The Secret To Success For Some U.S. Retailers

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by: Lipper Alpha Insight

By Jharonne Martis

A number of U.S. retailers have been closing their doors - the most recent being toy store giant Toys "R" Us. However, in a time when retailers are struggling, some are not affected. They even continue to grow, expand and open new stores across the country.

Some discount chains are thriving. Since the recession, consumers have been conditioned to only open their wallets and shop if they are offered a discount. As a result, today, consumers are used to buying designer clothing for less. The value proposition has become critical, and therefore such off-price retailers as TJX (NYSE:TJX) and Ross Stores (NASDAQ:ROST) continue to open stores.

Take TJX Companies, for example: since the last recession the retailer has maintained a 4.1% same store sales seven-year average. This is above the 3.0% SSS mark of healthy retail sales and suggests comps are robust. What's more, the retailer has been opening an average of ten stores per quarter over this seven-year period.

Exhibit 1: TJX Companies - Number of Stores and Same Store Sales: 2011-present

Source: Thomson Reuters Eikon

Coping with online competition

Some retailers have unique business models that are very difficult to replicate online, such as some cosmetic and off-price retailers. What's more, these successful retailers appeal to millennials, which is key, because they make up the biggest portion of the U.S. consumer population.

Millennials also prefer experiences over things, and beauty retailers such as Sephora and Ulta (NASDAQ:ULTA) offer consumers a shopping experience where they can try, play with makeup before purchasing it, and even return used merchandise. At some Sephoras you can even get your eyebrows shaped and at Ulta you can get a haircut done in the store. Although you can book a beauty treatment online, you just can't get the service done online.

Ulta's SSS has been declining because of difficult comparisons (Exhibit 2), but still remains considerably above the 3.0% healthy mark, suggesting SSS are robust. Accordingly, the retailer continues to expand its footprint.

Exhibit 2: Ulta - Number of Stores and Same Store Sales: 2015-present

Source: Thomson Reuters Eikon

Using media wisely

Savvy retailers know that social media has also changed the ways consumers shop. They visit and follow various influencers, brands on platforms such as Instagram for beauty inspiration and makeup tips, or how to style their hair by themselves. Consumers feel inspired in a visual way, and are getting a sense of necessity. Thanks to advancements in technology and smartphones, they expect instant gratification.

This has boosted sales at various sectors including the home improvement category. Now consumers want to have an experience, build things on their own and follow Do-it-Yourself (DIY) blogs, etc. Shoppers still want to go to Home Depot (NYSE:HD) because they also want advice from a professional. Home Depot also offers in-store family experiences, and has recently partnered up with Pinterest for consumers to use the Shop the Look Tool. Social media, experiences and the improvement in the housing department have propelled Lowe's (NYSE:LOW) and Home Depot to continue to expand their footprint (Exhibit 3).

Exhibit 3: Lowe's - Number of Stores and Same Store Sales: 2013-present

Source: Thomson Reuters Eikon

Several department stores are winning

Millennials are often cost-conscious and generally less inclined to shop at the same stores that their parents once did - like the department stores. The promotions might do a good job of attracting shoppers looking for lower prices, but the brands department stores sell don't. As a result, malls have fallen out of favor, and the big department stores that anchor malls continue to close their doors.

Looking at the data over the past ten years, it is evident that the bulk of department stores are closing stores. Sears (SHLD) has closed over 1,500 stores in the last decade. Nordstrom (NYSE:JWN) and Kohl's (NYSE:KSS) are the only two that continue to expand (Exhibit 4). What's more, both of these retailers are predicted to post double-digit earnings growth this year. The two department stores have better brands than their peers. What's more, they carry on-trend merchandise and are definitely capitalizing on the hot health trend right now by offering athleisure products by popular brands such as Adidas (OTCQX:ADDYY) and Nike (NYSE:NKE).

Exhibit 4: Store Closures and Growth over the past ten years - Department Stores

Source: Thomson Reuters Eikon

Strong trends - athleisure

Since the recession, Lululemon (NASDAQ:LULU) has been outperforming the apparel industry. What's interesting is that about 70% of its revenue is generated within stores, not online. Lululemon attracts in-store sales through its concept and strong sense of community. Upon entering the stores, shoppers enter a community where free yoga classes are offered in an environment that embraces wellbeing.

However, the competition isn't standing still. Gap's (NYSE:GPS) Athleta is known for opening stores in the vicinity of Lululemon, making it easier to steal some of Lululemon's core consumer - especially when offering lower prices, and similar store structure with free yoga classes.

This is interesting because with the exception of Athleta and Old Navy, Gap and its Banana Republic division continue to close stores. This underlines the strength of the athleisure trend and off-price strategy.

Exhibit 5: Gap and Old Navy Store Count: 2014-Present

Source: Thomson Reuters Eikon

Why do other retailers struggle?

Traditional retailers have been struggling in the past decade. Shoppers have shifted their spending to online retailers, local and organic business and groceries, and have chosen value/lower price points over brand loyalty. Besides preferring experiences over things, millennials are also very tech-focused; mobile phones are important to them, underlining the importance of retailers investing in e-commerce and omni-channel initiatives. This investment is a significant expense for retailers. As a result of all this, mall traffic and sales have declined, causing margins and profits to fall. Some retailers such as Toys "R" Us are closing stores, while others are facing consolidation.

Online trends

There has been a lot of talk about online retailing stealing brick-and-mortar business. However, over 90% of total retail sales still happens at brick-and-mortar stores. Online giant Amazon (NASDAQ:AMZN) knows this, and acquired natural and organic food supermarket Whole Foods. The online retailer also extended its physical presence by opening an Amazon Books store in New York, where shoppers can discover new and highly-rated books. The retailer already smashed its Q1 2018 earnings estimate, and posted a positive earnings surprise.

Exhibit 6: E-commerce sales as a percentage of Total U.S. Sales: 2008-Present

Source: Thomson Reuters Eikon