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 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
After high political and economic drama in 2013, the year 2014
opened to a soft start given the not-so-convincing emerging
economies and a severe winter that locked consumers indoors.
However, following the weather improvement through the second half
of February the business seemed to have picked up putting the U.S.
economy on the growth path. So far this year, the S&P 500 has
gained roughly 1.9%, The Nasdaq Composite Index rose about 4.0%,
while the Dow Jones Industrial Average lost a marginal 0.5% with a
major recovery seen in February.
Despite volatility in the indices so far, the economic outlook for
2014 remains positive based on favorable economic data and an
improved consumer and business outlook. This view is further
supported by the recent Economic Report issued by the White House
Council of Economic Advisors on Mar 10, 2014, wherein President
Obama's advisers signaled that the U.S. economy is set to improve
in the next two years. One could discount the value of the White
House report on partisan grounds, the report's overall views and
conclusions are completely in-line with market consensus and even
the projections of the U.S. Federal Reserve's FOMC members.
The White House report suggests that economic strength is on the
cards for the U.S. economy as the unemployment rate have bottomed
to levels not reached in over five years, fiscal deficits have been
reduced by over 50%, the housing market has rebound, manufacturers
are adding jobs for the first time since the 1990s and exports are
Looking ahead, the report projects Real GDP to grow in the 3.2% -
3.4% range during the four years through 2017, while market
analysts' continue to suggest about 3% economic growth (GDP) in
2014. Further, the report anticipates the unemployment rate to drop
to 5.5% by the end of fourth quarter of 2017 compared to the
current unemployment rate of 6.7% (as of February-end) as reported
by the Bureau of Labor Statistics on Mar 12, 2014.
Further, the report suggests faster growth in consumer spending in
2014 compared to the 2% rate during the past three years as
households continue to substantially lower their debts, thus
improving their spending appetite.
However, the recent Conference Board's data on Consumer Confidence
Index reflected a 1.3 points fall to 78.1 in Feb 2014, following a
rise in January to 79.4. Meanwhile, the University of Michigan's
Consumer Sentiment survey showed a 0.5% sequential and 5.2%
year-over-year improvement to 81.6 in Feb 2014.
With economic activity gradually gaining traction, the Federal
Reserve has so far reduced its monthly bond purchases by $20
billion to $65 billion, in two rounds of $10 billion tapering each.
However, the timing of the next round of tapering remains
uncertain. In the last Fed meeting in January, policymakers had
voted in favor of a plan to reduce the monthly bond purchases by
$10 billion at each future meeting. The Federal Open Market
Committee did not meet in February.
Looking back, the Federal Reserve had initiated a monthly stimulus
program of $85 billion to boost economic growth and keep interest
rates low. The Fed now lowered its purchase of mortgage-backed
securities by $5 billion to $30 billion a month and its purchase of
Treasury securities by another $5 billion to $35 billion per month.
The Fed had earlier indicated that it would ease monetary stimulus
only after considering the job scenario, inflation and economic
growth. However, officials are still trying to convince investors
that despite the tapering, they would try to keep the interest
rates near zero until the unemployment rate drops below 6.5%. The
Fed aims to bring the inflation rate to 2% to stimulate economic
growth, as chances of deflation lower the incentives.
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 for most retailers have been in the doldrums
for the past three months, owing to a short and promotional holiday
season in December followed by the inclement weather due to the
polar vortex throughout January and most of February.
While the latest key metrics data released last week reflected
negative February comps for many retailers, there were others that
benefited from the improved customer traffic due to a return to
normal weather in late February. This was positively timed with the
government's tax refunds, thus boosting the purchasing power of
consumers. As a result, the key metric data for February was
a mixed bag.
The aggrieved retailers list for the month was topped by
The Gap Inc.
), which posted a 7% fall in comps and a 3.8% decline in net sales
to $929 million for February. Other major losers on the list
include the off-price retailer of apparels, footwear and
Stein Mart Inc.
), which registered a 2.1% decline in February comps, while total
sales dipped 2.5%.
The Buckle Inc.
), a retailer of casual apparels, footwear and accessories for men
and women, posted a 1.4% decline in comps when compared with Feb
2013 results. However, net sales increased by a marginal 0.2% to
$89.5 million. Discount store operator
) reported a 2.2% fall in comps on top of a 1.5% decline last year.
Net sales for Feb 2014 were down 1% to $157.5 million.
On the other hand, the list of gainers despite the alarming weather
was led by drugstore operator
), which posted a 4.5% rise in comps and a 5% increase in total
sales. This was followed by
L Brands Inc.
Costco Wholesale Corp.
), all of which posted a 2% rise in comps for February.
Sales for the clothing retail chain L Brands rose 5.2% to $750
million, while the warehouse retailer Costco Wholesale delivered
sales growth of 4% to $7.90 billion. Meanwhile, Washington-based
retailer of sports-related teen apparel Zumiez reported an 8.8%
increase in sales to $48.4 million from $44.5 million in the
Drugstore chain retailer
Rite Aid Corp.
) reported 1.5% growth in comparable-store sales for Feb 2014,
while total drugstore sales climbed 2.4% to $2.515 billion for the
month. Apparel and accessories retailer
) reported a 1% rise in comps with a 3% improvement in net sales.
However, the U.S. retail and food services sales data for Jan 2014
were disappointing. According to the U.S. Census Bureau, the retail
and food services sales fell 0.4% sequentially but improved 2.6%
year over year to $427.8 billion.
Trends to Rule 2014
The retail industry is rapidly evolving with a dramatic change in
consumer buying habits. Consumers today are knowledgeable, more
inquisitive and choosy. Satisfying customers and enriching their
buying experience require new strategies. Modern retailing,
interestingly enough, is a new game with new rules.
According to the National Retail Federation's (NRF) monthly
economic review published on Feb 6, 2014, retail industry sales
(excluding automobiles, gas stations and restaurants) is projected
to grow 4.1% for 2014, modestly higher than the preliminary 3.7%
growth registered in 2013. Further, given the recent boom in the
digital world, NRF anticipates solid growth for the online business
this year capturing growth rates in the 9% - 12% range against
10.3% growth in 2013.
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 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 through 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
may 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 the growth of the .com era and an evolved consumer, 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
omnichannel customer. The consumer today seeks a more direct
communication through an app on their smartphone or an internet
chat 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 wallets 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.
Jos. A. Bank Clothiers 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 to move away from their
old-fashioned layouts and adopt 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
A step in this direction was demonstrated by
), which equipped its associates with iPhones to enable 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
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 in stores 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
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 the 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 many others.
Impact of Social Media on Shopping Decisions:
With the growth of the social networking sites and its use 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 big data solutions that help
accumulate information regarding the behavior 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.
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, targeting to grow 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 recovery in the U.S. economy,
consumers remain exposed 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
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.
Lack of Focus on Research & Development:
Despite the focus shifting to 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
customers when it comes to adopting new technologies and
This 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 help enhance their brand proposition. Identifying the best
options and investments in that direction will help fetch results.
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 may be irked by such tracking over time. As a result,
they may register for 'Do Not Track' systems to prevent tracking.
In order to address this issue, companies should educate shoppers
on the benefits for such data analysis. Customers need to be
informed that the tracking systems installed in their 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
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 Parts is #2,
Retail/Wholesale CMP #11, Retail-Jewelry #43, Building
Products-Retail/Wholesale #50, Retail-Drug Store #67,
Retail/Wholesale Auto/Truck #75, Retail-RGN Department #190,
Retail-Restaurants #199, Retail-Supermarket #199,
Retail-Miscellaneous/Diversified #205, Retail-Apparel/Shoe #222,
Internet Commerce #223, Retail-Discount #240 and Retail-Consumer
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 broader Retail/Wholesale sector portrays a discouraging
earnings trend. The fourth-quarter 2013 results for the sector were
disappointing in terms of both beat ratios (percentage of companies
coming out with positive surprises) and growth.
The earnings "beat ratio" was 61.1%, while the revenue "beat ratio"
was 25%. Total earnings for this sector declined 1.6% year over
year, in contrast to 6.2% growth registered in the third quarter of
2013. Total revenue improved only 1.9% in the quarter versus a 3.7%
jump in the previous quarter.
Looking at the consensus earnings expectations for the quarter
ahead, the picture looks slightly bright with earnings expected to
grow 2.3% in the first quarter of 2014 and 8.7% in the second
quarter of 2014, registering full-year 2014 growth of 10.3%. Going
into the next year, earnings expectations look encouraging with
projected earnings growth of 14.4% for the full-year 2015.
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
Barnes & Noble Inc.
Christopher & Banks Corp.
Iconix Brand Group Inc.
Michael Kors Holdings Ltd.
Spartan Stores Inc.
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
Foot Locker Inc.
), Rite Aid Corp.,
The Kroger Company
G-III Apparel Group Ltd.
Columbia Sportswear Company
Joe's Jeans Inc.
Under Armour Inc.
Burlington Stores 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
American Eagle Outfitters Inc.
Big 5 Sporting Goods Inc.
Chico's FAS Inc.
), Office Depot,
Brown Shoe Co. Inc.
), Best Buy Companies Inc.,
Dollar Tree Inc.
Lululemon Athletica Inc.
), The Buckle Inc., Nordstrom Inc.,
), Costco Wholesale,
Ross Stores Inc.
Family Dollar Stores Inc.
), L Brands,
The Men's Wearhouse Inc.
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