Retailers procure goods in large quantities directly from
manufacturers or wholesalers and sell these in smaller quantities
to customers through retail shops or online. As consumer spending
is the key to the viability of any economy, the health of the
retail industry is 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
From a growth perspective, the retail industry ranks second among
all U.S. industries, and employs an enormous overall workforce.
Annual sales turnover of the retail industry is more than 12% of
the total trade volume of all U.S.-based businesses.
Additionally, it accounts for over 11% of total employment in the
Recent Industry Trends
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. Though this statement is
debatable, the significant recovery in the stock market is
reflected through strong gains for the broader market indices. A
number of major market indices, including the Dow Jones
Industrial Average, are already at new all-time highs, and the
S&P 500 is not far from its 2007 peak.
Additionally, domestic economic data have mostly been encouraging
since Sept 2012. Labor and housing markets, two of the key
indicators of the economy, performed admirably in this period.
Also, the consumer sector joined the ranks for showcasing
improved data almost consistently.
According to the U.S. Census Bureau, the U.S. retail and food
services sales for February climbed 1.1% from the prior month and
4.6% from February last year to $421.4 billion. The latest
domestic retail sales data points to a 4th consecutive rise on a
monthly basis as well as the first highest monthly rate since
Sales gains for U.S. retailers in February mainly reflect an
improving job market and stronger household finances that helped
consumers, which helped the economy overcome higher taxes and
The employment situation in the U.S. seemed to improve in
February with readings for the unemployment rate coming at 7.7%
from 7.9% in Jan 2013. However, the overall scenario still
appears dismal as the unemployment rate has remained range bound
since Sept 2012, not providing enough stimuli to boost consumer
spending, which accounts for roughly 70% of U.S. economic
Moreover, the Conference Board came out with its reading of the
Consumer Confidence Index -- a barometer of the U.S. consumer
health - on Feb 26, 2013, which fell in January and rebounded in
February. The consumer Confidence Index now stands at 69.6 from
58.4 in January.
The improving trends witnessed in retail sales, consumer
confidence, automotive sales and housing data, along with
declining unemployment rate confirms that the U.S. economy
continues to be on track for recovery, while there's still a
general uncertainty on the economic front with the GDP growth
February Sales of Retailers
The key data in retail industry analysis is comparable store
sales (comps), as it excludes sales at newly opened and closed
Despite the recent positive domestic economic data, February
remained tough for most retailers as macro-economic factors
including increase in fuel and energy costs, higher payroll taxes
and delays in tax refunds. coupled with unfavorable weather
conditions hindered consumer spending and in turn adversely
affected the growth and profitability of companies. The best
performing sectors were discount and apparel stores, while the
teen apparel chains put up the worst performance in the month.
Comps results for apparel retailers like
Limited Brands Inc.
) (up 3%),
The Gap Inc.
) (up 3%),
Stein Mart Inc.
) (up 0.6%), and
) (up 1%) outperformed expectations, while
Ross Stores Inc.
) (down 1%) was among the underperformers.
Additionally, discount store operator,
Costco Wholesale Corp.
) came in strong posting a 6% increase in February comps, while
) dropped 1.5% in the month.
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On the other hand, drugstore chain
Rite Aid Corp.
) posted a 3.6% decline in February comps. Other major
underperformers in February included, teen apparel retailers
) (down 3%), and
) (down 1.1%).
Starting February, many major retailers including
Bon Ton Stores Inc.
Stage Stores Inc.
), announced that they will no longer report monthly sales
Looking ahead, retailers remain optimistic for March on account
of the calendar shift in the timing of the Easter holiday, which
falls on Mar 31 this year (it was Apr 8 last year). Moreover,
analysts remain positive on tSt. Patrick's Day sales, which fell
only two weeks in advance of Easter Sunday this year. However,
retailers expect their April sales results to be affected by the
shifting of Easter into March.
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 and services.
With the growth of the .com era, shoppers have largely adopted to
new purchasing modes, using the Internet, mobile phones and
tablets. Consumers today prefer to use their laptops or smart
phones to compare prices of things 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.
One such major player which has adapted to this trend is Macy's,
which continues to exhibit tremendous online growth momentum. The
company registered online sales growth of 47.7% in the fourth
quarter and seeks to further expand its online portal going
Another brick-and-mortar chain that is aggressively adapting to
new realities and strengthening its online presence is Nordstrom
Inc. In addition to offering free shipping and free returns in
its online store, the company has introduced a new functionality
of mobile point-of-sale devices and continues to expand its usage
in full-line and Rack stores.
Further, Nordstrom is expanding its online merchandise selection
and developing a more customized approach to enhance the overall
web and mobile experience. The company expects to spend 25% of
its planned five-year capital expenditures towards e-Commerce and
technology investments, including initiatives to improve
e-Commerce delivery and fulfillment, online and mobile experience
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.
The "Re" in Retailing
"Transformation" is the new mantra among retailers. Despite rapid
technological advancements which are influencing consumer
behavior, the retail industry continues to reinvent, redesign and
revitalize its physical store formats to maintain their
Of late, retail giants including
Best Buy Co. Inc.
JC Penney Co. Inc.
Build-A-Bear Workshop Inc.
) are focused on revisiting and re-evaluating conventionality and
traditional business traits, while envisioning its
brick-and-mortar store merchandise offerings. Additionally, these
companies continue to actively re-engineer and re-tool various
systems and processes.
Retail groups are coming up with strategic initiatives to boost
operating efficiencies, drive growth and enhance shareholder
value. Most of the retailers are focusing on drastically
abridging costs to ensure competent operating channels. We
believe that such measures are necessary to gain competitive
advantage over peers. However, a focus on improving the top line
should be prioritized to accelerate long-term growth.
The above-mentioned traits are made clear seeking the example of
JC Penney, which has left no stones unturned to bring the company
back on the growth trajectory. Management has taken up several
initiatives -- from implementation of a new pricing strategy,
refreshed logo, strategic merchandise and cost reduction -- while
enhancing the shopping experience of customers. The company
targets expenses to be 27% of sales by the end of the
Moreover, the leading specialty retailer of consumer electronic
products, Best Buy, shuttered stores which did not contribute to
its growth, while modifications of others are also in the cards.
The company plans to transform its big-box format to a big profit
center by redesigning its prototype stores to resemble
) retail store format. Best Buy is not the first one to resort to
such mimicry, as
Walt Disney Co.
Tesla Motors Inc.
) have already opened stores imitating the Apple format.
Target Corp. is another retail chain that has resorted to a major
remodeling program called 'P-fresh.' This program aims at
sustaining sales at existing general merchandise locations by
adding perishable food items, along with a deeper assortment of
dry dairy and frozen items, and improved store layout and
enhancement of in-store shopping experience across departments,
such as apparel, home, beauty, shoes and baby. During fiscal
2013, Target plans to remodel 100 locations.
Hot Topic Inc.
) -- a leading shopping mall-based specialty retailer -- unveiled
its new 'Blackheart' store concept, offering intimate apparel for
women between the ages of 18 to 30. These stores are positioned
in North America over competitor Limited Brands' La Senza stores,
which operate only in Canada and has international sites.
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 return of the retail market. Consumers are slowly
regaining confidence and cautiously increasing their spending.
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
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.
Though this is a positive sign, there has been a considerable
rise in prices of commodities, which is making it difficult for
consumers to make ends meet. On the other hand, retailers are
struggling as they are unable to pass these increased costs to
consumers and their employees, given already-shrinking income
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
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
Higher Fuel Prices:
As a new trend noticed of late, shoppers are making fewer
shopping trips. This has emerged from the rise in gas prices as
well as the hectic lives of consumers, while incomes are
restricted. Looking ahead, we expect this trend to continue for
the next few years.
Apart from cutting down on the number of trips, shoppers chalk
out their shopping agenda before stepping out. Today, consumers
look for multichannel retail outlets, which offer a variety of
goods, rather than making separate visits for paper goods, health
and beauty items, groceries, etc. Retailers now need to
understand consumers' shopping patterns and get the most out of
their visits by broadening their assortments with the appropriate
depth, breadth and freshness to appeal to shoppers' tastes.
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. One example of this is
). 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.
Use of Internet and Mobiles in Shopping:
With shoppers becoming more and more tech-savvy these days, a new
era of shopping via Internet, smartphones and tablets has taken
over. Today, consumers are increasingly using the tech-media to
make purchases, find coupons and search for the best deals. This
has affected the business of the traditional brick-and-mortar
stores, inducing retailers to shutter underperforming stores and
directing resources to build the e-Commerce platform.
The rate of electronic retail shopping is expected to increase
significantly over the next 4 to 5 years. To take advantage of
this growing trend, retailers need to identify the best possible
means of benefiting from the use of technology in shopping while
implementing relevant strategies. By integrating the digital mode
into the shopping experience, retailers can earn rewards in the
form of increased shopper demand and greater shopper loyalty.
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 the enterprise.
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 (consumer spending accounts for approximately 2/3rd
of the economy). Thus, identifying future winners from this
sector would be a good investment decision.
We recommend few stocks in the sector at this point, as these
companies are showing significant growth despite the secular
headwinds. Adaptability to the buying habits of the consumers and
strengthening the loyalty base helped these retailers post strong
results. The stocks in our coverage with a Zacks Rank #1 (Strong
Sears Holdings Corp.
Big 5 Sporting Goods Corp.
Rite Aid Corp.
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
Hot Topic Inc.
Bed Bath & Beyond Inc.
Avon Products Inc.
Ralph Lauren Corporation
On the other hand, retailers to avoid with a Zacks Rank #5
(Strong Sell) include
). Retailers on our Zacks Rank #4 (Sell) list include
American Eagle Outfitters Inc.
Pacific Sunwear of California Inc.