Archive for March, 2011

2011 Retail Analyst Predictions, Part 6: Matthew Fassler, Goldman Sachs

by Quantum Retail • March 23rd, 2011 • 1 Comment »

Matthew Fassler, Goldman Sachs analyst, discusses retail outlook in the specialty sectors.

Best Buy announces strategic growth strategy

According to a Feb. 22 Alacra Pulse article, Fassler had a neutral rating of Best Buy and trimmed his price target to $38 from $39, but said the company announced a series of changes to store opening plans, as well as other minor restructuring moves, that he believes will result in a more streamlined growth strategy and in cost saving.

Fassler also notes that warranties may be helping Best Buy’s profitability where past sales are lacking, saying that Best Buy has not disclosed how much extended warranties contribute to its profits. Consumer electronics retailing is “historically a low-margin business that is dependent on extended warranties for profitability,” he said. “Perhaps extended warranties have become even more valuable to Best Buy recently, as its content businesses — like movies and music — have shrunk.”

The company plans to open 6 to 8 large-format stores in the U.S. and a total of 18 stores in the United Kingdom, Mexico and Canada in fiscal 2012. The International market continues to bring noteworthy prospects for the company along with financial growth for the stakeholders,” said the Alacra Pulse article.

Best Buy also announced it is closing its namesake stores in China and shifting new U.S. store growth to smaller formats instead of its familiar big boxes, said the Wall Street Journal. Best Buy said it would focus on growing in China under another retail format called Five Star that has proven more successful; it disclosed plans to open 40 to 50 additional Five Star stores in 2012.

As a result of the restructuring moves, Best Buy said it would incur charges of $225 million to $245 million over its next two fiscal years, diluting earnings. But it maintained that the moves would eventually result in an annual pre-tax savings of $60 million to $70 million by 2013, according to the Journal.

In today’s cutthroat retail environment, retailers are facing tough issues, not losing sight of the domestic front while expanding globally, restructuring their initiatives to a local focus, aligning with customer needs, and more. Technology Evaluation Center’s P.J. Jakovljevic discusses what retailers can do to stay competitive with Quantum Retail’s Chief Customer Officer, Chris Allan, here »

Radio Shack to put strategic focus on mobile

On a February 22 earnings call, Julian C. Day, Chairman and CEO of Radio Shack, stated that with his plans to retire, there are also significant changes in the market that make it an appropriate time for a leadership transition.

The first area he mentions is mobility, the area of Radio Shack’s business most subject to technological and strategic change. Day stated that they have been able to expand their presence in the mobility sector, moving from two to three carriers nationally, and re-fixturing stores to allow customers to have choice and product comparison. The company’s mobile sales were up 33% in 2010 on top of 25% in 2009.

Other major developments in the mobility area, has been a partnership with Target, in which they operate the postpaid wireless business on their behalf. “We look forward to growing with Target and we believe that partnering with additional high caliber retailers to enable them to get access to the high growth mobility sector, while improving our overall channel economics, makes sound strategic sense,” said Day.

The second major change in the company’s business has been the ongoing reallocation of space in stores for mobility and some signature categories such as power. Day explains that it made sense for them to allocate resources to this category and illustrates just how important the traditional merchant art of picking the right product for the channel can be even in declining segments.

The third and last major change for Radio Shack is the financial strength of the Company. From mid-2006 through mid-2010; Radio Shack built their cash position from less than $200 million to over $900 million.

Fassler noted that it sounds like T-Mobile struggles are part of their gross margin issue, and that it will probably persist. “But putting that aside, how should we think about the gross margin trajectory here?”

“You’re absolutely right, Matt, with the T-Mobile issue, and until we work through all the details on that, it will remain a part of the issue.” Day continued. “I think, our biggest gross margin rate opportunity continues to be, as we get better at driving some of these end products in personal electronics, and in modern home. We need to do a better job on our accessories.”

For the year, Radio Shack reported that gross profit increased $48 million to $2.01 billion, a margin rate of 45%, down 90 basis points on a year-over-year basis. In the quarter, gross profit was most negatively impacted by the disappointing performance in their T-Mobile business.

Mobility is expanding immensely. Along with increasing focus on sales of mobile devices, retailers need to have a plan for mobile commerce in their own business. Check out our Guide to Creating a Plan for Mobile Commerce, E-Commerce, and Social Media »

Office Max and office supply giants could be in a permanent slump

Threats are looming over the office supply giants, leaving analysts divided over whether or not the big three chains — Staples, OfficeMax, and Office Depot, are in a short-term slump or a permanent one.
Fassler expects the stock to fall in the wake of the tough new guidance, said CNN. However, in a research note, Fassler indicates that there is some promise in OfficeMax’s forecast. “Guidance to relatively resilient profitability in the face of lower sales, despite a levered model, does still speak to the profit opportunity at [OfficeMax],” Fassler wrote. Fassler remained neutral on the stock.

In a February note titled “Signs of Paradigm Shift,” Fassler announced that he was cutting the firm’s exposure to office supply stocks due to “secular headwinds to cyclical recovery.”

One of those headwinds is the rise in retail competition — one-stop mass merchants like Wal-Mart, Costco, and Target. Amazon is also an adversary — many of the products sold in the office retailers’ brick and mortar outlets are available online, which enables customers to comparison shop.

The other secular shift isn’t competitive, but behavioral: Paper usage is in decline, said CNN. This affects the contract, or delivery side of the superstores’ business. Staples, OfficeMax, and Office Depot derive about half of their revenues from those operations, which sell in bulk to other companies.

Paper itself isn’t hugely lucrative, but it does drive sales of other products — ink, staples, printers, etc. Consequently, its shrinking usage could pose a big problem for the superstores. In a survey of office supply purchasers at large companies, Goldman Sachs found that nearly half of the respondents expected their paper consumption to drop. Reasons range from environmental concerns to double-sided printing to the advent of mobile technology.

Borders bankruptcy filing puts Barnes & Noble in a good position

As part of the Chapter 11 process, Borders  will close 30% of its 642 stores, or about 200 that it identifies as underperforming. The bookseller operated twice that many at its peak in 2003, stated Wall Street Journal’s Market Watch.

The Ann Arbor, Mich. based company listed debt of $1.29 billion and assets of $1.28 billion at the end of 2010 in its bankruptcy filing.

Borders, according to the filing, owes tens of millions of dollars to various publishers, including $41 million to Penguin Putnam, $37 million to Hachette Book Group, and $34 million to Simon & Schuster.

Market Watch noted that by the time Borders embraced e-commerce in recent years, the competition had already established a firm lead. Rival and leading bookseller Barnes & Noble Inc. stands to be a big winner in light of the filing, according to the article.

Fassler upgraded Barnes & Noble to neutral from sell ahead of the filing.

Barnes & Noble shares moved fractionally higher to finish at $18.77, but have still lost more than 11% in the past year.

Home Depot sees continued improvement as Lowe’s moves into transition state

The Home Depot Inc. and Lowe’s Companies Inc. are two similar home renovation retailers that are going in different directions, stated the National Post. While the team at Home Depot has gelled after several years of evolution and is poised for new levels of profitability, Lowe’s is undergoing a transition with many senior executives retiring in recent months.

Fassler, has upgraded Home Depot to “buy” while upping the price target to US$42 from US$37, while downgrading Lowe’s to “neutral” maintaining a US$28 price target.

For Home Depot, Fassler forecasts continued improvement in same-store sales over the next two quarters, thanks to a new focus on home repair, remodeling and maintenance categories and less emphasis on appliances, which faces tough sales comparisons over last year.

As for Lowe’s, the company’s management has undergone substantial shuffling in the past few months, stated the Post.

After Lowe’s most recent analyst meeting, Fassler noted its biggest challenge is introducing truly new and innovative ideas. “There had been too much “redundancy” in the company’s strategy over a number of years,” he said.

What are your strategic goals? Surprisingly many retailers do not have strategic goals for their products. Learn how to build yours and you will dramatically increase your profit. Check out our guide to Creating Product Strategies »

AutoZone’s customer service is their key differentiator

In a March 1 earnings call, William Rhodes, Chairman of the Board, CEO and President, stated that AutoZone is very pleased to announce another very strong quarter of performance, both financially and operationally. “Our earnings per share for the second quarter increased by 35.8%, our best performance since the fourth quarter of fiscal 2003, and our domestic same-store sales increased 7.1%,” he continued. “This marks the ninth consecutive quarter of EPS growth in excess of 20% and the 18th consecutive quarter of double-digit EPS growth.”

Regarding their second quarter results, their Total Auto Parts segment, made up of both Domestic and Mexico businesses, delivered a 10.3% sales increase. Their other businesses, including E-Commerce, were up 11.2%. “There is no question that our industry is experiencing strong growth in both Retail and Commercial sectors, and our competitors have also reported solid growth trends,” stated Rhodes. “However, based on sales data provided to us through NPD, our share of both the Retail and Commercial businesses gained share for the quarter, and according to the detail, we gained share each month of the quarter, November, December, and January.”

Servicing the customer and providing the degree of trustworthy advice continues to be a key point of differentiation in the marketplace, according to Rhodes.

In response to Fassler, William Giles, CFO, EVP of IT, Finance, and Store Development, and Treasurer, agreed that if there were a scenario where their sales growth were to be a bit slower and all the other factors went their way, the incentive comp would remain close to current levels.

How can retailers continue to service their customers better? One way is with a focus on localizing their shopping experience. Download our free guide on The Art of Localizing Inventory »

SOURCES: CNN, Wall Street Journal Market Watch, Alacra Pulse, The National Pulse, Seeking Alpha

Download a PDF of the full series HERE»

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2011 Retail Analyst Predictions, Part 5: Charles Grom, JPMorgan Chase

by Quantum Retail • March 17th, 2011 • 1 Comment »

Charles Grom, JPMorgan Chase analyst, discusses how increasing gas and commodities are affecting retail.

Increasing gas prices to cause pullback in consumer spending

Same store sales rose 4.2% in February, according to the International Council of Shopping Centers (ICSC). Consumer confidence recently hit a three-year high and the Bureau of Economic Analysis reported that spending on goods last quarter surpassed 2008 levels, stated CNN Money.

But retail analysts have begun to sound warnings about the danger that high gas prices pose for the sector. In the same report that announced the rise in February sales, the ICSC added that the rising cost of crude was “the big worry” facing consumers and the economy.

“All told, with gasoline prices expected to be up almost 6% in 2011, there is likely to be some pullback in retail sales and consumer spending as a result,” wrote J.P Morgan’s Charles Grom in a recent note.

It’s easy to see why rising gas prices have alarmed investors. When people pay more for fuel, they’re less likely to drive to stores. Once they’re there, they have less money to spend, said CNN. Every $1 increase in the price of a gallon of gas lowers consumer spending by $100 billion, stated the CNN article. If gas prices were to stay at $3.47 through the rest of 2011, resulting in a yearlong average of $3.41 — a $0.67 increase from 2010 — consumer spending would decline by $67 billion.

Meanwhile, the companies that were worst off when gas prices were high were value-oriented chains — Family Dollar, Dollar Tree, and 99 Cents Only. Because those companies’ customers tend to be less well off, they spend a larger proportion of their overall budget on gas. As a result, when gas costs go up, their purchasing power goes down.

CNN explained that however, if gas prices stay high for long enough, even if their usual customers spend less, more consumers will move to shopping at value chains for that time.

Grom thinks Wal-Mart’s U.S. same-store sales deterioration could be a lasting trend

In an interview with CNBC’s Fast Money, Grom discusses why he chose to downgrade his target on Wal-Mart from $59 to $54.

3 Reasons Wal-Mart is struggling:
1. Same store sales deterioration in the US
2. Heightened competition from the niche grocers and dollar stores
3. Lack of free cash flow due to international expansions.

How can Wal-Mart turn itself around?
If you look back over the past couple of years, Wal-Mart has gone from guardrail to guardrail trying to fix its traffic issues, stated Grom. A few years back they tried to go upscale and be like Target, last year they went aggressive on price, and over the balance of the second half of last year they tried to unwind some of those mistakes. “What we’ve been able to tell from some of the Nielsen data and store checks we’ve done is that their traffic simply remains elusive,” said Grom.

JPMorgan Chase is concerned for Wal-Mart’s U.S. performance in 2011. “We’ve become increasingly concerned that the company’s recent same-store-sales deterioration in the U.S. could be a secular problem that could last multiple years — not just a few quarters,” Grom wrote in a research note. Despite good outlook for international expansion, Wal-Mart’s U.S. base is suffering. Since nearly 80% of Wal-Mart’s business comes from the U.S., they will seriously need to focus some of their spending on traffic-driving initiatives. “We’ve been big advocates of trying to fix the mothership before trying to expand internationally,” Grom told CNBC. “They need to figure out how to compete more effectively against the dollar stores, against the niche grocers, and against some of their traditional supermarket peers like a Kroger.”

One of the ways that retailers can become more competitive is by having the right products in each location. It doesn’t make sense for you or your customers to generalize your stores. The first place to start with localizing your stores is allocation. If you always have what your customers need when they walk in the door, your customer traffic is bound to increase. Learn more by downloading our 10-Step Guide to More Profitable Allocation »

Costco Wholesale is hesitant to pass on cost increases to members

In a March 3rd earnings call with Costco, Grom noted that their fresh foods margins have been down. Richard A. Galanti, Executive Vice President and CFO, agrees with Grom’s assumption that it is because they haven’t been willing to pass on the price increases to customers. Looking ahead, if price increases continue to rise, Galanti states that they typically will wait several weeks or a few months before raising prices by $0.30 or $0.50 for example, to get back to their regular margin. “That’s not a competitive issue other than we want to protect the prices for the members who are buying these items,” stated Galanti. “We feel that overall margins have been quite good. We really don’t see any major competitive issues in our fresh foods.”

Grom also noted that Costco said gas pricing had hurt them in the second quarter. Galanti explained that gas is still a profitable business, but a very low margin business. “A business as I mentioned before requires some (stomach lining) occasionally but, nonetheless, we are getting good frequency,” stated Galanti. “But certainly when prices spike for a week or two here you see some relatively flat numbers, whether it’s plus a little bit of profit or minus a little bit of loss, it’s not a real big issue.”

For more insight on how to be innovative with your grocery business, check out our Grocery Innovation Report »

Target expects substantial growth with entrance into Canadian market

In a February 24th earnings call, Target stated that they expect to invest about $2.5 billion, plus or minus $200 million, in capital in the U.S. Retail segment in 2011, up modestly from the $2.1 billion they invested in 2010. This increase is driven in part by a larger remodel program and in part by modestly higher investment in future new stores as well. In their Credit Card segment, they expect receivables will continue to decline, although the pace of decline should begin to moderate as the year progresses.

With their movement into the Canadian market, they expect those stores to help the company exceed $100 billion in sales in the next 6 to 7 years, increasing earnings per share by 10-12% annually in the next few years, and even stronger after that.

Grom stated that in the fourth quarter, Target’s gross profit margins were down about 40 basis points, and it sounds like that’s mostly from their PFresh grocery and 5% Rewards credit card initiatives. In response to a question Grom asked about whether or not that is a good proxy for 2011 when looking at Target’s gross profit line, Douglas Scovanner, Chief Financial Officer, Chief Accounting Officer and Executive Vice President, clarified that the combination of the impact of PFresh and the 5% Rewards program adds up to more than the gross margin rate decline. So net all other factors, they are slightly positive, and therefore, as an outlook, particularly as these strategies build to more importance in 2011, the combination of the two will be larger, not smaller than 40 basis points.

When it comes to consumer outlook, Target explained that, following a pullback in the second and third quarters, consumer optimism is once again increasing and close to where it was in the first quarter of 2010. Even so, guests are telling us that they are still risk-averse. They’re concerned about losing their jobs and focused on controlling household budgets, leading to increased coupon use and a focus on promotions. For everyday purchases, guests often choose the good items rather than the better or best items within categories. In turn, they use those everyday savings as justification to occasionally splurge on the best items in categories most important to them. This has created softness on better items in some categories, making it more important than ever for us to help our guests understand features, quality, and value at every price point.

Quantum Retail’s CEO, Vicki Raport, recently spoke at the Target Analytics Forum on the future of business intelligence. Watch the video here»

Macy’s sees 2011 as another positive year

In a February 22nd earnings call, Macy’s stated that their 2010 4.6% annual comp store increase was their best performance in at least 15 years and it compared favorably to their key competitors. At this time last year, they expected comp store sales growth of 1% to 2% for 2010 and they obviously far exceeded that. “That delta is important and enabled us to produce higher-than-expected earnings and cash flow,” said Karen Hoguet, Chief Financial Officer and Executive Vice President.

Looking at 2011, Grom noted that on the gross profit margin line, it sounds like Macy’s expects their first quarter to be down. Hoguet confirmed that it could be down by more than the fourth quarter was, primarily due to non-merchandising margin issues, but she does think it will come back as they go through the year. She also expects a 3% comparable store sales increase for 2011 and does not see a huge deviation from quarter-to-quarter.

Grom stated that when they met in the past, she had spoken to year three of the My Macy’s program as an inflection year. Hoguet responded that she thinks the progress will continue. She stated that when looking at the top districts or the top regions for 2010, it’s many of the My Macy’s pilot districts and particularly the Upper Midwest, Chicago, Minneapolis and Detroit, one of their best performing regions on a comp percent versus the prior year. In fact, they had an increase over a two-year basis, which was not true for the company in total.

When it comes to commodity price increases, Hoguet said that it is a challenge Macy’s is taking very seriously. “As a better-fashion retailer, we are less reliant on opening-price-point basics and have the ability to add quality features and fashion details that command a higher price point,” she continued. “Average unit retails in these categories will increase, but into a lane in which we have successfully played prior to the recent recession.”

She asserted that a significant portion of Macy’s businesses are in categories that are not impacted by the escalation in raw material prices. Hoguet said Macy’s has established a pricing team to provide more analysis on pricing decisions. The retailer is also monitoring consumer reaction to price increases on spring merchandise. In addition, it is editing peripheral assortments to improve costs and working to maintain its value position relative to competitors when passing along price increases.

One way retailers can adapt to rising commodity costs is by editing their assortments and having the right amount of stock levels. Check out our Guide to Creating a SKU Rationalization strategy that works»

Look out for next weeks’ post with insight from Matthew Fassler, of Goldman Sachs.

Sign up to receive updates throughout this series.

SOURCES: CNN, Business Insider, CNBC, MSN, Seeking Alpha

Download a PDF of the full series HERE»

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Challenging the “Enterprise Apps Establishment” and Retailers’ Mindset – Part 2: Quantum’s Secret Sauce

by Quantum Retail • March 10th, 2011 • Write a comment »

Technology Evaluation Center’s P.J. Jakovljevic interviewed Quantum’s Chris Allan, Chief Customer Officer, for a two part blog series.

Part 1 of this blog series analyzed typical issues that retailers face in their cutthroat competitive environment and concluded that traditionally available packaged retail enterprise applications are sub-optimal, provide only stovepipe views, and demand constant manual intervention by a highly sophisticated user. This is especially true in the case of handling ever-more difficult products and assortments (e.g., big ticket slow-moving items, sized merchandise, etc.).

The article then introduced Quantum Retail Technology, an up-and-coming company with a budding install base, who has an intriguing mission and value proposition for retailers that have to deal with a slew of tricky retail items. What follows now is my discussion with Chris Allan, Quantum’s chief strategy officer.

Quantum’s Secret Sauce

PJ: What is your killer value proposition that other retail software “usual suspects” (e.g., Oracle, SAP, SAS, JDA, etc.) fail to provide? In other words, what are the pain points that only you can cure for your customers (and with what typical benefits)?

CA: The Q Platform (explained in Part 1) actually solves the problems that these other vendors mainly talk about solving–and delivers on the business case every time, with proven, measurable results. Quantum has developed the concept of managing by Merchandising Strategy–determining the role of the product within the customer offering, such as being an image item, loss leader, traffic driver, etc. (see Part 1 for more details).

Users are not asked to select from an overwhelming number of forecasting algorithms and replenishment algorithms, and to set a slew of tricky parameters up around each of those algorithms for every stock-keeping unit (SKU) in every store. Q takes the chosen Merchandising Strategy and understands the objectives of the product from both a financial and a merchandising perspective and ensures that every inventory decision that is made is aligned with achieving those objectives.

The way that customers buy product changes over time and Q adjusts automatically to react to those changes, ensuring that alignment is maintained throughout the products’ lifecycle. This is very different from having to actively maintain the ordering, allocation, and replenishment configurations for every SKU in every store and manually ensure that the system is set up correctly (which is the value prop of our aforementioned competitors)

In the process of understanding items Q considers over 30 dimensions of product behavior including average sales, maximum sales, demand, days between sales, lost sales, days between stock-outs, current inventory, last stock-out, weeks of supply, percent in stock, etc. Beyond these typical sales and inventory metrics, Q also understands the following:

  • When the issues happened, e.g. an out-of-stock on Monday has different gravity than out-of-stock on Saturday
  • Variations in contributing factors such as lead times, lifecycle, and customer service level
  • Variability and uniqueness in sales such as volatility, lumpiness, lost sales, demand vs. sales
  • Finally, and perhaps most importantly, profitability metrics such as gross margin return on inventory investment (GMROI)

These capabilities have led to retailers being able to have a high degree of automation  with Q using exception management to highlight only those areas where users should be spending time in the system. Typical results achieved and verified (by Quantum’s customers that were mentioned in Part 1) are as follows:

  • A 2.2 percent full-price sales increase (in fast fashion)
  • A 5.6 percent sales increase (in general merchandise)
  • A 4 percent increase in gross margin
  • An 11 percent inventory reduction
  • A 40 percent reduction in overstocks

Read more »

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2011 Retail Analyst Predictions, Part 4: Meredith Adler, Barclays Capital

by Quantum Retail • March 9th, 2011 • 2 Comments »

Meredith Adler, Managing Director, Barclays Capital, discusses retail outlook in the supermarket, discount, and pharmacy sectors.

Supermarket stocks looking a bit soggy


In an interview on January 27, 2011 with CNBC, Adler discusses the deflated outlook of supermarket stocks. Though Whole Foods Market, Inc. (WFMI) appears to be doing well, she says it really comes down to valuation. “The company in my view does not have the earnings per share growth prospects that the market thinks it does,” says Adler. “Certainly, they provide a wonderful shopping experience, we just don’t think that the prospects for their growth are as good as the price would indicate.” WFMI stock is currently trading at $57.87 per share on the NASDAQ, up nearly $20 in the last twelve months. But Adler points out that they’re still recovering from the very negative same store sales they had at the peak of the recession, and though there is a niche group of shoppers that can afford to shop at Whole Foods, there are many people that can’t, which might eventually create a plateau for growth.

Based on valuation and prospects, Adler is not very keen on this group right now (Whole Foods Market, Supervalu, Kroger, Safeway, or Winn-Dixie). The only one she recommended to CNBC was Winn Dixie and that was primarily a valuation play.

There are two reasons for the soggy stocks:

1. Food Inflation

2. Price Sensitive Shoppers

Food inflation is squeezing the already very tight margins of supermarket companies, and as costs go up, prices will go up. “But consumers are still hurting tremendously,” says Adler. With the large amount of retailers and grocers that sell food, the environment is becoming extremely competitive. “If prices don’t go up you will have pressure on profitability, and I think we’ve seen that already; although most of the increases have come on the perishable side, we have just barely seen it on the packaged goods side.” Adler Stated.

Quantum Retail is excited to help more grocers find the profit in their tight margins. The UK-based Marks & Spencer is currently Quantum’s largest grocery client.

Read about the success stories of some of Quantum’s Featured Customers »

Winn-Dixie’s new SVP of Retail Operations to focus on customer-centric strategy

Larry Appel, Winn-Dixie Stores’ new senior vice president, retail operations, brings a different perspective to his job, says Supermarket News (SN). Appel is an attorney by training, though he told SN he’s confident he will be able to fulfill his new responsibilities.

Gary Giblen, senior vice president, R.F. Lafferty & Co., New York, told SN Appel’s lack of direct retail experience could prove to be an asset. “Having been at the chain for several years and having seen the competitive landscape, he may be someone who’s able to think outside the box from inside the company,” he pointed out. “Up to this point Winn-Dixie has tried to improve the quality of its offerings, but it hasn’t tried anything radical. So maybe outside-the-box thinking by Appel will lead to development of additional formats, such as limited assortment or natural food stores; or multiple private-label tiers; or, most significantly, a loyalty card program.

“Giving discounts to its most loyal customers could become the foundation for a customer-centric, tailored marketing program at Winn-Dixie. And since loyalty cards in Florida are conspicuous by their absence, introducing one and using that as the backbone for a customized approach to serving different customer segments could be a positive thing for Winn-Dixie,” Giblen noted.

Meredith Adler, managing director at Barclays Capital, New York, told SN she expects Appel to bring a more strategic point of view to marketing. “It’s my understanding he’s a very good businessman who will bring a more strategic perspective to bear on merchandising, pricing and promotions,” she said.

“He has strong people below him working on day-to-day issues, but he will bring more strategic thinking to operations, and that’s a good thing for Winn-Dixie, which has not historically been as clearly focused.”

“Decisions must be made locally, and that’s what Appel is charged with doing. It’s often simply a matter of balance on how to make a strong statement to customers about pricing but without giving the store away,” Adler explained.

How can you be more customer-centric? The customer has always been at the center of retail, but the concern for the individual customer has faded out. It’s not logical anymore as a retailer to look at what consumers were doing in the past. It’s all about now. What are your customers doing today? What are they buying? What are they not buying? How much are they buying? How often are they buying? Are they buying it at the same place? These trends have changed.

Retailers can generalize no more. Today is all about the individual. And if you don’t have what they need when they come in your store or search your website, chances are they won’t be back. And that’s not all, they want to see something new, something fresh, something green, and they want it for less and they want it now. Are you up to the challenge?

Quantum’s Chief Scientist, Dr. Linda Whitaker, talks to RIS News about how to create a customer-centric supply chain »

Adler’s outlook for discount stores

Family Dollar saw profits increase nearly 10 percent in its most recent quarterly earnings, though analysts were disappointed, according to the Charlotte Observer. Family Dollar still lags its chief rival, Dollar General, in expansion.

Meredith Adler at Barclays Capital said she believes that dollar stores will continue to fare well even if sales start to level off. Although higher-income households may be recovering from the recession, she said, low-income families are still getting noticeably squeezed by high unemployment, weak disposable income, a depressed housing market, and rising gas prices, and will continue to shop at discount stores.

“The chains are also working hard to improve the customer shopping experience, which we think will limit defections by any middle-income customers that began shopping at these stores simply because of the economic slowdown,” Adler wrote in a research note.

According to the Globe and Mail, Adler’s favorite stock in the discount sector is Dollar Tree, which she believes can add at least 3,000 stores to its existing U.S. base of 4,000, plus 900 new Dollar Giant stores in Canada.

With rapid expansion, retailers need a solution that can quickly scale to keep up with the increasing pace of their business. Quantum’s solution, Q, tracks and executes on the unique demand for each and every one of your stores, even if it’s one of thousands…

Read more about how Q can automate the forecasting, order planning, assortment planning, allocation, and replenishment processes for every store in your chain »

Big Lots discusses aggressive expansion in their food business

In an earnings call on March 3, 2011, Adler discussed the expansion of consumables at Big Lots with CEO, Steve Fishman.

“There are probably seven or eight initiatives that we’re working really aggressively on in consumables to get that business going,” said Fishman, “And I will mention, that the consumable business has certainly been more encouraging in the most recent days… performing much better as a percent of total than it had been performing last year.”

Fishman says Big Lots is aggressively trying to increase transactions and show great value at the same time. Some of the initiatives Big Lots is planning include an expanded fresh private label assortment, more focus on the front of the store, engaging their Buzz Club members, Internet blowouts, and an international food fair with gourmet European jams, cookies, pastas, and condiments. “We saw real opportunity in the specialty part of our food business,” he stated. “Number one, it’s a higher-average unit retail, higher ticket, but it’s also something our customer has been coming to us for–unique items that can continue to set us apart.”

Several initiatives in the coming months will be heavily focused on the consumable side of the business for Big Lots. “Our feet are not touching the ground when it comes to consumables and when it comes to transactions,” Fishman stated.

For more insight on how to be innovative with your grocery business, check out our Grocery Innovation Report »

Duane Reade stores added 2.5% to Walgreen’s total revenue growth in 2010

Looking back at the holiday, Walgreen, the largest U.S. drugstore chain, said same store sales climbed 2.8 percent in December. At those stores, pharmacy revenue grew 2.2 percent. Revenue from sales of non-pharmacy items like cosmetics grew 3.6 percent. Walgreen said that was the largest increase in 14 months.

Walgreen has expanded by 506 locations over the last year, including the acquisition of the Duane Reade pharmacy chain. It also bought three stores in December and opened three others, including one store that was relocated.

Thomson Reuters says analysts were expecting sales at stores open at least a year to grow 3.3 percent. Despite the shortfall, Walgreen shares continued to rise.

Adler said Walgreen mailed out a lot of holiday shopping guides this year and was trying to attract more last-minute shoppers. Adler expected weaker growth of 2.2 percent, including a 1-percent increase in front-end revenue.

The company said its total revenue rose 7.5 percent to $6.81 billion in 2010. Walgreen said 2.5 percent of that growth came from Duane Reade stores. Walgreen bought the chain and its 258 New York City-area locations for $623 million last year. The company had 7,665 stores as of Dec. 31, and 471 worksite health centers, home care facilities, and specialty and mail service pharmacies, according to Thomson Reuters.

Since the start of the year, Walgreen stock has increased nearly $3.00 per share.

Look out for next weeks’ post with insight from Charles Grom, of JP Morgan.

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SOURCES: CNBC, Thomson Reuters, Supermarket News, Seeking Alpha, The Globe and Mail, Charlotte Observer

Download a PDF of the full series HERE»

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2011 Retail Analyst Predictions, part 3: Liz Dunn, FBR Capital Markets

by Quantum Retail • March 2nd, 2011 • 2 Comments »

“We expect a lot of upward earnings revisions on retail sales day,” said FBR Capital Markets analyst Liz Dunn. “We expect the upside to be significant. Beyond that, we believe the stocks could stall and even trade off given difficult first-quarter comparisons and rising product costs in 2011.” Ultimately it depends on employment increases this year. When jobs come back, that’s when spending comes back, said Dunn.

January exhibited the balancing act retailers face for all of 2011: keeping inventories lean, but not so low that they lose sales. Unfortunately, many stores last month cut back too much — and the harsh winter weather didn’t help matters.

In an interview with CNBC on February 15, 2011 Dunn also added that it’s important not to read too much into January’s sales, because the weather was very, very snowy, which she thinks hampered sales on the East coast and in the Midwest. But she does see some reason to be cautious with the rise of commodities. She notes that she is especially cautious of the teen sector because teen apparel is a heavily cotton focused assortment, and the customer is extremely price sensitive.

What will the rest of 2011 look like?

Dunn evaluates the 2011 outlook of some struggling and some succeeding retailers:

Caught in the middle of competition: American Eagle struggles to differentiate

According to Department Store Retailing News, analysts were critical of American Eagle, who announced total sales for the four weeks ended January 29, 2011 decreased 9% to $145 million. Some analysts are calling for a change in management, saying American Eagle needs to prove it’s not a “broken brand” to regain its status as a prime player, much less a “viable takeover target.”

“American Eagle has the middleman’s dilemma,” says FBR senior analyst Liz Dunn, as it competes with rivals Abercrombie and Hollister, to which it has lost many of its consumers.

“If Abercrombie promotes a bit less, then there is an opportunity for American Eagle to win back some of those customers,” but if Abercrombie “selectively promotes,” and finds creative solutions, then it will be more difficult, she said.

Turning around the brand won’t be easy, Department Store Retailing News predicts, as retailers face a handful of economic headwinds in 2011, ranging from rising transportation costs, gas prices and commodity prices, as well as high unemployment and difficult same-store sales comparisons. But as books close on the 2010 retail year, as most retailers have now done, the landscape appears more appealing than it did two years ago or even a year ago.

The only way retailers can pick up their game is to differentiate from the pack. It starts with analyzing your audience. Retailers need to be able to monitor the shifting patterns in their target market and evaluate what is and isn’t working in their business. Are the customers not finding the right thing when they walk in the door? Are they not finding the right price? Are they not encouraged enough to even get into the door? There is help! For strategies on how to differentiate as a retailer, you may be interested in our library of free whitepapers and reports »

JCPenney moves forward by shifting with shopper habits

The two incoming board members at JCPenney, Steven Roth and William Ackman, have histories that will likely carry over to their work with the apparel company, said Dunn. Roth’s past includes buying underfunded real estate, and Ackman has been called an “activist investor” who looks to unlock value. The two hold large stakes in the company — roughly one-quarter of the stock between the two of them, Dunn said.

The company seems to be moving away from its past, which includes its catalog business, to focus on a future that will include closing some stores, outlets and call center locations as well as cutting jobs related to those facilities. “I think that they’ll continue to look for ways to improve profitability, but these moves have been something that have been in the pipeline for a while and I think we’ll probably, I’d venture, … see more of these moves,” Dunn said.

The move away from the catalog business is due in part to buyers shifting their habits, Dunn said, and is something many companies are wrestling with. However, transitioning from catalog to internet is not easy because catalog shoppers are a significantly different group than internet shoppers. “I think it’s a nice idea that ‘this is a direct business’ and ‘that is a direct business’ and we can just shift it, but I think it’s been a hard decision for the company to make because it hasn’t been so seamless,” she said.

In 2011, JCPenney will close six underperforming stores, two call center locations and 19 outlet stores that carry a large amount of catalog merchandise and will reorganize its custom decorating business. Dunn said the company in recent years had moved away from its core customers and wasn’t responding to what they needed and wanted, which itself had changed due to the economy. But now the company appears to be shifting back, she said, which will be good financially because it won’t have to steeply discount higher-priced merchandise to move it.

One of the most important things retailers can do right now is respond instantly with core customers wants and needs, because they have changed dramatically, and they change on a daily basis. With that reality comes a mountain of data as a result of tracking those very behaviors. And that complexity will continue to proliferate your assessments of product and store performance. In order to keep up with what your customers want, it takes not only some introspection of your brand and product strategies, but also the right technology that can keep up with the pace of today’s market. Check out Quantum’s perspective on adapting to the new pace of retail »

Lululemon may see stalling growth as competitors beef up their activewear

After virtually inventing the yogawear category in Canada, Lululemon has moved aggressively south of the border, where it now operates 82 stores. That compares with 45 in the much smaller Canadian market, where even the shopping bags it hands out with purchases have become a fashion statement, reports Reuters.

However, the company is facing a fresh challenge in the United States from other retailers looking to cash in on the activewear trend, and that could lead to some stalling in Lululemon’s growth, analysts say. “The biggest risk right now is valuation,” Dunn said. “With the stock trading where it is, it’s vulnerable to any sort of slowdown in trend.”

The shares are trading at a multiple of 45 times forward earnings, a steep premium over the 20 times forward earnings for the broader industry, according to StarMine data. The Vancouver-based company’s stock has more than doubled in the last 52 weeks and is up 55 percent in the last three months. Last month, the shares hit a record high of $74.60, a threefold leap since the company went public in 2007.

After topping earnings estimates for at least the last eight straight quarters, Lululemon needs to do more than merely beat forecasts, analysts say. It may now take a blockbuster quarter to keep investors contented.

Chico’s and Soma see outlets as an area of growth for 2011

On a recent earnings call with Chico’s, Dunn asked Kent A. Kleeberger, EVP, CFO, and Treasurer of Chico’s to discuss the productivity of outlets and how the outlet strategy will impact the company’s gross margins for 2011.

Kleeberger said that their outlet strategy is a big driver for the Chico’s brand. They’ve continued to experience increased sales with their made for outlet product (MFO) and have begun expanding into additional categories. They have a major presence in accessories as an example. But they are really just dabbling their foot in the water at present, says Kleeberger, because it becomes a function of bandwidth. But Chico’s plans to significantly increase MFO product in the latter half of 2011. He states that their sister company, White House/Black Market, has been doing some novel things in the outlet sector, as has the Soma brand, such as mixing in some full price product with their clearance good. Overall he looks forward to that particular channel from both a growth perspective as well as increased MFO product in both White House and Soma to boost margins in the next few years.

Kohl’s discusses takeover opportunities

Wes McDonald, CFO of Kohl’s, reported to Dunn in a recent earnings call, that twelve of their 40 stores opening in 2011 are takeovers; a few more Mervyn’s, a couple of Wal-Marts, and a couple of Lowe’s.

In response to Dunn regarding the success of takeover stores vs. new stores, McDonald explained that the return has been better for takeover stores because they’re cheaper to open since the building already exists. “We have to remodel to our specs. But I’d say, it really depends on the area, we can ground-up stores. They’ll get us a return and takeovers are in general a better return than a ground-up store. They’re just cheaper originally to open.”

Look out for next weeks’ post with insight from Meredith Adler, of Barclays Capital.

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SOURCES: Department Store Retailing News, Fort Worth Business Press, Wall Street Journal Market Watch, Reuters, The Street, and Huffington Post

Download a PDF of the full series HERE»

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