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. (LTD) 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. (EBAY) 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. (JWN),
Macy's Inc. (M),
J.C. Penney Company
Inc. (JCP),
Kohl's Corp. (KSS),
Target Corp. (TGT) 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. (M) 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
(JWN) and
Saks (SKS).
Limited Brands Inc. (LTD), 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. (HOTT), 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. (DDS), 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. (TIF) with 20% of its FY10
revenue coming from Japan operations;
Gap Inc.
(GPS) with an operational network of 131 namesake stores and 29
Banana Republic stores in Japan;
American Apparel
Inc. (APP) with 6 of its stores in Japan, and finally
Wal-Mart Stores Inc. (WMT) which operates as many
as 414 retail stores in Japan, including namesake hypermarkets and
Seiyu supermarkets.
AMER APPAREL (APP): Free Stock Analysis Report
DILLARDS INC-A (DDS): Free Stock Analysis Report
EBAY INC (EBAY): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
HOT TOPIC INC (HOTT): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
KOHLS CORP (KSS): Free Stock Analysis Report
LIMITED INC (LTD): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
SAKS INC (SKS): Free Stock Analysis Report
TARGET CORP (TGT): Free Stock Analysis Report
TIFFANY & CO (TIF): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
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