Retailers procure goods in large quantities directly from manufacturers or wholesalers and sell them in smaller quantities to customers through retail shops or online platforms. As consumer spending is the key to the viability of any economy, the health of the retail industry becomes an important economic indicator.
As a leader in the retail business, the United States provides ample growth opportunities for all types of retail companies. From a labor market perspective, the retail industry ranks among the dominant U.S. industries and employs an enormous workforce. Retail sales represent approximately 30% of consumer spending, which itself accounts for more than two-thirds of the economy.
Despite commencing the year on a sluggish note, the U.S. economy soon started to recover prompting the Federal Reserve to wind up its stimulus program, initiated to boost economic growth and keep interest rates low. Stocks have done reasonably well in this backdrop, with the large-cap S&P 500 index up +10.8% in the year-to-date period. The Retail sector, however, hasn’t been a big participant in the stock market’s year-to-date gains, with the sector’s performance better than only 5 of the 16 Zacks sectors in the index.
The economic outlook for rest of 2014 and next year remain positive based on favorable economic data and an improved consumer and business outlook. The labor market has started making sustainable gains, with the unemployment rate steadily coming down.
Gradual recovery in the housing market, strengthening of the manufacturing sector and improving labor market are positive indicators no doubt, and the retail sector is likely to grab all the attention. These feel-good factors have abated fears of a derailed economy that arose after the first quarter of 2014, when GDP data revealed a 2.1% decline.
Economic growth in each of the following two quarters exceeded 3%, with the advanced Q3 GDP growth coming in a better than expected 3.5%. All of this combined have started showing up in improved consumer confidence measures, which when combined with the recent slide in oil prices has raised hopes of a positive holiday shopping season.
Data compiled by the nation's largest retail trade group, National Retail Federation (NRF), suggests a 4.1% jump in holiday sales (November and December) to $616.9 billion, against 3.1% growth registered last year and better than the 10-year average sales increment of 2.9%. Online sales for this holiday season are projected to increase 8%–11% to approximately $105 billion, according to Shop.org. Moreover, NRF expects seasonal recruitment to range between 725,000 and 800,000 this year compared with 768,000 hired in the prior holiday season.
However, buyers’ loosening their purse strings is not enough; retailers must also be on their toes to make the most of this holiday season. Be it with early-hour store openings, promotional events, free shipping on online purchases or heavy discounts, retailers must throw all possible bait to attract buyers.
Key Metrics
The key data in the retail industry analysis is comparable-store sales (comps), as it excludes sales at newly opened and closed stores. The recent sales data of most retailers display a slight slowdown that resulted in soft comps for October. Though the industry is picking up pace, soft sales for the month reflects a lull in the shopping scenario, usually observed after the back-to-school season comes to an end and the Christmas holiday shopping season is just about to commence. As this scenario is repeated every year, it is not a matter of concern.
The latest key metrics data released last week reflect an overall positive sentiment as all but 3 of retailers that reported monthly comps emerged as winners.
The list of gainers in October was led by drugstore retailer Walgreen Co. (NYSE:WAG), which posted a 5.6% rise in comps, followed by Rite Aid Corp. (NYSE:RAD) with a 5.5% rise in comps. Total sales for Walgreens rose 6.9% to $6.80 billion, while Rite Aid’s sales grew 5% to $2.058 billion.
The warehouse retailer Costco Wholesale Corp. (NASDAQ:COST) occupied the third spot with 4.0% growth in comparable-store sales for Oct 2014, while total sales climbed 7% to $8.73 billion for the month.
Moving forward with the list, Washington-based retailer of sports-related teen apparel Zumiez Inc. (NASDAQ:ZUMZ) reported a 3.1% increase in comps while sales improved 11.7% to $51.7 million from the year-ago period. Comps of the clothing retail chain L Brands Inc. (NYSE:LB) rose 3% while sales also improved by 3% to $700 million.
Apparel and accessories retailer Cato Corp. reported a 2% rise in comps along with a 6% improvement in net sales. Further, off-price retailer of apparels, footwear and accessories, Stein Mart Inc. registered a 1.4% increase in October comps while total sales rose 2.9%.
On the other hand, the list for disappointed retailers of the month was topped by The Buckle Inc. (NYSE:BKE), which posted a 4.4% fall in comps and 1.3% decline in net sales to $85.4 million for October. This was followed by The Gap Inc. (NYSE:GPS), which reported a 3% decline in comps and 2.3% increase in net sales to $1.26 billion. Another downer on the list is discount store operator Fred's Inc. (NASDAQ:FRED), which reported a 1.4% fall in comps as against an increase of 0.8% last year. Fred's net sales for Oct 2014 were up 1.3% to $145.3 million.
Zacks Industry Rank
Within the Zacks Industry classification, Retail/Wholesale (one of 16 Zacks sectors) is divided into two categories -- Nonfood Retail-Wholesale and Food/Drug- Retail/Wholesale under the Medium (M) Industry Group and further sub-divided into 14 industries at the expanded (X) level -- Building Products-Retail/Wholesale, Internet Commerce, Retail/Wholesale Auto/Truck, Retail-Apparel/Shoe, Retail-Consumer Electronic, Retail-Discount, Retail-Drug Store, Retail-Jewelry, Retail-Miscellaneous/Diversified, Retail-Restaurants, Retail-RGN Department, Retail-Supermarket, Retail/Wholesale-Auto Parts and Retail/Wholesale CMP.
We divide the 16 Zacks sectors into 60 M-level industries and 250 X-level industry groups. We rank all the 250 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
As a point of reference, the outlook for industries with Zacks Industry Rank #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
The Zacks Industry Rank for Internet Commerce #46, Retail-Miscellaneous/Diversified #46, Retail-Consumer Electronic #79, Retail-Restaurants #82, Retail/Wholesale Auto/Truck #87, Retail/Wholesale CMP #104, Retail-Discount #104, Retail-Apparel/Shoe #157, Retail-Supermarket #158, Retail-RGN Department #178, Retail-Drug Store #195, Retail/Wholesale-Auto Parts is #199, Retail-Jewelry #242 and Building Products-Retail/Wholesale #247.
On analyzing the Zacks Industry Rank for the constituent industries in this space, it is apparent that the overall outlook for the Retail/Wholesale sector is Neutral.
Sector Level Earnings Trends
The Q3 earnings season is almost over with results of more than 80% of the S&P 500 members already on the books, primarily from three of the 16 Zacks sectors (Autos, Aerospace and Transporters). Coming to the retail sector, a large chunk of companies have yet to report earnings, as only about 48.8% of the broader Retail/Wholesale companies have released their financial results. Though it is difficult to arrive at a precise trend for the quarter at this time, the earnings growth rates are considerably lower compared with the trend seen in the second quarter of 2014, while revenue growth trend remains fairly in-line.
So far, both earnings and revenue "beat ratio" are 66.7%. Total earnings for this sector improved 2.3% year over year while total revenue improved 8.3% in the quarter. This compares with 6.6% earnings growth and 8.8% revenue growth reported in the second quarter.
With nearly 50% of the results yet to arrive, earnings and revenue projections for Q3 stand at 0.7% and 5.3%, respectively, for the Retail/Wholesale sector. This compares with 2.7% earnings growth and 5.8% revenue growth registered in the second quarter of 2014.
Looking at the consensus earnings expectations for the quarter ahead, the picture looks slightly bleak with earnings expected to grow 2.9% in the fourth quarter of 2014, registering full-year growth of 5.3%. Going into the next year, earnings expectations look encouraging with projected earnings growth of 14.0% for 2015.
For more details about the earnings of this sector and others, please read our ‘Earnings Trends’ report.