Back to top

Zacks Analyst Interviews

This page is temporarily not available.  Please check later as it should be available shortly. If you have any questions, please email customer support at support@zacks.com or call 800-767-3771 ext.  9339.

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.

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 in the second half of the year and beyond. One could contest this economic outlook, but the stock market’s strong recent gains show clearly which way investors think the economy is headed. The S&P 500 index has clocked gains of roughly 14.3%, while the Dow Jones Industrial Average has gained approximately 15.2% so far this year.

The belief in economic recovery is reflected in measures of consumer confidence hitting new multi-year high. The recent Conference Board’s Consumer Confidence Index improved to 81.4 in Jun 2013 from a revised 74.3 in May 2013. The index notched its highest level since Jan 2008, when it had touched 87.3. This prompts a sense of optimism about steady increase in consumer spending going forward.

The recovery in the housing market, stock prices gaining momentum and improving labor market conditions played vital roles to help the consumer confidence move north.

According to the Census Bureau and Department of Housing and Urban Development, sales of new houses jumped 2.1% sequentially in May 2013 and surged 29% from May 2012. Additionally, unemployment rate is currently hovering around 7.6%, reflecting an improvement from 7.9% in the beginning of the year.

Meanwhile, Fed Officials hinted that it might gradually roll back the $85 billion monthly stimulus program in the later part of the year and said that they might discontinue the program by the middle of next year if economy improves further.

Fed Officials look quite optimistic about the unemployment rate going down to a range of 7.2% to 7.3% in 2013 with expected economic growth of 2.3% to 2.6%. Moreover, they see the unemployment rate between 6.5% and 6.8% next year, driven by economic growth in the 3% to 3.5% range.

We will have to wait and see how the economic picture unfolds, but Ben Bernanke in his Congressional testimony this week indicated that the Fed will maintain accommodative monetary policy for a very long time even if they make changes to the QE program.

Key Metric for June

The key data in retail industry analysis is comparable-store sales (comps), as it excludes sales at newly opened and closed stores. Improving job market, lower gas prices, warmer weather and clearance discounts boosted consumer sentiment. These positives aided retailers to generate healthy sales for the month of June with consumer spending gaining some pace.

Among the retailers, clothing chain The Gap Inc. (GPS) led the pack with a 7% rise in comps and an 8% increase in net sales to $1.53 billion for the month of June. Off-price retailer of apparels, footwear and accessories Stein Mart Inc. was also on the list of best performers. The company registered a 6.5% rise in June comps, while total sales increased 2.6% to $109 million.  

Furthermore, discount store operator Fred's, Inc. (FRED) witnessed a significant improvement with a 4.5% rise in comps, substantially up from the 4% decrease witnessed in Jun 2012. Net sales for June increased 3% to $187.7 million. Costco Wholesale Corporation (COST), the warehouse retailer, delivered comparable-store sales growth of 6% in June, following an increase of 5% in May. Meanwhile, net sales for June rose 8% to $9.92 billion from $9.16 billion in the year-ago period.

The Buckle, Inc. (BKE), a retailer of casual apparels, footwear and accessories for men and women, witnessed a 3.4% rise in comps when compared with Jun 2012 results. Net sales increased 3.9% to $82.5 million from $79.4 million in the prior-year period.

However, some retailers showcased soft performance. Apparel and accessories retailer, Cato Corporation (CATO) reported a 1% rise in comps. L Brands, Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products posted flat comparable-store sales. Washington-based retailer of sports-related teen apparel Zumiez Inc. (ZUMZ - Analyst Report) reported a 1.0% increase in comps.

Drugstore chain retailer Rite Aid Corp. (RAD - Analyst Report) reported marginal growth in comparable-store sales for Jun 2013, thereby breaking the declining trend of comps for the past four months. The company’s comps for the 4-week period ended Jun 29, 2013 inched up 0.7%, primarily driven by improved comps results at its pharmacy and front-end stores.

However, the U.S. retail and food services sales data for Jun 2013 were somewhat disappointing. According to the U.S. Census Bureau, the retail and food services sales grew 0.4% sequentially and 5.7% year-over-year to $422.8 billion. The rate of increase decelerated from 0.5% gain in May 2013 and fell short of analysts’ expectation of 0.7% to 0.9% increase. Retail sales represent approximately 30% of consumer spending.

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 recessionary fears 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 ideate 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.

Banking on this new mantra, Staples Inc. (SPLS - Analyst Report), 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 operator Macy's, Inc. (M) 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 experience.

Trends to Rule 2013

Some of the trends that are expected to rule the retail sector this year 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, store-within-a store has been making headlines, though the concept is nothing new to retailers. J. C. Penney Company Inc. (JCP) 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. (BBY), which has been facing stiff competition from industry bellwethers such as Wal-Mart Stores Inc. (WMT - Analyst Report) and Amazon.com Inc. (AMZN) 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 Apple Inc.’s (AAPL) products. Taking the initiatives further, Best Buy recently unveiled its partnership with Microsoft Corporation (MSFT) to roll out “Windows Store” across its 500 outlets in the U.S. with an additional 100 in Canada.

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 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.

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 traffic.

Staging Stores: 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 15 industries at the expanded level – Building Products-Retail/Wholesale, Food Items-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 rank all the 260 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-RGN Department #8, Retail/Wholesale CMP #9, Retail-Restaurants #40, Retail-Jewelry #44, Building Products-Retail/Wholesale #61, Retail/Wholesale Auto/Truck #67, Retail-Drug Store #71, Retail-Consumer Electronic #76, Retail-Miscellaneous/Diversified #97, Internet Commerce #104, Food Items-Wholesale #111, Retail-Apparel/Shoe #156, Retail-Supermarket #159, Retail/Wholesale-Auto Parts #184 and Retail-Discount #204.

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 positive.

Earnings Trends

The broader Retail/Wholesale sector portrays an impressive earnings trend. The first quarter 2013 results for the sector were impressive in terms of both beat ratios (percentage of companies coming out with positive surprises) and growth.

The earnings "beat ratio" was 75%, while the revenue "beat ratio" was 50%. Total earnings for this sector increased 7.9%, reflecting an improvement over 6.6% growth registered in the fourth quarter of 2012. Total revenue grew 1.7% in the quarter versus 5.3% jump in the previous quarter.

Looking at the consensus earnings expectations for the rest of the year, we remain encouraged since earnings are expected to grow 5.9% in the second quarter of 2013 and 17.6% in the third quarter, but are expected to decline by 9.1% in the fourth quarter, thereby registering full-year 2013 growth of 10.0%.

For more details about earnings for 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, Bon-Ton Stores Inc. (BONT), Big 5 Sporting Goods Corp. (BGFV), PVH Corp. (PVH), The Children's Place (PLCE), Macy’s Inc. (M), Mohawk Industries Inc. (MHK), Haverty Furniture Companies Inc. (HVT), Conns Inc. (CONN) and Restoration Hardware Holdings, Inc. (RH - Snapshot Report).

Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely Tiffany & Co. (TIF - Analyst Report), Kohl's Corp. (KSS), SUPERVALU Inc. (SVU - Analyst Report), The Kroger Company (KR), Build-A-Bear Workshop Inc. (BBW), Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA - Snapshot Report), G-III Apparel Group, Ltd. (GIII) and Michael Kors Holdings Limited (KORS).

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 Ralph Lauren Corporation (RL - Analyst Report), Target Corp. (TGT - Analyst Report), Ascena Retail Group Inc. (ASNA), Companhia Brasileira de Distribuicao (CBD), Furniture Brands International Inc. (FBN), Gordmans Stores, Inc. (GMAN), Jos. A Bank Clothiers Inc. (JOSB), Marinemax Inc. (HZO) and Safeway Inc. (SWY - Analyst Report).

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

Learn more

Start for as little as $4.50 per trade.

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
DIXIE GRP IN DXYN 15.84 +7.90%
BOFI HLDG IN BOFI 85.30 +4.97%
RAMBUS INC RMBS 12.31 +4.41%
VIPSHOP HOLD VIPS 148.73 +4.35%
NETFLIX INC NFLX 345.74 +4.32%