Posts Tagged ‘retail predictions 2011’

2011 Retail Analysts in Review – Part 3: Liz Dunn, FBR Capital Markets

by Quantum Retail • December 7th, 2011 • Write a comment »

Liz Dunn, analyst at FBR Capital Markets began her 2011 retail predictions expecting the upside of the year to be significant. She believed stocks could stall and even trade off, but that a lot of 2011 would depend on employment rate increases – when jobs came back, spending would come back. Dunn also stated that retailers should be cautious of cutting back too much on inventories and of the rising price of commodities.

2011 through the eyes of four different retailers

Dunn evaluated 2011 outlooks for four retailers – some struggling and some succeeding:

American Eagle: Caught in the middle of competition while struggling to differentiate

Analysts were critical of American Eagle as the four weeks ended January 29, 2011 and reported total sales decreased by nine percent. Some say a change in management was needed to prove they’re a prime player and not a “broken brand”.

Dunn admitted that turning around AE wouldn’t be easy as retailers all around faced a handful of economic headwinds in 2011 from rising transportation costs, gas prices and commodity prices, unemployment and difficult same-store sales comparisons. The only way for retailers to pick up their game would be to differentiate from the pack. Consumer’s shopping behaviors and patterns constantly change; whether it’s difficult to get people through the doors or if it’s just that customers are not finding the right product, there are ways around it.

As American Eagle continues to face strong competition, their total sales have not been too detrimental. Total sales for the second quarter increased by 4 percent to $676 million compared to $652 million last year. There were no major management changes to attribute for that increase, but a new focus on key item businesses and improved merchandising more than likely played a large part. However, AE recently announced current CEO Jim O’Donnell would be retiring late January 2012 and a replacement has already been selected.

In addition, AE also launched new campaigns and initiatives to give them a competitive advantage. With the rising prices of cotton and the retailer’s love for denim, AE partnered with Cotton Incorporated on “COTTON FROM BLUE TO GREEN®” denim recycling program. The retailer also began engaging heavily in social media with a social photo contest in which nearly 800,000 customers and employees uploaded photos of them wearing AE apparel. The contest, called AE BestShot, was a chance for American Eagle to show just how passionate people are about the brand.

To learn more about how to differentiate as a retailer check out our free whitepapers and reports»

J.C. Penney: Moving forward by shifting with shopper habits

Dunn believed we would see J.C. Penney moving away from their past, including their catalog business, to focus on their future. The retailer planned on closing stores, call centers, and outlets and cutting jobs related to these facilities in order to gain traction for their future. Dunn predicted we would see a lot more of these moves from J.C. Penney as they transitioned their appeal to consumers shifting habits.

The most important thing a retailer should do in this type of situation is to respond to what core customer’s want and need. It takes a proper mix of strategies and technology to keep up with today’s market.

It appears as if J.C. Penney is making moves to differentiate from their past. The company hired a new CEO, former SVP of retail operations at Apple, and began the leap into e-commerce and m-commerce. J.C. Penney has been looking to mirror the ease and convenience of their stores and catalog online at jcp.com and with a new mobile commerce site. They continued to leverage their digital infrastructure and introduced guided navigation and mobile coupons.

The retailer also started to better understand their core customer as well as shoppers changing habits. By closing a string of stores and outlets, they have made themselves available to acquire new brands and compelling assortments necessary to maintain relevance to their consumers. Recent store closings were also executed to aid in increased sales productivity and to manage costs and expenses more tightly. In time, J.C. Penney hopes to be the one-stop-shop for all of their customer’s needs.

Lululemon: Might see stalling growth as competitors beef up their activewear

After having virtually invented the yogawear category in Canada, the company was facing a fresh challenge in the United States as other retailers have looked to cash in on the activewear trend. Dunn stated lululemon’s biggest risk for 2011 was valuation and although the retailer has tapped earnings estimates for at least eight straight quarters, analysts believed they needed to do more than simply beat forecasts; they needed to announce a blockbuster quarter to keep investors contended.

Many retailers, despite their main focus, have sought after a piece of the activewear pie, so to speak, with reporters citing this trend as “lululemon envy”. Retailers, like Gap and Nordstrom, have started to mimic lululemon’s strategy. Gap’s Athleta stores sell yogawear for similar prices and offer free yoga classes – an innovation started by lululemon. Nordstrom went a step further by hiring lululemon alum to create and introduce their new yoga line Zella. Even companies that already dominate in athletic wear are taking it to the next level. The North Face recently announced that they will premiere new running and yoga collections in spring 2012 and Nike now sells capris and crops in a yoga-studio format.

Needless to say, lululemon has started a revolution. It’s not just their product that enables them to have increased revenue of 39 percent in the second quarter of 2011, but it’s the format of their stores, their deep experience and passion of the sports they practice; it’s the complimentary yoga classes and local “ambassadors” that give them a cult-like following and have made them a household name.

Chico’s and Soma: Outlets are an area of growth

Dunn asked Kent A. Kleeberger, EVP, CFO and treasurer of Chico’s, to discuss outlets and outlet strategy and how it would impact the company’s gross margins in 2011.

Kleeberger commented that their outlet strategy was a big driver for the Chico’s brand. Chico’s has continued to experience increased sales with their made for outlet (MFO) products, expanding into additional categories. The retailer planned to grow their MFO product in 2011. Their sister company, White House|Black Market has been doing some novel things in the outlet sector as well, and Soma brands has been mixing in some full-price product with clearance goods. Overall, Kleeberger was looking forward to growth in the sector as well as increased MFO product across all brands in 2011 and beyond.

Chico’s focused their infrastructure investments on opening new stores, primarily for the Chico’s brand and new Soma stores. They began to explore new merchandise opportunities and brand extensions; however, the Chico’s brand spent the majority of 2011 growing the number of WH|BM and Soma boutiques as opposed to outlet stores. Additionally, they increased penetration of the MFO product with the Chico’s brand, but much of their clearance was carried out through their direct-to-customer channel.

The 2011-year saw some stores struggle, but the majority of retailers’ maintained sales and some even achieved record quarters. Despite costly commodities, low unemployment rates and increased competition, retailers found creative, new ways to succeed in the challenging market from taking advantage of brand and product strategies to increasing e-commerce initiatives. Nonetheless, the most important thing a retailer can do is respond to core customer’s changing wants and needs. Next generation technologies need to be implemented to ensure the right product is in the right place at the right time allowing consumers to find what they want when they want it.

Read Dunn’s full report here»

For more information about adapting to the new pace of retail with Quantum Retail’s inventory platform Q visit»

Please note that the information provided above is sourced from public releases and reports and does not include any undisclosed information from or about the retailers named.

Stay posted for next week’s review from Meredith Adler, Barclays Capital

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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.

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

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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2011 Retail Analyst Predictions, part 2: Marie Driscoll, Standard & Poor’s

by Quantum Retail • February 22nd, 2011 • 3 Comments »

Marie Driscoll and other retail analysts at S&P Equity Research see 2011 as another good year and are projecting that consumer spending will rise 3%.

“The most important driver of retail sales is the trend in the labor market, and we think the employment situation will continue to stabilize with some slight improvement,” said Marie Driscoll, Group Head of the Consumer Discretionary Retail analysts at S&P Equity Research. “We think this will be a slight positive for retail sales this year, although we admit that various aspects of the labor market are still extremely poor.”

“Perhaps the biggest catalyst for improving retail sales in 2011 will be the extension of the Bush Era tax cuts and the one-year, 2% payroll tax cut for all workers,” said Driscoll. “We think this ‘tax holiday’ will have a significant impact on spending, as the median income family earning about $50,000 per year will receive an additional $1,000 in its paychecks and those earning $106,800, the current limit of FICA taxes, and above will take home about $2,100 more this year.”

10 Trends for Retailers in 2011:

The analysts at S&P have identified the following ten trends for retailers in 2011 and the medium-term future.

1. International growth: Retailers such as Abercrombie & Fitch, Polo Ralph Lauren, and Tiffany plan to increasingly focus on international markets (in particular, emerging markets) to boost growth rates. On that same note, S&P expects opportunistic domestic store closures for many retailers.

Even with the uncertain economy, it’s important to note that thriving retailers are now even more aggressive about global supply chain expansion; they don’t want to depend solely on US revenue stream. But how do retailers think globally and act locally?  They need to have a supply-chain that is able to be responsive to customer needs, now and in the future, and one that can be efficient at distributing product on a global scale. Retailers need to look for opportunities that leverage intelligent international partners for ideas in technology, analytics, customer service, and distribution. This will allow them to extend their reach and scale their capabilities far beyond that which they can manage effectively today.

Read more on how to adapt to global expansion here »

2. E-commerce growth: S&P projects aggregate online retail growth of 10% in 2011, as consumers increasingly migrate to online sites for convenience and value. It seems apparent that consumers are becoming more channel agnostic, with retailers such as Amazon.com likely to gain additional market share.

For retailers that are agnostic about the web, they may need to look at it in another light… the web is the perfect place to test trends and assess customer interest across a global scale. If retailers were to put products online before allocating it to stores, they would be able to track demand trends on their product lines, pin it down by location, and have foresight as to which products will be a success, and which are duds.

For those retailers that are stepping up to the plate with their e-commerce initiatives, it is important to make sure their online sales do not take away from the inventory needed for their stores. Some retailers report DC horror stories from web promotions that have eaten away at the stock that would need to be moved to stores. Retailers need to have a process that streamlines the stock for their web purchases and their store-needs.

Quantum has devised a solution that enables retailers to easily manage and integrate e-commerce inventory, warehouse or vendor availability and distribution alongside physical store locations. This permits retailers to maintain availability, so that high demand products do not go out of stock either in-store or online.

Read more on how Quantum integrates e-commerce and store demand here »

3. M-commerce growth: They expect m-commerce to become more common, as demands by consumers to price comparison shop prompt retailers to enable Wi-Fi hot spots in their stores. It is estimated that about 50% of consumers will have smartphones by the end of 2011. In addition, they think that sales clerks, like consumers, will also be empowered by greater access to information.

By year’s end Quantum is planning to release a mobile app for our system Q, so retailers can react to customer demand from anywhere! We’ll keep you posted!

4. Social media growth: Companies will likely rely more on social media, not only by responding to consumer complaints, but also to market products and promotions. This should be an effective way for companies like Coach and Urban Outfitters to manage their image and brands.

Quantum updates our Twitter followers on retail news, social media, and innovation here »

Quantum was featured in SmartBrief Social Media, read the article here »

5. Green/organic growth: S&P expects consumers to increasingly seek out organic or green products that are better for the environment, but not at the cost of foregoing fashion. They think retailers like VF Corp are at the forefront of this trend.

Download this free white paper on green retailing here »

6. Meeting individual consumer demand: Retailers will likely increasingly cater to (and meet) individual consumer demands by providing greater service and marketing. They think this will be accomplished through the use of computer algorithms to analyze past shopping activity. My Macy’s is a great example of this, as Macy’s now individualizes 1,000 mailings to its customers.

It is important to personalize service and marketing, but what about your store offerings? Quantum Retail believes that every store behaves differently. Locally, your customers are entirely unique. It’s not only beneficial to your customers when you stock the right amount of sizes and products that they are seeking, it is also cost-effective for you as a retailer to send each store unique inventory, to keep up with the real demand at your stores. If you don’t, you lose money for having over stocks, or you lose sales by stocking out.

Quantum’s system, Q, gives you visibility of the real demand in your stores now. With the understanding of lost sales for every product, Q sends product based on the current demand and availability, preventing you from missing opportunities so you can capitalize on every potential sale. Q learns from how your product is moving right now, so you do not need a year’s worth of data to predict how a product will perform. By continuously tracking 35 performance metrics, such as: average demand, average sales, seasonal affects to product life-cycle patterns, shelf life, maximum sales per day, average inventory by date, in stock and in transit, this lets retailers calculate potential consumer activity and demand every day.

Read how Quantum’s system calculates and reacts to real-time demand here »

7. Increasing the divide between high-end and value merchants: They expect continued bifurcation of the retail market with high-end luxury stores benefiting from the wealth effect and low-end stores being aided by value-seeking consumers.

8. Increasing the thrill-factor: Consumers are always seeking new and exciting experiences. Retailers that are able to thrill, surprise, delight, and engage, will probably win, S&P predicts. Destination stores, such as those from Disney and Apple, are increasingly becoming a source of additional entertainment for consumers.

9. Increasing consumer personalization: S&P expects retailers and brands to test the waters of mass collaboration, providing the consumer community input in product design. This further engages the consumer, and brings about a whole new meaning to the word “personalization”.

10. Increased coupon use to lead to decreased margin: Coupons are fast becoming ubiquitous through increased connectivity. Be it online or on their mobile phones, more and more consumers are searching for coupons as a means for creating value from their purchase. “Caveat emptor” could become “mercator emptor” given consumers’ newfound and increasing knowledge base, with retailer margins likely to decline as a result.

Look out for next weeks’ post with insight from Liz Dunn of FBR Capital Markets.

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SOURCE: PRNewswire

Download a PDF of the full series HERE»

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2011 Retail Analyst Predictions, part 1: Deborah Weinswig, Citigroup

by Quantum Retail • February 15th, 2011 • 2 Comments »

One of the top retail industry analysts, Deborah Weinswig, of Citigroup, reports that retailers are back on offense with respect to retail technology. “During the recession, retailers invested in IT to protect margins and lower costs. In 2011, we expect retailers to utilize technology to drive sales (across multiple channels), improve buying and allocation decisions (incl. increased localization), enhance margins with next gen. optimization tools, and leverage stronger toplines with workforce management.”

Citigroup predicts to see CVS, Home Depot, JC Penney, and Macy’s as the retailers that are most likely to use technology as a disruptive force to drive earnings in 2011.

Weinswig identifies several key themes that Citigroup believes will shape retailers’ technology investment decisions in 2011. Two of those themes are: Optimization technologies, and multichannel fulfillment.

Optimization Technologies on Steroids

“Retailers have been investing in price, markdown, and size optimization systems since the early 2000′s and have realized significant topline and margin benefits as a result of these investments,” says Weinswig. “Retailers are now looking at the next generation of these technologies to build on their existing capabilities.”

Citigroup believes that retailers are eager to implement the next generation of optimization systems given the strong track record of optimization technology on their profit and loss.

Linda Whitaker, Chief Scientist at Quantum Retail, agrees with the importance of ridding the retail process of markdowns, but recognizes that a retailer’s markdown strategy needs to be an integral part of the entire life cycle of the product and not just a Band-Aid response. “It is no good just covering up the real problem without addressing the root causes of inefficiencies in assortment planning and inventory execution,” she states. Proactively determining the role of the product within the overall assortment and having the power to determine at an individual store level the inventory allocation process necessary to meet that role are key components to minimizing markdowns.

A new holistic approach to retailing integrates merchandising and fulfillment processes while managing and reporting on inventory from the store-level up, in real-time. It provides merchandising plans, goals and strategies that directly drive product fulfillment. This allows the fulfillment process to be driven by a bottom-up view of item behavior, fused with plans, goals and strategies. Real-time performance analysis enables a rapid response if a product or location is failing to achieve its goals or has the ability to exceed them.

This concept derives trends from relatively short and recent learning to make accurate predictions of future behavior and drive decisions that maximize inventory productivity. It is unlike traditional ’number-crunching‘ approaches that rely on interpreting trends and forecasts based on huge pools of historical data. As a result this method of analysis has the flexibility to respond in real time and at a much finer level of detail SKU/store level than would conventionally be possible.

Read more on Quantum’s approach to markdown optimization here»

Multi-Channel Fulfillment

“Retailers are investing to streamline their in-store and online merchandise assortments and inventory platforms in order to create a more seamless experience for the customer,” says Weinswig. Citigroup defines multi-channel fulfillment capabilities as the ability to fulfill online orders with inventory from the store, and meet customer demand in-store with online inventory, and they look for retailers with integrated online and store inventory platforms.

Citigroup states that multi-channel customers are very valuable to retailers as they spend 2-4 times more than customers that only shop in-store.

Some examples of stores using multi-channel fulfillment are Macy’s “Search and Send” technology, which allows associates to search the company’s online inventory for the desired product via the in-store POS system and have it shipped to the customer’s home, Walmart, with their “Pick Up Today” technology, which gives it the ability to fulfill online demand with inventory from the store, as well as their new relationship with Fedex that allows customers located in metro areas like Los Angeles, Boston, and New York to have their online orders shipped to select Fedex locations for free, and Marks & Spencer with their “collection in store” offer for online purchases.

Quantum Retail recently released Q v.10.05 to support multi-channel and multi-supply chain fulfillment.

  • Multi channel/supply chain support gives flexibility in order planning and distribution for retailers with complex supply networks and methods, such as vendor to national distribution center (DC), vendor to regional DC, national DC to regional DC, etc. to move stock as quickly and efficiently as possible, reducing the risk of missing a sale due to unplanned circumstances. Q now supports direct to store orders and allows users to view order quantities by location in order to get the right quantity to every local store as soon as it is needed.
  • eCommerce integration enables retailers to easily manage and integrate eCommerce inventory, warehouse or vendor availability and distribution alongside physical store locations. This permits retailers to maintain availability, so that high demand products do not go out of stock either in-store or online.

For more information on Q v.10.05 visit»

For more information on:
Q Allocation & Replenishment visit»
Q Assortment & Range Planning visit»

Look out for next weeks’ post with insight from Marie Driscoll, Group Head of the Consumer Discretionary Retail analysts at S&P Equity Research.

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SOURCE CITED: Citi Investment Research & Analysis

Download a PDF of the full series HERE»

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