The economic recovery post-downturn still remains fragile and requires a boost from a sustained and significant improvement in jobs creation and income growth. A turnaround in the jobs and income scenario will finally outweigh other drags such as tighter credit.
On September 15, 2009, the Federal Reserve Chairman issued a statement that the recession was over for the U.S. However, trends indicate that the consequences of recession will go beyond the technical indicators. The number of retail store closures in 2010 so far appears to be lower compared to fiscal 2009. However, it is still not insignificant. A revival in consumer spending in the new decade is expected to be somewhat sluggish because of more jobless claims, and many mutli-store chains continue to respond to recessed retail consumption with store closings.
Discounted Shopping
As a result of tapering of consumer credit and a fall in wages and personal wealth, U.S. consumers became tepid about discretionary spending and looked for more discount shopping opportunities. Same-store sales trends in 2010 revealed that retailers that offer value for money and low prices are performing better in this lukewarm environment. High unemployment rates, a falling housing market index and lower consumer spending pattern compelled many retailers to become more promotional, and offer heavy discounts and attractive merchandise at the same time to lure shoppers to the malls.
Inventory Pile-Up
Mounting inventories are a menacing indication for retailers. Retailers that experienced productive sales in the first quarter of fiscal 2010 increased their inventory in expectation of a sustained rise in demand. However, the situation somewhat took a turn for the worse in April and May leading to the pile-up of inventories. In these circumstances, retailers felt the need to manage inventory a bit more firmly and realign it with consumers' current spending habits.
Online Sales & Value-Focused Retailers Win the Day
Given this scenario, non-store and online sales will remain strong as shoppers continue to shift demand for consumer electronics and other categories online. Also, apparel stores, particularly off-mall value specialty stores, and small-ticket discretionary categories will see a return to profitability and growth. Value-focused mass retailers will also hold up well, including supercenters and warehouse clubs.
Costco Wholesale Corporation (COST) reported a 7.0% rise in comparable-store sales for August, after a 6% increase in July 2010, Costco's 7.0% increase in comparable-store sales reflect comparable sales growth of 6% at its U.S. locations and 11% at its international divisions.
Retailers Adapt to Consumer Preferences
Given the macro conditions, consumers now prefer price over fit and merchandise quality as major determinants for their shopping choices. Across all income levels, all respondents ranked price as the most important reason for store choices by a significant magnitude ahead of other criteria. Therefore, this reiterates the importance for retailers to offer trend-right and well-designed assortments without compromising quality in order to improve merchandise margins, in addition to compelling price points.
Some retail chains like Aeropostale Inc. (ARO), Best Buy Co. Inc. (BBY), Bed Bath & Beyond Inc. (BBBY), Dick's Sporting Goods Inc. (DKS), Hot Topic Inc. (HOTT), J.C. Penney Company Inc. (JCP), Kohl's Corp. (KSS), Target Corp. (TGT), Urban Outfitters Inc. (URBN) and many others have managed to survive in this difficult macro economic condition helped by their solid cash position, credit availability and good expense management. The key reasons for their survival have been their continuous effort to offer innovative products and value pricing, rapidly respond to the buying habits of the consumers, and strengthen loyalties despite price-motivated fickleness. Some of these retail chains may emerge as a much stronger company post-recession.
National Retail Federation Survey
The National Retail Federation (NRF) expects that while the retail environment will remain difficult, the improving economy will bring in some relief in terms of positive sales gains. Retail store chains have been able to post improving sales trends by cutting down inventories and offering attractive discounts to customers. As per the National Federation Outlook, total sales for the retail industry will increase by 2.5% in fiscal 2010 when compared with a fall of 2.5% last year.
Cost of Living Index
According to a recent survey, the cost of living in the U.S. climbed in July 2010 for the first time in four months, pointing to a stabilization that may ease concern. The consumer-price index increased 0.3%, the most in the year. However, the unemployment rate remained unchanged at about 9.6%.
In addition to the improving macro backdrop, the easy comparisons from the prior year should also put this year's performance in a better light. The sustainability of the momentum, however, will rest squarely on the continued economic recovery and improvement in the job market. This will ultimately boost consumer confidence and disarm prudent discretionary spending.
Retail is basically a volume game. Going forward, with the competition intensifying and the costs scaling up, the players who are able to cater to the needs of consumers, grow volumes by ensuring footfalls, cut costs and weather competition will have the final advantage.
OPPORTUNITIES
Many retail chains have benefited in spite of this tough macro economic environment. In this group, we prefer the following companies:
Gap Inc. (GPS), the largest U.S. clothing chain, delivered solid top-line and earnings results for second-quarter 2010. The company is expected to continue to deliver strong sales as comps comparisons remain easy throughout the year. Gap's size and buying power as compared with other retailers help it to withstand higher costs. Also, the turnaround story in the U.S. has helped the company to build a strong position in order to expand overseas and improve its online reach.
Limited Brands Inc. (LTD), a specialty retailer of women's intimate and other apparel, beauty and personal care products, represents a story with positive same-store sales, margin recovery and strong international growth opportunities. The company has been able to showcase the potential of its brand internationally through various initiatives.
WEAKNESSES
Some of the companies, however, have been more than hit by the lackluster macro-environment. In this group, we discuss American Eagle Outfitters and Home Depot.
American Eagle Outfitters Inc. (AEO) reported an earnings drop of 64.2% in the second quarter of fiscal 2010. Inventory levels remain high and the pricing environment is competitive. High inventory levels as compared with peers are an obstacle to out-performance. However, the company's plan to further expand internationally will help to bolster its growth.
The Home Depot Inc. (HD), one of the world's largest home improvement retailers, reported better-than-expected first-quarter results. However, the company faces fierce competition from various global and regional competitors. Moreover, exposure to adverse foreign currency translations also puts a question mark on the future prospects of the company.
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
AEROPOSTALE INC (ARO): Free Stock Analysis Report
BED BATH&BEYOND (BBBY): Free Stock Analysis Report
BEST BUY (BBY): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
DICKS SPRTG GDS (DKS): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
HOT TOPIC INC (HOTT): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
LIMITED INC (LTD): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
URBAN OUTFITTER (URBN): Free Stock Analysis Report
Zacks Investment Research
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Discounted Shopping
As a result of tapering of consumer credit and a fall in wages and personal wealth, U.S. consumers became tepid about discretionary spending and looked for more discount shopping opportunities. Same-store sales trends in 2010 revealed that retailers that offer value for money and low prices are performing better in this lukewarm environment. High unemployment rates, a falling housing market index and lower consumer spending pattern compelled many retailers to become more promotional, and offer heavy discounts and attractive merchandise at the same time to lure shoppers to the malls.
Inventory Pile-Up
Mounting inventories are a menacing indication for retailers. Retailers that experienced productive sales in the first quarter of fiscal 2010 increased their inventory in expectation of a sustained rise in demand. However, the situation somewhat took a turn for the worse in April and May leading to the pile-up of inventories. In these circumstances, retailers felt the need to manage inventory a bit more firmly and realign it with consumers' current spending habits.
Online Sales & Value-Focused Retailers Win the Day
Given this scenario, non-store and online sales will remain strong as shoppers continue to shift demand for consumer electronics and other categories online. Also, apparel stores, particularly off-mall value specialty stores, and small-ticket discretionary categories will see a return to profitability and growth. Value-focused mass retailers will also hold up well, including supercenters and warehouse clubs.
Costco Wholesale Corporation (COST) reported a 7.0% rise in comparable-store sales for August, after a 6% increase in July 2010, Costco's 7.0% increase in comparable-store sales reflect comparable sales growth of 6% at its U.S. locations and 11% at its international divisions.
Retailers Adapt to Consumer Preferences
Given the macro conditions, consumers now prefer price over fit and merchandise quality as major determinants for their shopping choices. Across all income levels, all respondents ranked price as the most important reason for store choices by a significant magnitude ahead of other criteria. Therefore, this reiterates the importance for retailers to offer trend-right and well-designed assortments without compromising quality in order to improve merchandise margins, in addition to compelling price points.
Some retail chains like Aeropostale Inc. (ARO), Best Buy Co. Inc. (BBY), Bed Bath & Beyond Inc. (BBBY), Dick's Sporting Goods Inc. (DKS), Hot Topic Inc. (HOTT), J.C. Penney Company Inc. (JCP), Kohl's Corp. (KSS), Target Corp. (TGT), Urban Outfitters Inc. (URBN) and many others have managed to survive in this difficult macro economic condition helped by their solid cash position, credit availability and good expense management. The key reasons for their survival have been their continuous effort to offer innovative products and value pricing, rapidly respond to the buying habits of the consumers, and strengthen loyalties despite price-motivated fickleness. Some of these retail chains may emerge as a much stronger company post-recession.
National Retail Federation Survey
The National Retail Federation (NRF) expects that while the retail environment will remain difficult, the improving economy will bring in some relief in terms of positive sales gains. Retail store chains have been able to post improving sales trends by cutting down inventories and offering attractive discounts to customers. As per the National Federation Outlook, total sales for the retail industry will increase by 2.5% in fiscal 2010 when compared with a fall of 2.5% last year.
Cost of Living Index
According to a recent survey, the cost of living in the U.S. climbed in July 2010 for the first time in four months, pointing to a stabilization that may ease concern. The consumer-price index increased 0.3%, the most in the year. However, the unemployment rate remained unchanged at about 9.6%.
In addition to the improving macro backdrop, the easy comparisons from the prior year should also put this year's performance in a better light. The sustainability of the momentum, however, will rest squarely on the continued economic recovery and improvement in the job market. This will ultimately boost consumer confidence and disarm prudent discretionary spending.
Retail is basically a volume game. Going forward, with the competition intensifying and the costs scaling up, the players who are able to cater to the needs of consumers, grow volumes by ensuring footfalls, cut costs and weather competition will have the final advantage.
OPPORTUNITIES
Many retail chains have benefited in spite of this tough macro economic environment. In this group, we prefer the following companies:
Gap Inc. (GPS), the largest U.S. clothing chain, delivered solid top-line and earnings results for second-quarter 2010. The company is expected to continue to deliver strong sales as comps comparisons remain easy throughout the year. Gap's size and buying power as compared with other retailers help it to withstand higher costs. Also, the turnaround story in the U.S. has helped the company to build a strong position in order to expand overseas and improve its online reach.
Limited Brands Inc. (LTD), a specialty retailer of women's intimate and other apparel, beauty and personal care products, represents a story with positive same-store sales, margin recovery and strong international growth opportunities. The company has been able to showcase the potential of its brand internationally through various initiatives.
WEAKNESSES
Some of the companies, however, have been more than hit by the lackluster macro-environment. In this group, we discuss American Eagle Outfitters and Home Depot.
American Eagle Outfitters Inc. (AEO) reported an earnings drop of 64.2% in the second quarter of fiscal 2010. Inventory levels remain high and the pricing environment is competitive. High inventory levels as compared with peers are an obstacle to out-performance. However, the company's plan to further expand internationally will help to bolster its growth.
The Home Depot Inc. (HD), one of the world's largest home improvement retailers, reported better-than-expected first-quarter results. However, the company faces fierce competition from various global and regional competitors. Moreover, exposure to adverse foreign currency translations also puts a question mark on the future prospects of the company.
AMER EAGLE OUTF (AEO): Free Stock Analysis Report
AEROPOSTALE INC (ARO): Free Stock Analysis Report
BED BATH&BEYOND (BBBY): Free Stock Analysis Report
BEST BUY (BBY): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
DICKS SPRTG GDS (DKS): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
HOT TOPIC INC (HOTT): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
LIMITED INC (LTD): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
URBAN OUTFITTER (URBN): Free Stock Analysis Report
Zacks Investment Research
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Posted In: Apparel RetailComputer & Electronics RetailConsumer DiscretionaryConsumer StaplesDepartment StoresFinancialsGeneral Merchandise StoresHome Improvement RetailHomefurnishing RetailHypermarkets & Super CentersMortgage REIT'sSpecialty Stores
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