Retail Industry Stock Outlook - August 2011 - Industry Outlook

A Glimpse at Fiscal 2010

Fiscal 2010 for retailers was a year of continuous process of streamlining and assimilating internal processes. With this priority in mind, retailers concentrated more on aligning inventories, improving efficiencies and spending on technology, which led them to enter fiscal 2011 with a more optimistic outlook.

The Challenges and Opportunities of 2011

The retail industry is well positioned to face another year of challenges and utilize to the fullest the opportunities made available by the economic recovery, even as the quality and pace of the recovery has left much to be desired. Despite continued problems, consumers are slowly gaining confidence in the market and increasing their spending power, which is helping retail sales show signs of recovery.

According to projections by the National Retail Federation (NRF), retail industry sales are expected to grow 4% from the 2010 levels, with strength in the holiday season and some improvement overall driving most of the gains. According to the NRF, retailers ended fiscal 2010 on a strong note due to the good holiday season that set them up for improved growth in the recovering economy. However, inflationary pressures from high commodity prices despite some recent easing and continued high unemployment remain headwinds for the economic recovery.

Having stabilized their financial positions, retailers now are well positioned to bring newer concepts to the store. We expect retailers to remain focused on having better supply chain and leaner inventory levels. Those who execute will stand out in the end.

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 foot traffic, cut costs and weather competition will have the final advantage.

Supply Chain Management Remains a Challenge

In fiscal 2010, when retailers were still struggling to shake off the effects of the worst recession in recent history, supply chain management was proving to be quite problematic. However, many retailers took advantage of the best holiday season and turned such challenges into opportunities. In fiscal 2011, capacity and pricing issues are still expected to impact retailers’ operations.

Multi-Channel Retailing – An Opportunity

Every challenge comes with an opportunity and one such opportunity is Multi-channel retailing. This refers to the retailer’s ability to sell directly to the customer through multiple distributions channels, such ‘brick & mortar’ stores, mail order catalogs and online. Multi-channel retailing can provide a platform of growth for many retailers. Retailers are adjusting their supply chain in order to meet the needs of the Multi-channel retailing.

Retailers Adapt to Consumer Preferences

Given the still uncertain macro environment, consumers now prefer price over fit and quality as the major determinant for their shopping decision. In surveys across all income levels, respondents rank 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.

July Comparables

According to the International Council of Shopping Centers (ICSC), for the month of July 2011 same-store sales increased 2.9% over last year, with growth of 3% expected for the month of August.

Some retail chains like 

Nordstrom Inc.

 (JWN), 

Macy's, Inc.

 (M), 

Ross Stores Inc.

 (ROST), 

Limited Brands Inc.

 (LTD), 

HOT Topic Inc.

 (HOTT) and many others reported robust comparables for the month of July 2011.

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 July as hot weather deep discounts lured consumers to visit shopping malls.

Macy's, Inc.

 (M), reported same-store sales growth of 5.0%. Total sales were up 5.7% to $1.6 billion. An increase in online sales added to the surge in same-store sales growth.

Nordstrom Inc.’s

 (JWN) same-store sales for July 2011 increased 6.6% compared with the same month last year. Total retail sales were $993 million, up 11.5% from $890 million in July 2011.

Limited Brands Inc.

(LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products recently posted a 6% increase in comparable-store sales for July 2011. Total sales for the period came in at $660.4 million for the period compared to $619.7 million last year.

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. These companies have still not been able to offset these difficulties and are reporting flat or declining sales trends.

Kohl's Corp.

 (KSS), value-oriented specialty department store offering moderately priced, exclusive and national brand apparel, shoes, accessories, beauty and home products in an exciting shopping environment, reported that company’s comparable-store sales for July 2011 inched down 4.6% with total sales plummeting 2.9% to $1,122.0 million.

Gap Inc.

 (GPS) a premier international specialty retailer offering a diverse range of clothing, accessories, and personal care products, reported a 5% decrease in same-store sales for the four-week period ended July 30, 2011. The company reported flat net sales growth for the period.

GAP INC (GPS): Free Stock Analysis Report

HOT TOPIC INC (HOTT): Free Stock Analysis Report

NORDSTROM INC (JWN): Free Stock Analysis Report

KOHLS CORP (KSS): Free Stock Analysis Report

LIMITED BRANDS (LTD): Free Stock Analysis Report

MACYS INC (M): Free Stock Analysis Report

ROSS STORES (ROST): Free Stock Analysis Report

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