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
picking up.
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.
Key Metrics
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. (GPS), 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 accessories,
Stein Mart
Inc. (SMRT), which registered a 2.1% decline in February
comps, while total sales dipped 2.5%.
The Buckle Inc. (BKE), 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
Fred's Inc. (FRED) 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
Walgreen Co. (WAG),
which posted a 4.5% rise in comps and a 5% increase in total sales.
This was followed by
L Brands Inc. (LTD),
Costco Wholesale Corp. (COST) and
Zumiez
Inc. (ZUMZ), 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
year-ago period.
Drugstore chain retailer
Rite Aid Corp. (RAD)
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
Cato Corporation
(CATO) 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 Staples Inc. (SPLS),
Macy's Inc. (M), Nordstrom Inc.
(JWN) and Chico’s FAS Inc. (CHS).
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. (CAR) 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.
(ANF), Advance Auto Parts Inc. (AAP),
Aeropostale Inc. (ARO), American Eagle
Outfitters Inc. (AEO), Barnes & Noble
Inc. (BKS), Foot Locker Inc. (FL), Guitar
Center, Jamba Inc.’s (JMBA) Jamba Juice,
J.C. Penney Company Inc. (JCP), Jos. A.
Bank Clothiers Inc. (TM), Nine West, Office Depot
Inc. (JOSB), 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
networks.
A step in this direction was demonstrated by Apple
Inc. (AAPL), 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
endless aisles.
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.
(RAD), 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 (CLX), Ralph Lauren
Corp. (RL), V.F. Corp. (VFC) and
Tiffany & Co. (TIF).
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
companies.
Macroeconomic Conditions: 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 platforms.
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
stores.
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
way.
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
Retail/Wholesale CMP.
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
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/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
Electronic #255.
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.
Earnings Trends
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 ‘Earnings Trends’ report.
Conclusion
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. 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. The stocks in our coverage with a Zacks Rank #1 (Strong
Buy) include Barnes & Noble Inc. (BKS),
Christopher & Banks Corp. (CBK), Zale
Corp. (ZLC), Zynga Inc. (ZNGA),
Iconix Brand Group Inc. (ICON), Michael
Kors Holdings Ltd. (KORS), Spartan Stores
Inc. (SPTN) and Hanesbrands Inc.
(HBI).
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely
AutoZone Inc. (AZO), Herbalife
Ltd. (HLF), Foot Locker Inc. (FL), Rite
Aid Corp., The Kroger Company (KR), G-III
Apparel Group Ltd. (GIII), Columbia Sportswear
Company (COLM), Joe's Jeans Inc. (JOEZ),
Under Armour Inc. (UA) and Burlington
Stores Inc. (BURL).
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 Aarons Inc. (AAN),
American Eagle Outfitters Inc. (AEO), Big
5 Sporting Goods Inc. (BGFV), Chico's FAS
Inc. (CHS), Office Depot, Groupon Inc.
(GRPN), Coach Inc. (COH), Brown Shoe Co.
Inc. (BWS), Best Buy Companies Inc., Dillard's
Inc. (DDS), Dollar Tree Inc. (DLTR),
Lululemon Athletica Inc. (LULU), DSW
Inc. (DSW), Aeropostale Inc. (ARO), The
Buckle Inc., Nordstrom Inc., Target Corp. (TGT),
Costco Wholesale, Ross Stores Inc. (ROST),
Family Dollar Stores Inc. (FDO), L Brands,
The Men's Wearhouse Inc. (MW), Express
Inc. (EXPR) and Cabela's
Incorporated (CAB).
AARONS INC (AAN): Free Stock Analysis Report
ADVANCE AUTO PT (AAP): Free Stock Analysis Report
APPLE INC (AAPL): Free Stock Analysis Report
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
ABERCROMBIE (ANF): Free Stock Analysis Report
AEROPOSTALE INC (ARO): Free Stock Analysis Report
AUTOZONE INC (AZO): Free Stock Analysis Report
BIG 5 SPORTING (BGFV): Free Stock Analysis Report
BUCKLE INC (BKE): Free Stock Analysis Report
BARNES & NOBLE (BKS): Free Stock Analysis Report
BURLINGTON STRS (BURL): Free Stock Analysis Report
CABELAS INC (CAB): Free Stock Analysis Report
AVIS BUDGET GRP (CAR): Free Stock Analysis Report
CHRISTOPHER&BNK (CBK): Free Stock Analysis Report
CHICOS FAS INC (CHS): Free Stock Analysis Report
CLOROX CO (CLX): Free Stock Analysis Report
COACH INC (COH): Free Stock Analysis Report
COLUMBIA SPORTS (COLM): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
DILLARDS INC-A (DDS): Free Stock Analysis Report
DOLLAR TREE INC (DLTR): Free Stock Analysis Report
DSW INC CL-A (DSW): Free Stock Analysis Report
EXPRESS INC (EXPR): Free Stock Analysis Report
FRANKLIN COVEY (FC): Free Stock Analysis Report
FAMILY DOLLAR (FDO): Free Stock Analysis Report
FOOT LOCKER INC (FL): Free Stock Analysis Report
FREDS INC (FRED): Free Stock Analysis Report
G-III APPAREL (GIII): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
GROUPON INC (GRPN): Free Stock Analysis Report
HANESBRANDS INC (HBI): Free Stock Analysis Report
HERBALIFE LTD (HLF): Free Stock Analysis Report
ICONIX BRAND GP (ICON): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
JAMBA INC (JMBA): Free Stock Analysis Report
JOES JEANS INC (JOEZ): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
MICHAEL KORS (KORS): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
LULULEMON ATHLT (LULU): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
MENS WEARHOUSE (MW): Free Stock Analysis Report
OFFICE DEPOT (ODP): Free Stock Analysis Report
RITE AID CORP (RAD): Free Stock Analysis Report
RALPH LAUREN CP (RL): Free Stock Analysis Report
ROSS STORES (ROST): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
SPARTAN STORES (SPTN): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
TIFFANY & CO (TIF): Free Stock Analysis Report
UNDER ARMOUR-A (UA): Free Stock Analysis Report
V F CORP (VFC): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
ZALE CORP NEW (ZLC): Free Stock Analysis Report
ZYNGA INC (ZNGA): Free Stock Analysis Report
ZUMIEZ INC (ZUMZ): Free Stock Analysis Report
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