3% to 3.5% range.
We will have to wait and see how the economic picture unfolds, but
Ben Bernanke in his Congressional testimony this week indicated
that the Fed will maintain accommodative monetary policy for a very
long time even if they make changes to the QE program.
Key Metric for June
The key data in retail industry analysis is comparable-store sales
(comps), as it excludes sales at newly opened and closed stores.
Improving job market, lower gas prices, warmer weather and
clearance discounts boosted consumer sentiment. These positives
aided retailers to generate healthy sales for the month of June
with consumer spending gaining some pace.
Among the retailers, clothing chain
The Gap Inc.
) led the pack with a 7% rise in comps and an 8% increase in net
sales to $1.53 billion for the month of June. Off-price retailer of
apparels, footwear and accessories
Stein Mart Inc.
) was also on the list of best performers. The company registered a
6.5% rise in June comps, while total sales increased 2.6% to $109
Furthermore, discount store operator
) witnessed a significant improvement with a 4.5% rise in comps,
substantially up from the 4% decrease witnessed in Jun 2012. Net
sales for June increased 3% to $187.7 million.
Costco Wholesale Corporation
), the warehouse retailer, delivered comparable-store sales growth
of 6% in June, following an increase of 5% in May. Meanwhile, net
sales for June rose 8% to $9.92 billion from $9.16 billion in the
The Buckle, Inc.
), a retailer of casual apparels, footwear and accessories for men
and women, witnessed a 3.4% rise in comps when compared with Jun
2012 results. Net sales increased 3.9% to $82.5 million from $79.4
million in the prior-year period.
However, some retailers showcased soft performance. Apparel and
) reported a 1% rise in comps.
L Brands, Inc.
), a specialty retailer of women's intimate and other apparel,
beauty and personal care products posted flat comparable-store
sales. Washington-based retailer of sports-related teen apparel
) reported a 1.0% increase in comps.
Drugstore chain retailer
Rite Aid Corp.
) reported marginal growth in comparable-store sales for Jun 2013,
thereby breaking the declining trend of comps for the past four
months. The company's comps for the 4-week period ended Jun 29,
2013 inched up 0.7%, primarily driven by improved comps results at
its pharmacy and front-end stores.
However, the U.S. retail and food services sales data for Jun 2013
were somewhat disappointing. According to the U.S. Census Bureau,
the retail and food services sales grew 0.4% sequentially and 5.7%
year-over-year to $422.8 billion. The rate of increase decelerated
from 0.5% gain in May 2013 and fell short of analysts' expectation
of 0.7% to 0.9% increase. Retail sales represent approximately 30%
of consumer spending.
Retailing - New Game, New Rules
The retail industry is rapidly evolving with a dramatic change in
consumer buying habits. Satisfying customers and enriching buying
experience require new strategies from retailers today. Modern
retailing, interestingly enough, is a new game with new rules.
Despite the gradual rise in consumer discretionary purchases, the
sluggish U.S. economy and recessionary fears in Europe cannot be
ignored. Burdened with the lackluster scenario, retailers have
largely concentrated on buyers' needs and lured them with
innovative products, attractive discounts, free shipping and the
ease of shopping through smartphones and tablets. However, these
strategies only helped in generating modest revenues.
Thus, retailers essentially need to ideate brilliant strategies,
while incorporating technological advancements and utilizing their
real estate portfolio to the optimum level. In short, they need to
Experiment, Differentiate, Optimize and Transform.
Banking on this new mantra,
), the world's largest retailer of office products and services and
second largest online retailer, launched its first omnichannel
stores - what it refers to as the future of retail.
Simply put, through this omnichannel strategy, Staples hopes to
integrate its retail network with enhanced digital capabilities.
The company stated that stores will incorporate its .com and mobile
assets. Alongside, the stores will feature Staples.com kiosks.
This new era store concept, with all its attractions could well
prove to be a game changer in the long run for Staples. Providing
shoppers the ease of shopping on their own terms and enriching
their in-store shopping experience could be a crucial point of
differentiation among other retailers.
In harmony with the evolving retail industry, department store
) also adopted an omnichannel strategy. Despite macroeconomic
challenges and cautious consumer spending, Macy's continues to post
healthy results. Management largely attributes the credit to its
omnichannel strategy aimed at enhancing customers' shopping
Trends to Rule 2013
Some of the trends that are expected to rule the retail sector this
year include employing more technological solutions, incorporating
customer feedback and targeting additional audiences with products
With the growth of the .com era, shoppers have largely adopted new
purchasing modes, using the Internet, mobile phones and tablets.
Consumers today prefer to use their laptops or smartphones to
compare prices of products they want to buy and place orders
online, instead of visiting the company's stores. This growing
trend has guided major U.S. retail chains to downsize their
physical retail operations, and in turn develop their e-Commerce
and m-Commerce sites to attract customers.
Other traits that are expected to affect the retail industry are
the growth of self-service options for processes such as checking
out and finding items in stores. These offerings provide greater
convenience and faster transactions, and they satisfy shoppers who
prefer to visit brick-and-mortar locations for immediately
purchasing predetermined items.
Of late, store-within-a store has been making headlines, though the
concept is nothing new to retailers.
J. C. Penney Company Inc.
) is one such retailer which has been focusing on this business
strategy for quite some time. The recent one to join the league is
consumer electronic retailer
Best Buy Company Inc.
(BBY), which has been facing stiff competition from industry
bellwethers such as
Wal-Mart Stores Inc.
) to increase its footfall, sales and profitability.
Best Buy is leaving no stone unturned to woo consumers and attain
incremental revenue, and it was well evident from its strategic
initiative of opening over 1,400 "Samsung Experience Shops" within
its stores, announced in April. The model seems to be working for
the retailer, which also has a dedicated floor area for
) products. Taking the initiatives further, Best Buy recently
unveiled its partnership with
) to roll out "Windows Store" across its 500 outlets in the U.S.
with an additional 100 in Canada.
Challenges and Some Remedial Measures
The retail industry is highly competitive and encounters
significant challenges. Although the U.S. economy has started
witnessing a recovery, we still believe that 2013 will not fully
mark the resurrection. Consumers are slowly regaining confidence
and cautiously increasing their spending.
Moreover, consumers remain sensitive to macroeconomic 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 eventually adversely affect the growth and profitability of
Retail is no different from other U.S. industries, which 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 for the health of
the retail industry. While the unemployment rate has decreased
considerably over time, consumers are now beginning to draw out
their savings to spend, anticipating some economic recovery.
Changes in Consumer Needs, Attitudes and Behavior:
The growth of modern retail is linked to consumer needs, attitudes
and behavior. Adapting to the sluggish economic environment
prevalent over the last few years, consumer behavior has shifted to
being more conservative. This has now become the regular behavioral
pattern of consumers as they remain budget conscious, seeking
greater value. In the process, buyers are swiftly switching to the
less expensive brands and consolidating shopping trips.
Moreover, people today prefer to cook at home instead of eat
out. This shift in consumer behavior is inducing retailers to adopt
various strategies to stay in the competition. Retailers are
offering trend-right and well-designed assortments at compelling
prices, without compromising on the quality, in order to drive
The waning popularity of brick-and-mortar store formats has made it
essential for retailers to adopt new techniques like 'staging
stores' to woo customers. Staging basically refers to the act of
making the company's stores attractive, where people like to spend
their time. The idea behind this strategy is to make shopping
interesting for consumers, so that they would want to walk into the
stores, rather than shop online.
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 15 industries at
the expanded level - Building Products-Retail/Wholesale, Food
Items-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 rank all the 260 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
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-RGN Department #8,
Retail/Wholesale CMP #9, Retail-Restaurants #40, Retail-Jewelry
#44, Building Products-Retail/Wholesale #61, Retail/Wholesale
Auto/Truck #67, Retail-Drug Store #71, Retail-Consumer Electronic
#76, Retail-Miscellaneous/Diversified #97, Internet Commerce #104,
Food Items-Wholesale #111, Retail-Apparel/Shoe #156,
Retail-Supermarket #159, Retail/Wholesale-Auto Parts #184 and
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 positive.
The broader Retail/Wholesale sector portrays an impressive earnings
trend. The first quarter 2013 results for the sector were
impressive in terms of both beat ratios (percentage of companies
coming out with positive surprises) and growth.
The earnings "beat ratio" was 75%, while the revenue "beat ratio"
was 50%. Total earnings for this sector increased 7.9%, reflecting
an improvement over 6.6% growth registered in the fourth quarter of
2012. Total revenue grew 1.7% in the quarter versus 5.3% jump in
the previous quarter.
Looking at the consensus earnings expectations for the rest of the
year, we remain encouraged since earnings are expected to grow 5.9%
in the second quarter of 2013 and 17.6% in the third quarter, but
are expected to decline by 9.1% in the fourth quarter, thereby
registering full-year 2013 growth of 10.0%.
For more details about earnings for this sector and others, please
'Earnings Trends' report
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
Bon-Ton Stores Inc.
Big 5 Sporting Goods Corp.
The Children's Place
Mohawk Industries Inc.
Haverty Furniture Companies Inc.
Restoration Hardware Holdings, Inc.
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
Tiffany & Co.
The Kroger Company
Build-A-Bear Workshop Inc.
Ulta Salon, Cosmetics & Fragrance, Inc.
G-III Apparel Group, Ltd.
Michael Kors Holdings Limited
On the other hand, there are stocks that don't hold promise in the
near term, and carry Zacks Rank #4 (Sell) and Zacks Rank #5 (Strong
Sell). These include
Ralph Lauren Corporation
Ascena Retail Group Inc.
Companhia Brasileira de Distribuicao
Furniture Brands International Inc.
Gordmans Stores, Inc.
Jos. A Bank Clothiers Inc.
APPLE INC (AAPL): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis
ASCENA RETAIL (ASNA): Free Stock Analysis
BUILD-A-BEAR WK (BBW): Free Stock Analysis
BEST BUY (BBY): Free Stock Analysis Report
BIG 5 SPORTING (BGFV): Free Stock Analysis
BUCKLE INC (BKE): Free Stock Analysis Report
BON-TON STORES (BONT): Get Free Report
CATO CORP A (CATO): Get Free Report
CONNS INC (CONN): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis
FURN BRAND INTL (FBN): Free Stock Analysis
FREDS INC (FRED): Free Stock Analysis Report
G-III APPAREL (GIII): Free Stock Analysis
GORDMANS STORES (GMAN): Free Stock Analysis
GAP INC (GPS): Free Stock Analysis Report
HAVERTY FURNIT (HVT): Free Stock Analysis
MARINEMAX INC (HZO): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis
JOS A BANK CLTH (JOSB): Free Stock Analysis
MICHAEL KORS (KORS): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
L BRANDS INC (LTD): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
MOHAWK INDS INC (MHK): Free Stock Analysis
MICROSOFT CORP (MSFT): Free Stock Analysis
CHILDRENS PLACE (PLCE): Free Stock Analysis
PVH CORP (PVH): Free Stock Analysis Report
RITE AID CORP (RAD): Free Stock Analysis Report
RESTORATION HDW (RH): Free Stock Analysis
RALPH LAUREN CP (RL): Free Stock Analysis
STEIN MART INC (SMRT): Free Stock Analysis
STAPLES INC (SPLS): Free Stock Analysis Report
SUPERVALU INC (SVU): Free Stock Analysis Report
SAFEWAY INC (SWY): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
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