Posted Date: 5/2/2012
2012 Retail Leaders & Laggards
By Dave Weinand and Joe Skorupa
What a difference a year can make. This time last year the global economy was
still on shaky ground, Europe was wracked by a sovereign debt crisis and U.S. unemployment numbers were roughly 9%. Although retailers were going on the offensive in terms of investment in growth strategies they were finding that sales gains were largely elusive.
Then, beginning in October of 2011 the outlook brightened and since that point there has been a 22% rise in stock prices for the S&P 500 built on improving employment figures and stronger sales for the majority of retailers.
This past March retail sales grew 0.8% which followed a 1.0% gain in February. These numbers are almost triple the estimates of 81 economists interviewed by Bloomberg News. Year-over-year same store sales grew in March by 3.9%, which is another strong indicator of improved conditions.
These positive developements have given retailers a renewed sense of purpose. While speed bumps remain, such as high energy prices, a bruising presidential election and a still shaky European economy, many retailers have emerged from the doldrums of recent years with a renewed fighting spirit and belief in their own power to innovate and differentiate in the face of fierce marketplace forces.
That spirit is a necessity in today’s consumer-driven, technology-dependent retail environment, and those that adopt a less aggressive stance are in for a rough ride in good economic times or bad.
View from the Street
This is the third year RIS has teamed up with wRatings, a financial analyst firm headed by founder and CEO Gary Williams, to take a detailed look at the top 10 and bottom 10 retailers from a business and stock market perspective.
Williams is a member of the RIS Financial Advisory Board and an upcoming keynote speaker at the RIS 2012 Retail Executive Summit, which takes place on June 13 to 15 in Del Mar, California.
What makes this annual report unique is that it is an exclusive look at data and analysis usually reserved for wRatings’ clients, which are typically investors, fund managers and financial executives at major corporations.
The data has been crunched to create lists in three categories: 1. Top and bottom 10 overall wScores (numerical evaluations based on criteria explained below), 2. Top and bottom 10 year-over-year wScore change leaders and laggards, and 3. Top and bottom 10 year-over-year leaders and laggards in stock prices.
All data for this story was pulled after the 13th week of the year to ensure inclusion of all financial reports for the full year of 2011 and any effects of these results were factored into stock prices and wScore evaluations.
The methodology that Williams uses to create wScore evaluations is based on tracking long-term performance trends and examining what he calls “moats.”
Basic economic theory shows that in a highly competitive market business performance deteriorates as rivals imitate advantages. To achieve durable success, retailers must defy the force of imitation that causes advantages to deteriorate.
A good example of a moat is eBay’s lock on user-controlled auction sales. Another is Starbucks’ rabidly loyal customer base. A third is Apple’s ability to create unique markets.
wRatings’ evaluations analyze moats in nine areas. The areas are supply chain, products and customers, and three moats are included in each area. wRatings then converts the evaluations into numerical figures. In addition, the wRatings evaluation takes into account five years’ worth of financial metrics and then weights each company relative to other scores within their verticals.
The best way to think about what a wScore measures is long- and short-term competitive strength and the ability to grow revenue and earnings.
What follows is a unique overview of the top and bottom players in the retail landscape based on in-depth business analysis and stock performance.
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2012 wScore Leaders and Laggards
The first thing that jumps out when reviewing the 2012 wScore leaders list is the sense of consistency with 2011. Six of the top 10 make a return to the 2012 list. Coach, Lululemon Athletica, Tempur-Pedic, Fossil, Select-Comfort and Tiffany all return with strong showings.
One similarity among these wScore leaders is that their merchandise mix is dominated by private-label products. Two new entries to this year’s list, Vera Bradley and Aeropostale, also follow the private-label formula.
From an investment perspective, the returning leaders have seen their stock prices follow their wScores on an upward track, except for two of the new entries – Vera Bradley and Aeropostale. If history is a guide, then stock prices for these two retailers will likely follow an upward track as investors begin to take note of their strong fundamentals.
In the laggard category, there are few surprises. Two retailers are locked into product categories that are fast becoming digital – Trans World Entertainment (parent company to music retailer f.y.e.) and Books-a-Million. Both are struggling to redefine their business models. dELiA’s and Pacific Sunwear have failed to differentiate in a highly competitive youth fashion category. Hancock Fabrics, the one retailer to return to the laggard list from 2011, is the third largest retailer in a three-retailer category.
The two drug store chains, Rite Aid and CVS Caremark, have successful businesses and registered strong year-over-year stock-price growth. CVS has also been an aggressive adopter of technology during this period. So, why the low wScores?
The commoditized nature of their product mix prevents them from achieving much differentiation and they are locked into price wars with discount druggists. Online retailers, such as soap.com and diapers.com (not to mention Amazon) are also chipping away at the edges of their business.
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2012 wScore Growth Leaders and Laggards
There are no repeat retailers in the top and bottom lists that track year-over-year wScore changes and it would be an amazing shock if there were. These lists track huge movements, and it is statistically unlikely a retailer could make year-over-year jumps in the 30-plus percent range two years in a row.
As we have seen in the top and bottom wScore lists for 2012 previously discussed, the retailers that perform well are for the most part those that have a strong focus on private-label product mixes. These include the Vitamin Shoppe, Express, Vera Bradley and Cache.
Ross Stores is one of the leaders in the resurgent department store category, which was written off a half dozen years ago as being a dinosaur. Instead, players like Ross and Macy’s have roared back and let competitors know they have plenty of life left in their business models.
As in the other top 10 lists it is interesting to note those retailers that show strong wScores and weak stock prices. This list includes; Citi Trends, Big 5 Sporting Goods, Vera Bradley and Ross Stores. It may be that investors have already baked in future sales and profit performance into current stock prices or it could be that these retailers are undervalued. Something worth watching in the next few months.
Of the top 10 laggards for year-over-year change in wScores we see two distinct groups: those focused on products that are going digital (Trans World Entertainment, Books-A-Million, Barnes & Noble and PC Connection) and those that are having difficulty differentiating from stronger competitors (Pacific Sunwear, Hot Topic, dELiA’s, Coldwater Creek and Ingles Markets).
Virtually all of the retailers on the laggards list have also had rough years in the stock market in the last 12 months.
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2012 Stock Price Leaders and Laggards
Only one retailer, Select Comfort, made both the top 10 list in wScore rankings and the top 10 list of leaders in year-over-year stock price movement. Select Comfort was also on the wScore leaders list last year, so it is definitely building a strong foundation for its business model.
Defying the odds from a performance perspective is Conn’s, a regional electronics and home furnishings retailer in Texas, Louisiana and Oklahoma. Clearly it faces challenges similar to the troubles plaguing Best Buy, however its stock price has grown more than 200% based on the release of strong earnings reports. Conn’s is apparently bucking a national trend and giving hope to regional retailers who stay closely in touch with their local shoppers.
Ulta Salon & Cosmetics takes the two-year performance crown as it has gone from $18 a share in April 2010 to $93 in April 2012. Ulta has a strong online business coupled with a broad store footprint that has helped it differentiate from other cosmetics retailers.
All companies in the bottom 10 list of year-over-year stock laggards are examples of retailers that continue to struggle to differentiate in an oversaturated retail marketplace.
As the market improves and shopper confidence increases, retailers stand to benefit. However, many retailers have emerged from the recent recession with a renewed fighting spirit, because what doesn’t kill you makes you stronger.
Success in the future will go to those retailers that push the boundaries of innovation and differentiation, and from evidence seen in the top 10 lists analyzed here, it appears many have gotten the message.
How to Kill Showrooming
By Gary A. Williams
The reality is that “showrooming,” where consumers touch and feel merchandise in stores and buy it elsewhere, is here to stay. This is forcing retailers to find a way to become relevant again with consumers.
Over the decades, retailers have trained customers to come into their stores to see which products are available and on sale. They spend millions of dollars in a single promotion to persuade consumers to come to their stores for the lowest prices. So, is it any surprise that consumers check for low prices with the aid of smartphones and spend their dollars with the cost leader?
Some retailers believe they have a way around showrooming by playing games with consumers. Some are forcing suppliers to create unique products for their stores. Others are sending special coupons to consumers that offer targeted or local bargains. Very large retailers are offering in-store pick-up for online orders placed the same day. In the end, none of these will stop showrooming.
What is the answer? In a nutshell, retailers must re-think how they make money.
There is a simple reason we don’t stop by the local Maxwell House coffee shop to get our morning java. Or we don’t say “Just USPS-it” to ship our packages overnight. Or we don’t use a Sony Walkman to download our favorite songs.
The reason is that Starbucks, FedEx and Apple fundamentally changed how consumers feel about the products they sell. No trickery required.
To stop showrooming from damaging their businesses, retailers need to think big and think different. For example, Best Buy’s answer is to decrease the size of stores and focus on mobile. Frankly, retail doesn’t need more AT&T or Verizon Wireless outlets.
What would be compelling? Combine a Costco-style membership program with the latest in entertainment (think of a sporting event, concert or movie experience). Split the sales floor into distinct home-technology experiences like IKEA. Show a home office in single, dual or family-based setups. Have manufacturers pitch in (with dollars and staff) to get a showcase on the sales floor. Sell merchandise in a “value-meal” format. Sell products online and fulfill directly from the supplier. Change store sets monthly to keep customers coming back to see what’s new. The ideas are endless.
In other words, make the shopping experience so compelling that customers cannot wait to come back and see what’s next. And then add the two Cs: charge for it and change it again.
Gary Williams is the founder and CEO of wRatings, and a keynote speaker at the RIS 2012 Retail Executive Summit, on June 13 to 15 in Del Mar, California.