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. Retail
sales represent approximately 30% of consumer spending.
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 going forward. One could contest this economic
outlook, but the stock market's strong recent gains show clearly
which way investors think the economy is headed. After strong gains
this year, the S&P 500 and the Dow Jones Industrial Average are
in record territory already and on the cusp of reaching milestone
The stock market continues to soar given the Federal Reserve's
stimulus program, wherein the central bank buys $85 million in
bonds each month. Though the Fed Officials hinted to gradually roll
back the program, however, the timing of the probable tapering of
the program is still not certain.
Overall, most market participants expect the Fed to hold off on
making any changes to its policy stance at least through April
An improved housing backdrop and gains on the labor market front
have raised hopes of better times to come on consumer spending
front. The recent rise in mortgage rates as a result of Fed taper
fears has had some dampening effect on the housing sector, but
overall activity level in the sector remains favorable. The last
jobs report also indicated positive momentum in the labor market,
though the data may not have been entirely reliable given effects
from government shutdown.
However, consumer confidence appears to have taken a hit as a
result of the fiscal discord in Washington DC.
The Conference Board's Consumer Confidence Index fell drastically
to 71.2 in Oct 2013 following a small dip to 80.2 in September. The
University of Michigan Consumer Sentiment survey shows similar
The key data in retail industry analysis is comparable-store sales
(comps), as it excludes sales at newly opened and closed stores. An
improving job market, lower gas prices and favorable weather
boosted sales data.
Apart from this, the reopening of government offices boosted
customer traffic to stores for buy-now and wear-now apparel. These
positives aided retailers to generate healthy sales for the month
of October with consumer spending gaining some pace. As a result,
the key metric data for most retailers reflected growth for the
month of October.
Among the retailers, clothing chain
L Brands Inc.
), a specialty retailer of women's intimate and other apparel,
beauty and personal care
products, led the pack with an 8% rise comparable-store sales and
an 11.4% increase in net sales. This was followed by drugstore
(WAG), which posted a 5.8% rise in comps and a 6.1% increase in
Off-price retailer of apparels, footwear and accessories
Stein Mart Inc.
) was also on the list of best performers. The company registered a
5.4% rise in October comps, while total sales increased 6.9%.
The Gap Inc.
) posted a 4% rise in comps and a 5.7% increase in net sales to
$1.29 billion for the month of October.
Apparel and accessories retailer,
) reported a 3% rise in comps with a 4% improvement in net sales.
Costco Wholesale Corporation
), the warehouse retailer, also delivered comps growth of 3%.
Meanwhile, net sales for October rose 6% to $8.15 billion from
$7.66 billion in the year-ago period.
The Buckle Inc.
), a retailer of casual apparels, footwear and accessories for men
and women, witnessed a 2.6% rise in comps when compared with Oct
2012 results. Net sales increased 2.8% to $86.6 million from $84.2
million in the prior-year period.
Drugstore chain retailer
Rite Aid Corp.
) reported a 2.1% growth in comparable-store sales for Oct 2013,
primarily driven by improved comps results at its pharmacy stores.
Total drugstore sales climbed 2.2% to $1.961 billion for the month.
However, some retailers showcased soft performance.
Washington-based retailer of sports-related teen apparel
) reported a 1.2% increase in comps, while net sales notched 10%
higher to $46.3 million. Discount store operator
) witnessed marginal growth with only a 0.8% rise in comps, up from
a 0.8% decrease witnessed in Oct 2012. Net sales for October
increased 2% to $143.4 million.
However, the U.S. retail and food services sales data for Sep 2013
were disappointing. According to the U.S. Census Bureau, the retail
and food services sales fell 1% sequentially but improved 3.2%
year-over-year to $425.9 billion.
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 continued weak 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 come up with 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. In doing so, most retailers today are adopting an
"omnichannel" approach, utilizing all possible mediums to engage
consumers, including brick and mortar stores, online, and mobile.
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
Other notable retailers who are dancing to the tune of the
omnichannel strategy include
Chico's FAS Inc.
Trends to Rule Going Forward
Some of the trends that are expected to rule the retail sector
going forward 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 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, the store-within-a-store concept has been making
headlines, though it's 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.
), 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
Taking the initiatives further, Best Buy recently unveiled its
) to roll out the "Windows Store" across its 500 outlets in the
U.S. with an additional 100 in Canada. The electronics retailer
come out with better-than-expected results for the October quarter,
but warned about trends in its margins for the all-important
holiday season quarter.
Further, retailers across the industry are identifying the need to
know their customers better, to drive growth. In today's retail
world, where consumer is the king, companies are focusing on
effectively using data and analytics to better understand
consumers, as well as for branding, product management, and making
better pricing decisions. Focused on leveraging large amounts of
consumer-related data and providing personalized solutions to
customers, retailers are adopting the technologies like Cloud
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 14 industries at
the expanded level -- Building Products-Retail/Wholesale, Internet
Commerce, Retail/Wholesale Auto/Truck, Retail-Apparel/Shoe,
Retail-Consumer Electronic, Retail-Discount, Retail-Drug Store,
Retail-Restaurants, Retail-RGN Department, Retail-Supermarket,
Retail/Wholesale-Auto Parts and Retail/Wholesale CMP.
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 more visit:
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-Drug Store #9, Internet Commerce
#22, Retail/Wholesale-Auto Parts #31, Retail/Wholesale CMP #46,
Retail-Consumer Electronic #72, Retail-Miscellaneous/Diversified
#91, Retail-RGN Department #109, Retail-Discount #109,
Retail-Supermarket #165, Building Products-Retail/Wholesale #175,
Retail/Wholesale Auto/Truck #175, Retail-Restaurants #179,
Retail-Apparel/Shoe #222 and Retail-Jewelry #233.
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 Neutral.
The broader Retail/Wholesale sector portrays an impressive earnings
trend. The third 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 52%, while the revenue "beat ratio"
was 28%. Total earnings for this sector increased 6.2% year over
year, reflecting an improvement over 7.3% growth registered in the
second quarter of 2013. Total revenue grew 3.7% in the quarter
versus 4.2% jump in the previous quarter.
Looking at the consensus earnings expectations for the rest of the
year, the picture looks blurred with earnings expected to grow only
1.4% in the fourth quarter of 2013, registering full-year 2013
growth of 7.2%. Going into the next year, however, earnings
expectations look slightly encouraging, with projected earnings
growth of 10.8% in the first quarter and 13.5% in the second
quarter of 2014. Additionally, full-year 2014 earnings are expected
to grow 17.0%.
For more details about earnings for 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
Buy) include, Best Buy Companies Inc., Rite Aid Corp.,
Constellation Brands Inc.
Builders FirstSource Inc.
TravelCenters of America LLC
Nu Skin Enterprises Inc.
Mohawk Industries Inc.
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
Ulta Salon, Cosmetics & Fragrance Inc.
Tractor Supply Company
Five Below Inc.
Gildan Activewear Inc.
Big Lots Inc.
The TJX Companies Inc.
Marks & Spencers Group Plc
Finish Line Inc.
Haverty Furniture Companies Inc.
Fortune Brands Home & Security Inc.
The Kroger Company
Michael Kors Holdings Ltd
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
Barnes & Noble Inc.
Hibbett Sports Inc.
), Staples Inc.,
), Fred's Inc.,
Family Dollar Stores Inc.
Wholesale Foods Market Inc.
Leggett & Platt Inc.
Lowe's Companies Inc.
Abercrombie & Fitch Co.
BJ's Restaurants Inc.
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