Correlation with the Economy
Key Metrics
The Buckle Inc.
Retailing - New Game, New Rules
Trends to Rule Going Forward
Taking the initiatives further, Best Buy recently unveiled its partnership with Microsoft Corporation (MSFT) to roll out the “Windows Store” across its 500 outlets in the U.S. with an additional 100 in Canada. The electronics retailer come out with better-than-expected results for the October quarter, but warned about trends in its margins for the all-important holiday season quarter.
Further, retailers across the industry are identifying the need to know their customers better, to drive growth. In today's retail world, where consumer is the king, companies are focusing on effectively using data and analytics to better understand consumers, as well as for branding, product management, and making better pricing decisions. Focused on leveraging large amounts of consumer-related data and providing personalized solutions to customers, retailers are adopting the technologies like Cloud Computing.
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 14 industries at the expanded level -- Building Products-Retail/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 250 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-Drug Store #9, Internet Commerce #22, Retail/Wholesale-Auto Parts #31, Retail/Wholesale CMP #46, Retail-Consumer Electronic #72, Retail-Miscellaneous/Diversified #91, Retail-RGN Department #109, Retail-Discount #109, Retail-Supermarket #165, Building Products-Retail/Wholesale #175, Retail/Wholesale Auto/Truck #175, Retail-Restaurants #179, Retail-Apparel/Shoe #222 and Retail-Jewelry #233.
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 Neutral.
Earnings Trends
The broader Retail/Wholesale sector portrays an impressive earnings trend. The third quarter 2013 results for the sector were disappointing in terms of both beat ratios (percentage of companies coming out with positive surprises) and growth.
The earnings "beat ratio" was 52%, while the revenue "beat ratio" was 28%. Total earnings for this sector increased 6.2% year over year, reflecting an improvement over 7.3% growth registered in the second quarter of 2013. Total revenue grew 3.7% in the quarter versus 4.2% jump in the previous quarter.
Looking at the consensus earnings expectations for the rest of the year, the picture looks blurred with earnings expected to grow only 1.4% in the fourth quarter of 2013, registering full-year 2013 growth of 7.2%. Going into the next year, however, earnings expectations look slightly encouraging, with projected earnings growth of 10.8% in the first quarter and 13.5% in the second quarter of 2014. Additionally, full-year 2014 earnings are expected to grow 17.0%.
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, Best Buy Companies Inc., Rite Aid Corp., Constellation Brands Inc. (STZ), Hanesbrands Inc. (HBI), Quicksilver Inc. (ZQK), Builders FirstSource Inc. (BLDR), TravelCenters of America LLC (TA), Netflix Inc. (NFLX), Nu Skin Enterprises Inc. (NUS) and Mohawk Industries Inc. (MHK).
Additionally, we prefer stocks with a Zacks Rank #2 (Buy), namely Ulta Salon, Cosmetics & Fragrance Inc. (ULTA), Marinemax Inc. (HZO), Tractor Supply Company (TSCO), Five Below Inc. (FIVE), Gildan Activewear Inc. (GIL), Big Lots Inc. (BIG), PriceSmart Inc. (PSMT), The TJX Companies Inc. (TJX), Marks & Spencers Group Plc (MAKSY), Conns Inc. (CONN), GameStop Corp. (GME), DSW Inc. (DSW), Finish Line Inc. (FINL), Haverty Furniture Companies Inc. (HVT), Fortune Brands Home & Security Inc. (FBHS), The Kroger Company (KR) and Michael Kors Holdings Ltd (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 Barnes & Noble Inc. (BKS), Hibbett Sports Inc. (HIBB), Staples Inc., Costa Inc. (ATX), PVH Corp. (PVH), Coach Inc. (COH), Fred's Inc., Family Dollar Stores Inc. (FDO), Crocs Inc. (CROX), Wholesale Foods Market Inc. (WFM), Aarons Inc. (AAN), RadioShack Corp. (RSH), Aeropostale Inc. (ARO), Zale Corp. (ZLC), Leggett & Platt Inc. (LEG), Lowe's Companies Inc. (LOW), Abercrombie & Fitch Co. (ANF), Fastenal Company (FAST) and BJ's Restaurants Inc. (BJRI).
AARONS INC (AAN): Free Stock Analysis Report
APPLE INC (AAPL): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis Report
ABERCROMBIE (ANF): Free Stock Analysis Report
AEROPOSTALE INC (ARO): Free Stock Analysis Report
COSTA INC (ATX): Free Stock Analysis Report
BEST BUY (BBY): Free Stock Analysis Report
BIG LOTS INC (BIG): Free Stock Analysis Report
BJ'S RESTAURANT (BJRI): Free Stock Analysis Report
BUCKLE INC (BKE): Free Stock Analysis Report
BARNES & NOBLE (BKS): Free Stock Analysis Report
BUILDERS FIRSTS (BLDR): Free Stock Analysis Report
CHICOS FAS INC (CHS): Free Stock Analysis Report
COACH INC (COH): Free Stock Analysis Report
CONNS INC (CONN): Free Stock Analysis Report
COSTCO WHOLE CP (COST): Free Stock Analysis Report
CROCS INC (CROX): Free Stock Analysis Report
DSW INC CL-A (DSW): Free Stock Analysis Report
FASTENAL (FAST): Free Stock Analysis Report
FORTUNE BRD H&S (FBHS): Free Stock Analysis Report
FAMILY DOLLAR (FDO): Free Stock Analysis Report
FINISH LINE-CLA (FINL): Free Stock Analysis Report
FIVE BELOW INC (FIVE): Free Stock Analysis Report
FREDS INC (FRED): Free Stock Analysis Report
GILDAN ACTVWEAR (GIL): Free Stock Analysis Report
GAMESTOP CORP (GME): Free Stock Analysis Report
GAP INC (GPS): Free Stock Analysis Report
HANESBRANDS INC (HBI): Free Stock Analysis Report
HIBBET SPORTS (HIBB): Free Stock Analysis Report
HAVERTY FURNIT (HVT): Free Stock Analysis Report
MARINEMAX INC (HZO): Free Stock Analysis Report
PENNEY (JC) INC (JCP): Free Stock Analysis Report
NORDSTROM INC (JWN): Free Stock Analysis Report
MICHAEL KORS (KORS): Free Stock Analysis Report
KROGER CO (KR): Free Stock Analysis Report
LEGGETT & PLATT (LEG): Free Stock Analysis Report
LOWES COS (LOW): Free Stock Analysis Report
L BRANDS INC (LTD): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
MARKS&SPENCER (MAKSY): Get Free Report
MOHAWK INDS INC (MHK): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
NETFLIX INC (NFLX): Free Stock Analysis Report
NU SKIN ENTERP (NUS): Free Stock Analysis Report
PRICESMART INC (PSMT): Free Stock Analysis Report
PVH CORP (PVH): Free Stock Analysis Report
RITE AID CORP (RAD): Free Stock Analysis Report
RADIOSHACK CORP (RSH): Free Stock Analysis Report
STAPLES INC (SPLS): Free Stock Analysis Report
CONSTELLATN BRD (STZ): Free Stock Analysis Report
TRAVELCENTERS (TA): Free Stock Analysis Report
TJX COS INC NEW (TJX): Free Stock Analysis Report
TRACTOR SUPPLY (TSCO): Free Stock Analysis Report
ULTA SALON COSM (ULTA): Free Stock Analysis Report
WALGREEN CO (WAG): Free Stock Analysis Report
WHOLE FOODS MKT (WFM): Free Stock Analysis Report
WAL-MART STORES (WMT): Free Stock Analysis Report
ZALE CORP NEW (ZLC): Free Stock Analysis Report
QUIKSILVER INC (ZQK): Free Stock Analysis Report
ZUMIEZ INC (ZUMZ): Free Stock Analysis Report
To read this article on Zacks.com click here.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.