Retail Industry Outlook - April 2011

Insight from Fiscal 2010

Fiscal 2010 was a year of hard work, involving the continuous streamlining of internal processes. To that end, retailers concentrated on aligning inventories with sales, improving operating efficiencies and spending on technology. These focused efforts helped retailers enter fiscal 2011 with a more optimistic outlook.

Foresight for Fiscal 2011

While challenges no doubt still abound, retailers appear to be in a good position to take advantage of a much improved economy. Retailers are now hoping to focus more on bringing new concepts to stores and luring customers by the age-old marketing ploy of replacing customer needs by wants. On the operational front, retailers would like to hone their supply chains and maintain lean inventory levels.

Keys to Success

The National Retail Federation (NRF) estimates that retail industry sales will grow at a 4% clip from the 2010 levels, on the back of a better-than-expected holiday season, coupled with strong sales growth.

According to NRF, retailers ended fiscal 2010 on a promising note attributable to good holiday season sales, which set the stage for potential improvements in fiscal 2011. However, inflation from rising commodity prices and a still high unemployment level could remain a matter of concern for retailers.

In this scenario, understanding current customer trends and simultaneously aligning the business model to meet customer requirements is the key to retain and attract new customers. Limited Brands Inc. ([url=http://www.zacks.com/stock/quote/ltd]LTD[/url]) is one such company that has very competently adjusted its products to the demands of the time to book maximum profits.

Another key to success in the retail arena is keeping volume growth intact. Retail is basically a volume game. Going forward, with competition intensifying and costs scaling up, the players who are able to grow volumes by ensuring footfall, cutting costs and warding off competition will have the final advantage.

Retailers Adapt to Consumer Preferences

In spite of an improved macro outlook, we believe that frugality and conscious shopping would remain the norm for US retailing this year. Hence, price would prompt shopping decisions over merchandise quality.

Across all income levels, all consumers ranked price as the most important reason for store choices by a significant magnitude ahead of other criteria. Hence, retailers will have to be very sharp about offering trend-right and well-designed assortments without compromising on quality in order to improve merchandise margins besides offering the wares at compelling price points.

Cost of Living Index

While the prices of certain essential items have been on the rise, the overall inflation picture is not threatening enough. Rising inflation can puts a brake on sales as consumers are forced to spend disposable income on more expensive food and fuel.

However, the high unemployment rate remains a matter of nagging concern for the U.S. retail community. And the unemployment rate has come down a full percentage point in the last five months, but still remains significantly high at 8.8%, as of the March payroll report.

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.

Discounted Shopping

As a result of the limited availability of consumer credit and the fall in wages and personal wealth in a still difficult labor market environment, U.S. consumers have been hesitant of discretionary spending and have been looking for more discount shopping opportunities. According to the survey by NRF, the most important factor impacting shopping in the holiday season, was price discounts (41.8% of people surveyed) or everyday low prices (12.7%).

Online Sales

eBay Inc. ([url=http://www.zacks.com/stock/quote/ebay]EBAY[/url]) posted a 5% rise in revenue in the fourth quarter of fiscal 2010 attributable to strong growth at its PayPal online payments unit.
Customers in the US have undergone a fundamental change in how they spend their money. They primarily focused on value-for-money items throughout the holiday shopping season, especially for traditional and popular gifts. As a result, traditional items such as toys, electronic goods and clothing were at the top of every holiday shopping list, and most consumers spent more on gift cards.

Smartphones

Smartphones have created a ripple in the world of shopping. Today with improving shopping applications, most of the retailers are focusing on smartphones as an effective sales channel. Consumers, too, are widely using smartphones as part of their shopping research and purchasing experience.

March Comparables

According to the Thomson Reuters survey of 25 major retailers, sales in March increased by a better than expected rate of 1.7%. The strong showing came despite the delayed Easter and the recent surge in gasoline prices, which had tempered expectations.

Some retail chains like Nordstrom Inc. ([url=http://www.zacks.com/stock/quote/jwn]JWN[/url]), Macy's Inc. ([url=http://www.zacks.com/stock/quote/m]M[/url]), J.C. Penney Company Inc. ([url=http://www.zacks.com/stock/quote/jcp]JCP[/url]), Kohl's Corp. ([url=http://www.zacks.com/stock/quote/kss]KSS[/url]), Target Corp. ([url=http://www.zacks.com/stock/quote/tgt]TGT[/url]) and many others reported strong sales numbers.

Improving labor markets, better economic conditions and the fall in payroll tax helped to mitigate the effect of high fuel and food prices. The key reasons for their strong performances appear to be their continuous efforts to offer innovative products and value pricing, rapidly respond to the buying habits of the consumers and strengthen loyalties despite price-motivated fickleness.

OPPORTUNITIES

Many retail chains posted strong same-store sales growth in the month of March as consumers were more willing to visit shopping malls. Luxury chains and department stores posted strong growth in the month.

Macy's Inc. ([url=http://www.zacks.com/stock/quote/m]M[/url]) reported same-store sales growth of 0.9% in March 2011, compared to expectations of a 2% drop. An increase in online sales added to the surge in same-store sales growth. Also reporting strength were Nordstrom ([url=http://www.zacks.com/stock/quote/jwn]JWN[/url]) and Saks ([url=http://www.zacks.com/stock/quote/sks]SKS[/url]).

Limited Brands Inc. ([url=http://www.zacks.com/stock/quote/ltd]LTD[/url]), a specialty retailer of women's intimate and other apparel, beauty and personal care products, posted a 14% increase in comparable-store sales for March 2011, handily coming ahead of expectations of a 1.5% increase.

WEAKNESSES

Generally, retail companies have been under pressure in the recent downturn due to high inventory, lack of consumer spending due to weak disposable incomes and rising commodity prices. In spite of a revival, as discussed above, there have been companies in this space who've proved to be a bit of a laggard and are reporting flat or declining sales trends.

Hot Topic Inc. ([url=http://www.zacks.com/stock/quote/hott]HOTT[/url]), a shopping mall-based teen retailer, remained in the red with same-store sales sliding 5% in March. This marked the 23rd consecutive month of declining comparables.

Dillard's Inc. ([url=http://www.zacks.com/stock/quote/dds]DDS[/url]), the leading apparel and home-furnishing retailer in the United States, reported a decline of 1% in same-store sales for the five-week period ended April 2, 2011. Sales in the home, furniture, and junior's categories were particularly soft.

How Does the Japan Disaster Affect U.S Retail?

A final word of caution stemming from the aftermath of the Japan disaster is appropriate. The companies which are expected to suffer the most from the Japan earthquake and tsunami include Tiffany & Co. ([url=http://www.zacks.com/stock/quote/tif]TIF[/url]) with 20% of its FY10 revenue coming from Japan operations; Gap Inc. ([url=http://www.zacks.com/stock/quote/gps]GPS[/url]) with an operational network of 131 namesake stores and 29 Banana Republic stores in Japan; American Apparel Inc. ([url=http://www.zacks.com/stock/quote/app]APP[/url]) with 6 of its stores in Japan, and finally Wal-Mart Stores Inc. ([url=http://www.zacks.com/stock/quote/wmt]WMT[/url]) which operates as many as 414 retail stores in Japan, including namesake hypermarkets and Seiyu supermarkets.