As consumer spending is the key to the viability of any
economy, the health of the retail industry is an important
economic indicator. According to the National Retail Federation,
retail accounts for about $2.5 trillion of annual U.S. GDP and
acts as a barometer for measuring the health of the nation's
The United States provides ample growth opportunities for all
types of retail companies. Retailers of all sizes -- individual
direct marketers or direct sellers, small- to medium-sized
franchise unit owners, and large "big-box" store operators --
compete in the U.S., fostering increased growth opportunities.
The retail industry provides enormous employment opportunities,
accounting for nearly 42 million jobs. Annual sales turnover of
the retail industry is more than 12% of total trade volume of all
the U.S.-based businesses.
Recent Industry Trends
Retailers had a robust 'back to school' and 'back to college'
season with most companies posting positive comparable store
sales (a key metric in retail industry analysis as it excludes
sales at newly opened and closed stores) in the months of July,
August and September. The back to school season had an
encouraging start as consumers began shopping early July instead
of August. Further, the spending appetite of shoppers also scaled
October comps for most retailers escalated as the U.S.
unemployment rate declined in September, while property values
improved, boosting consumer confidence and ultimately driving
consumer spending levels to grow. Additionally, cool weather,
strong store traffic and Columbus Day promotions helped sales
growth in the beginning of the month.
The Conference Board's reading of the Consumer Confidence Index
-- a barometer of U.S. consumer health -- rose to 72.2 in October
from 68.4 in September, marking the second consecutive
improvement after a long time. The unemployment rate in the
United States, reported by the US Bureau of Labor Statistics,
remained static at 7.9% in October, following a decline in
Comps results for apparel retailers like
) up 3%,
The Gap Inc.
) up 4%,
Ross Stores Inc.
) up 4% and
) up 7% remained positive. Additionally, discount store operators
Costco Wholesale Corp.
) came in strong, posting a 7% and 2.4% increase in October
On the other hand, department store chains like
Stage Stores Inc.
) continued to exhibit potential with 4.1%, 3.3%, 9.8%, and 6.5%
increase in comps, respectively. However, results at the
drugstore chains were disappointing, with
) posting a 5.9% decline in October comps, and
Rite Aid Corp.
) dipping 1.1%.
October comps for the teen apparel retailers remained mixed with
The Buckle Inc.
) posting increases of 3.8% and 0.6%, respectively; while comps
Wet Seal Inc.
) were down 7.6% and
) remained flat.
The upcoming holiday sales season is expected to be rewarding for
retailers as the consumer sentiments remain positive, improving
unemployment rates and soaring home prices. The National Retail
Federation expects holiday sales this year to rise 4.1% to $586.1
billion, above the 10-year average holiday sales increase of
3.5%, still remaining lower than the 5.6% growth recoded in the
2011 holiday season.
Optimism for the holiday season remains intact as retail
promotions are expected to hit the right chord with holiday
shoppers. Retailers have pulled up their socks to make the most
of the busiest shopping season of the year from offering
lucrative discounts to flexibility of shopping through
smartphones and tablets to free shipping and 24-hour shopping.
Certain retailers including Target Corp.,
Wal-Mart Stores Inc.
Sears Holdings Corporation
) have announced their plans to kick start the holiday season by
opening their showrooms to public earlier at night on
Thanksgiving Day, instead of the usual practice of opening at
The latest trend this holiday season is the policy of matching
prices being offered by online retail giants in order to be a
part of the competition. Discount retail chain, Target
Corporation and beleaguered consumer electronics retailer,
Best Buy Co. Inc.
), announced that they will offer their patrons the facility to
match the prices being offered by
), Wal-Mart Stores Inc.'s Walmart.com and ToysRus.com.
Further, to better serve the shoppers, the retailers are ramping
up their hiring plans. Retail giants such as Macy's, Target
Corp., Wal-Mart Stores, Kohl's Corp. and Toys "R" Us have
announced their hiring plans for the upcoming holiday season.
However, the consumer spending plans this holiday season may be
affected to some extent as macro challenges remain prevalent in
the U.S. economy and the consumers have adapted a
budget-conscious method of spending, which has become the
population's 'New Normal.'
Hurricane Sandy's Impact on Retailers
Hurricane Sandy, which hit the U.S. East Coast on October 28, led
to a two-day shut down of the U.S. stock trading, marking the
first back-to-back shutdown owing to weather related adversities
since 1888. The storm, which is estimated to have caused more
than $20 billion of economic damage, had both a positive and
negative impact on the October sales data of retailers.
In general, the October sales data of retailers remained largely
unaffected by the storm as most retailers closed books for
October sales on October 27. However, October sales for food,
beverage and personal care stores seemed to have gained a little
as consumers resorted to some stocking up of essentials before
Further, reports suggest that the overall impact of Sandy on
retailers should be minimal as most of the damage occurred on a
Monday and a Tuesday instead of the weekend, and it was well
before Black Friday and the onset of holiday shopping. However,
the real impact is expected to be reflected in the November
sales, and will depend greatly on the timing of the recovery and
opening up of the damaged stores. Delayed come back may cause
retailers to lose on the sales in the upcoming holiday shopping
season, substantially affecting their quarterly results.
As a common belief, storms are considered to be beneficial for
food merchants before the occurrence of the calamity and for home
improvement stores following the disaster, as people need to
repair their homes. On the other hand, specialty-apparel chains
and department stores get little chance to make up for their lost
sales due to the storm.
Some of the department store chains that are believed to be hit
hard by Hurricane Sandy are Macy's and
). Macy's houses about 30% of its stores in the states affected
by the storm, while Saks has about 27% of its stores there.
Further, drugstore retailers, Walgreen and Rite Aid, reported
great damages to their stores. Walgreen, which owns the Duane
Reade chain, pointed that about 750 of its 1,400 stores in the
affected region remained closed during the storm.
Rite Aid reported that about 188 of its stores were either closed
or operating without power as of October 31, down from about 790
stores that were closed during the storm. Other companies having
high percentage of stores in storm affected areas include
American Eagle Outfitters Inc.
), Limited Brands Inc. and
Urban Outfitters Inc.
Backdrop Still Weak
Uncertain and sluggish economic conditions continue to weigh upon
the retailers, indicating a grim outlook in terms of
profitability and consequent growth. However, continuous efforts
on their part to offer innovative products and value pricing have
been paying off in an economy which is still in the doldrums. It
is still a tough time for retailers, who are using all their
resources in order to combat the sluggishness.
According to the U.S. Census Bureau, the U.S. retail and food
services sales declined 0.3% from the prior month sales to $411.6
billion in October.
The "Re" is Back in Retailing
'Transformation' is the new mantra for the 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., Target Corp.,
J. C. Penney Co. Inc.
Build-A-Bear Workshop Inc.
) are focused on revisiting and re-evaluating conventionality and
traditional business traits, while also envisioning its
brick-and-mortar store merchandise offerings. Additionally, these
companies continue to actively re-engineer and re-tool various
systems and processes.
Moreover, the retail groups are coming up with strategic
initiatives to boost operating efficiencies, drive growth and
enhance shareholder's value. Most 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 accelerate long-term growth.
The above mentioned traits are evident from the efforts of J. C.
Penney, which has left no stone unturned to bring the company
back on the growth trajectory. Management has taken up everything
from implementation of new pricing strategy, fresh logo and
strategic merchandise and cost reduction initiatives, while
enhancing the shopping experience of customers.
Moreover, the leading specialty retailer of consumer electronic
products -- Best Buy intends to get rid of stores that are not
contributing to its growth, while modifying others are also on
the cards. The company plans to transform its big-box format to a
big profit center by redesigning its prototype stores to mimic
) 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 emulating the Apple format.
Target Corp. is another retail chain that has resorted to a major
redesign by developing the 'City Target' format, which aims at
tapping the urban markets, where real estate remains a
constraint. These stores are designed to fit in urban locations,
both in terms of size and store design aesthetic. The has already
company opened its first City Target stores in Chicago, Los
Angeles and Seattle with 80,000 square feet, a lustrous urban
background, no lawn and garden department and smaller back rooms.
In a similar move,
) -- one of the leading specialty retailers of hunting, fishing,
camping and related outdoor merchandise - had 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
Challenges and Some Remedial Measures
The retail industry is highly competitive and has significant
challenges. Although the U.S. economy has started witnessing a
soft recovery, we still believe that 2012 will not fully mark the
return of the retail market, and 2013 may also have a somewhat
similar story to tell, unless concrete steps are taken to bring
the economy back on the growth trajectory. 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 remain
affected by the slow economic recovery. While the unemployment
rate has decreased considerably over time, consumers are now
beginning to draw out their savings to spend, in the hope of some
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, the retailers are
struggling as they are unable to pass these increased costs to
consumers and their employees, given the 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
normal behavior of consumers as they remain budget conscious,
seeking more and more value. In the process, buyers are swiftly
switching to the less expensive brands and consolidating shopping
Retailers are offering trend-right and well-designed assortments
at compelling prices, without compromising on quality, in order
to drive traffic.
Higher Fuel Prices:
As a new trend, shoppers are making fewer shopping trips. This
has emerged from the rise in gas prices as well as the hectic
lives of consumers, while income remains constricted. Looking
ahead, we expect this trend to continue for the next few years.
Apart from cutting down on the number of trips, shoppers also
chalk out their shopping mission before stepping out. Today,
consumers look for multichannel retail outlets, which offer
variety of goods, rather than making separate visits for paper
goods, health and beauty items, grocery, etc. Thus, retailers now
need to understand the consumers' shopping missions and get the
most out of their visits by broadening their assortments with the
appropriate depth, breadth and freshness to appeal to their
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 destinations, 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.
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
emerged. Today, consumers are increasingly using the tech-media
to make purchases, find coupons and search for the best deals.
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.
The rate of electronic retail shopping is expected to increase
significantly over the next four to five 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
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
the retailers are focusing on. Moreover, cost-containment efforts
and merchandise initiatives to improve margins are top
Further, retailers are largely concentrating on buyers' needs,
which in turn, will usher in huge potential for growth and is
likely to augment sales in the long run. Additionally, exploring
all possible opportunities to create premium as well as value
products to suit the different income groups should help improve
returns. Considering the current macro-economic environment, this
strategy should be a smart move to better position companies to
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 #1 Rank (Strong
), Stage Stores,
), The Gap Inc. and
Additionally, we are also bullish on stocks with a Zacks #2 Rank
(Buy), namely American Eagle Outfitters Inc.,
), Macy's Inc.,
Home Depot Inc.
Big 5 Sporting Goods Corp.
Lululemon Athletica Inc.
Constellation Brands Inc.
Dick's Sporting Goods Inc.
On the other hand, we are bearish on retailers with a Zacks #5
Rank (Strong Sell) and Zacks #4 Rank (Sell) including J. C.
Deckers Outdoor Corp.
Spectrum Brands Holdings Inc.
Avon Products Inc.
) and Best Buy.
BEST BUY (BBY): Free Stock Analysis Report
CABELAS INC (CAB): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis
FAMILY DOLLAR (FDO): Free Stock Analysis
GAP INC (GPS): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis
NORDSTROM INC (JWN): Free Stock Analysis
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
TARGET CORP (TGT): Free Stock Analysis Report
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