High Sales and Raised Stakes Signal Caution for Retailers
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Present-day retailers are contesting with a slow U.S. economic recovery, high unemployment, low discretionary spending, and an even lower credit-rich clientele, but that has not stopped the retail service industry from gaining momentum.
Last week, the U.S. Census Bureau reported month-over-month retail spending, excluding cars, gasoline and building supplies, in February was $407.8 billion, up 1.1% - the highest in five months - from January and 6.5% above last year.
Added to the drive is Kiplinger’s Economic Outlook for 2012. The personal finance magazine expects retail sales to grow by 6% (which is down from the previous 7.4% prediction made in 2011); a GDP expected growth of 2%-2.3%, up from last year’s 1.7%; and for the inflation rate to continue its steadily decline- down from an October 2011 high of 3.9%- to lower from its current rate of 2.9% to 2%. But, “…despite the lower pace of growth, in absolute terms retail sales will rise nearly $252 billion this year. The pace last year was better, but only because 2010 retail sales were still stunted from the recession.” Martin Crutsinger, of the Associated Press stated that, “For all 2011, sales totaled a record $4.7 trillion, a gain of nearly 8% over 2010. It was the largest percentage increase since 1999.” Also, “The figures confirm evidence that the economy was strengthening as 2011 ended.”
With this encouraging news, apparel retailers, in particular, have seen a much-needed upswing in investor confidence. In what first appeared to be more hard times for the industry with news of job cuts, store closings and slow foot-traffic, economists expected more of the same stalled sales growth. Although, with the help of renewed business and marketing strategies for companies such as Sears Holdings and J.C. Penney Co, the financial markets were hit with unanticipated optimism.
According to Bloomberg, “Investors have driven up retailers’ shares as the job market heals.” The S&P Supercomposite Retailing Index, which consists of all retailing stocks, “has climbed 14 percent this year through March 9, compared with a 9 percent advance for the broader S&P 500.” PowerShares’ Dynamic Retail Intellidex Index, comprised of stocks of 30 US retailers including Coinstar and Home Depot, has seen a 17% jump since the new year and according to BarChart.com, Dynamic Retail Portfolio (AMEX: PMR), the fund that represents the Intellidex index, has a “strong buy” rating.
Stock performance for the apparel industry is typically volatile but specialty clothing retailers Gap, Ralph Lauren and Chico’s FAS are currently exceeding expectations.
Just when analysts were beginning to completely discount the retailer, shares of Gap (NYSE: GPS) managed to rebound after estimates were raised when “the company delivered its 5th consecutive positive earnings surprise,” said in a NASDAQ report.
This is despite Q4 2011 financial results revealing lower numbers year-over-year across the board in net sales of $4.28 billion (-0.01%) and net income of $218 million, which fell by 40%. Diluted earnings per share for the fiscal was $1.56 with net income of $883 million and $1.88 per share with a net income of $1.20 billion for 2010. Shares currently trade at $26.13 with a 52-week range of $15.08-$26.30.
However, investors feel their long-term strategies will prove to be profitable. Close attention to Gap’s last quarter cash flow from investing activities compared with the corresponding quarter a year earlier show nearly $110 million was spent; indicating a restructuring of operations that, presumably, include efforts in broadening their online and international presence in Latin America.
Apparel powerhouse, Ralph Lauren (NYSE: RL), up until March 14, experienced record highs. Shares rose 9.2% to $171.49 after its third quarter release on February 8. 3Q net income was $169 million, or $1.78 per diluted share, slightly above the $168 million earned in the third quarter last year, or $1.72 per diluted share. “Due to the stronger-than-expected third quarter performance, the Company now expects consolidated revenues for Fiscal 2012 to increase by approximately 20%,” noted in a Ralph Lauren press release. Since its inception in 1998, shares of RL have gained an astounding 550.41%. The manufacturing clothier currently trades at around $178.00 with a 52-week high/low range of $105.11-$182.48.
Shares of Chico’s FAS (NYSE: CHS), operator of the women’s private label White House l Black Market, experienced a rally of more than 15% to $14.94 after its end-of-year fiscal 2011 results exceeded analysts’ estimations. The company netted $2.20 billion in sales for 2011, up from the previous year at $1.90 billion while net income rose $140 million, up from $115 million in 2010. Diluted EPS for 2011 was $.83 compared to $.64 for 2010. CHS currently trades at $15.20 with a 52 high/low range of $9.57-$16.50
Reports show that overall household spending in the last several months is at record levels and retailers that have vigorously pushed new products are reaping the rewards. Because 2011 was a year of expansion for retailers as well as instability for the economy (as explained by Barbara Farfan in an article on About.com), the apparel industry continues to have cause for concern from the likes of climbing gas prices and unemployment, with over half the population (56%) of young adults, ages 18-24, being unemployed.
For retailing to smoothly progress into the future it will involve smaller-store formats, a more personalized approach and, what retail analyst Adriana Shapira said in an interview on Bloomberg radio, in regards to apparel retailers, a new theme developing within the “brands versus boxes” concept.
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