“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.
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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.
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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»
The post was helpful for me to get a overlook of the big retailers and what Dunn says about sales for the beginning of 2011. The bad weather played a huge part in our sales as we are in the Northeast. I also learned that catalog shoppers are not the same as internet shoppers and I have never given that any though especially in the scale in which they are speaking. Maybe because I didn’t know catalog shopping still existed.
Thank you for making these things concise and easily available to read.
Wow. You really nailed it on LULUlemon..LOL