ANF Abercrombie and Fitch Co

Does the start of holiday sales suggest a break from the phase when US consumers were reeling under a series of macro-economic shocks? For now, the initial data released by National Retail Federation suggests that Santa has a bagful of gifts for the majority of retailers this holiday season.

Early reports hinted that the retailers have won over prolonged macro-economic uncertainty. Shoppers shrugged off their economic woes to mark record holiday weekend sales of $52.4 billion.

Supporting the view, data released by the Conference Board reveals that Consumer Confidence Index increased to 56.0 in November from 40.9 in October (its highest level since July, when the index reached 59.2). Further, data from the Commerce Department noted consumer spending to have recorded its fastest growth in third quarter 2011. The quarter saw an annualized growth rate of 2.3% for consumer spending.

According to a survey of the National Retail Federation, a whopping 226 million shoppers visited stores and went online over the Black Friday weekend, up from 212 million last year. The retailers offered deep discounts, early store openings and free shipping to online customers to make the most of the busiest shopping week of the year.

In order to get their share of pie, retailers like Macy’s Inc. (M) and Best Buy Co. Inc. (BBY), for the first time this year opened their stores early. According to sales estimates, Best Buy marked a trend reversal from last year, as it drew an increased number of shoppers, while Macy’s registered incremental sales.

Bonding with Shoppers

Of late, the retail industry has been experiencing a shift in consumers' shopping patterns. These days, shoppers are spending on essentials primarily and are looking for value-adds.

Across all income levels, shoppers are ranking value-for-price as the most important reason for store choices. Thus, the retailers are offering trend-right and well-designed assortments at compelling prices, without compromising quality, in order to improve merchandise margins.

Lingering Concerns

We believe that a slow-moving US and Asia, and recessionary fears in Europe, will continue to weigh upon consumer discretionary purchases. Further, inflation from rising commodity prices and significant disruption in global credit markets will create difficulties going forward.

Moreover, consumers remain sensitive to macro-economic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn adversely affect the growth and profitability of retail companies.

Beyond the macro factors, rising inventory levels remain a drag on the margins of softline retailers. Evidently, as in the case of Aeropostale Inc. (ARO) and Urban Outfitters Inc. (URBN), even deep discounts offered by them are not helping to tame margin pressures.

Addressing the Challenges

Every challenge comes with an opportunity and most of the retailers have pulled up their socks and incorporated many strategic measures to mitigate the top-line headwinds.

Starting from enhancing the supply-chain management to going global, from improving their productivity through operating efficiencies to bringing in the technological advancements, the retailers are trying to play every card dealt.

With consumers attaining confidence in the market and increasing their spending power, companies are focusing on cost containment, inventory management and merchandise initiatives to improve margins through leverage on buying and occupancy expenses.

Going forward, with the advent of technology, an increasing number of consumers are using smartphones and tablets to purchase items. A recent data released by ComScore Inc. justifies the stance and reports a 26% jump in online spending on Black Friday to $816 million. Thus, most of the companies have incorporated e-commerce platforms to bring in incremental gains.

The technological advancement in marketing such as, ecommerce and online business provides a win-win situation for both the retailers and shoppers, as it enables the companies to generate additional sales and broadens the company’s existing customer base throughout the world. Moreover, it also enhances the visibility and reputation of the retailer as a global firm offering great fashion and value at the same time. On the other side, shoppers get the benefit of purchasing researched products at the best prices, as they can compare the prices being offered by various companies.

The ComScore data suggests that the online retailers experienced a notable jump in Black Friday activity in comparison to last year. Amazon.com Inc. (AMZN) led the pack as it generated 50% more visitors than any other retailer.

Further, the international turf provides ample long-term opportunities for retailers to enhance their margins. Thanks to globalization, retailers have the opportunity to explore and add newer markets for their products by opening new stores or through e-commerce sites.

Needless to emphasize that only strong and popular brands have the potential to drive growth through the global markets. Following our rationale, we are bullish on Ralph Lauren Corporation (RL), Macy’s and Lululemon Athletica Inc. (LULU), while we are Neutral on J.C. Penney Company Inc. (JCP), Abercrombie & Fitch Co. (ANF) and Gap Inc. (GPS).

November Comparables

The start of the holiday season led a majority of the retailers to register healthy sales in November, as lucrative discounts offered by them pulled shoppers to their stores. According to the data released by Retail Metrics, comparable-store sales for over 20 companies rose 3.2%, beating the streets’ expectation of 3.1%.

Retail chains like Costco Wholesale Corporation (COST), Nordstrom Inc. (JWN), Macy's, Ross Stores Inc. (ROST), Limited Brands Inc. (LTD), Saks Incorporated (SKS) and many others have reported strong comparables for the month of November 2011.

The key reasons for their strong performances appear to be their continuous effort to offer innovative products and value pricing coupled with their adaptability to the buying habits of the consumers and strengthen loyalties.

OPPORTUNITIES

Costco Wholesale Corporation (COST) registered a growth of 9% in comparable store sales. Excluding the effects of higher gasoline prices and foreign currencies fluctuation, Costco’s comparable-store sales increased 7%.

Macy's Inc. (M), reported same-store sales growth of 4.8%. Total sales were up 5.3% to $2,465 million. An increase in online sales added to the surge in same-store sales growth.

Nordstrom Inc’s (JWN) same-store sales for November 2011 increased 5.6% compared with the same month last year. Total retail sales were $910 million, up 11.6% from $815 million in November 2010.

Saks Incorporated (SKS), the luxury department store, marked a 9.3% increase in comparable store sales for November 2011. Owned sales increased 8.7% to $277.1 million during the period.

Limited Brands Inc. (LTD), a specialty retailer of women’s intimate and other apparel, beauty and personal care products posted a 7% increase in comparable-store sales for November 2011. Total sales for the period came in at $872.6 million for the period.

WEAKNESSES

Kohl's Corp. (KSS), value-oriented specialty department store offering moderately priced, exclusive and national brand apparel, shoes, accessories, beauty and home products in an exciting shopping environment, reported that company’s comparable-store sales for November 2011 decreased 6.2% with total sales shrinking 4.5% to $1,930 million.

Gap Inc. (GPS), a premier international specialty retailer offering a diverse range of clothing, accessories, and personal care products, reported a 5% decrease in same store sales for the four-week period ended November 27, 2011. The company reported a decline of 3% in net sales for the period.

J.C. Penney Company Inc. (JCP) reported a 2% decline in comparable store sales for November 2011. Moreover, total sales decreased 5.9% to $1,737 million during the period.

Summing Up

Retail is basically a volume game. Going forward, with the raging competition and price wars, the players who will be able to cater to the needs of discerning consumers will grow volumes by ensuring foot falls and margin expansion and will have the final laugh.

Further, the ratio of converting shoppers to buyers will also rest on the continued economic recovery and improvement in the job market. This will ultimately boost consumer confidence and increase discretionary spending.
 
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