8 Retail Giants Facing Massive Headwinds

by: IncomeHunter

The retail giants are currently at their drawing boards to plot their strategy for the final onset of the holiday season. These measures are aimed at matching the prices that online retailers offer. For the year, the retail industry has started on a strong footing but slowed down for the second quarter.

This is in line with industry's forecasts. Industry pundits are cautiously optimistic for this year, noting the roller coaster swings retailers experienced last year. For this year, the story has been similar. The unsteady demand for the June sales impacted the industry. The bad weather resulted in slower sales and offset the gains during Father's Day. Meanwhile, the retailers seem to have climbed back with the back-to-school shopping season.

Looking at the September same stores sales growth, the results were mixed. The major retailers came relatively better than expected. Target (NYSE:TGT) reported 2% same-stores sales growth, beating expectations of 2%. It expects low-to-mid single digit growth for its October same-store sales growth. Another retailer Costco (NASDAQ:COST) posted same-store sales growth of 6%, exceeding growth expectations of 5.7%. Meanwhile, other retailers such as Macy's (NYSE:M) posted same-store sales growth of 2.5% behind expectations of 3.3%. Even Wal-Mart (NYSE:WMT) posted flat same-store sales growth of 1%. Other major underperformers include The Buckle (NYSE:BKE) and Cato (NYSE:CATO) experiencing declines of 0.1% and 2%, respectively.

Having said this, it is extremely important for these retailers to perform well during the season. Traditional retailers are currently facing significant headwinds, mostly coming from technological advancement and the proliferation of newer business models. This results in the emergence of new consumer types and habits.

For example, consumers could easily compare best prices for various consumer goods. Thus, online retailers such as Amazon (NASDAQ:AMZN) have experienced uninterrupted growth for the last 10 years. Its competitive advantage lies on its low-cost operations, focus on customer service and network effect. This is the main reason behind the 31% revenue growth for the period. This means that the company could easily maintain strong market shares for the coming years.

Another challenge for traditional retailer is an innovative business model. A good example would be Repairclinic.com. RepairClinic is an online resource that makes fixing things easy for people. The company was founded in 1999 and has been America's most popular and trusted online store for replacement parts and free repair help for major household appliances, outdoor power equipment, water vacuum cleaners. The do-it-yourself (DIY) appeal to consumers resulted are hurting retailers such as Target, Sears (NASDAQ:SHLD) and even Wal-Mart. In the case of Sears, it has established a dedicated business to compete with replacement parts player such as RepairClinic. Its Sears Parts Direct is an online access point for repair parts and accessories from every major brand. Like RepairClinic, it also offers practical and DIY tips for consumers. So far, Sears Parts Direct has been getting mixed reviews and there's a lot of work that needs to be done. In contrast, RepairClinic is getting good reviews, implying that there's wide acceptance from consumers. I see that RepairClinic will continue to have stronger reviews and acceptance as it has been in the game for a long period of time. Thus, it enjoys the first mover advantage.

Economic Backdrop Still Weak

Aside from the challenges mentioned above, the overall macroeconomic backdrop remains weak. This indicates slower profitability and cash flow for retailers. However, the recent months shows some improvement. According to the U.S. Census Bureau, U.S. retail sales reached $412.9 billion, an increase of 1.1% compared with the previous month. On a year-on-year basis, this is up by 5.4%. While this one of the reasons to be optimistic over its prospects, the conference confidence index has fallen to 62. This is due to the changing consumer habits. Consumers are becoming more rational with their spending given the prolonged uncertainties in the global economy. Also other economic indicators such as unemployment suggest that the U.S. economy will be slower than expected. In turn, this will have a significant impact on consumer spending, a key component of the overall economy.

The tightening of the consumers' belt would result in the consumer finding better deals among retailers. This explains the rise of mobile and online shopping. There is also a growing trend of retail store closures over the last few years. There is now a growing trend to downsize the physical operations of these brick and mortar operations and reinvest the savings to e-commerce sites to attract new and existing customers.

Given this trend, I believe that store closings will continue throughout the year. Unless we see that there is a significant pick up in the U.S. economy, this situation will continue for next year. The best strategy for retailers is to reinvest. Retailers should focus on finding innovative solutions to create customer value and reduce operating costs and risks. The challenge is to improve operating margins over time.

Retail operating margins have significantly decline compared with previous years. For instance, Target's operating margins have declined from 6% in 2004 to 1.8% in 2011. I believe that retailers should explore other possibilities to diversify revenue sources, as well as create avenues for value-added products. With this, these retailers will be in a better position to attract consumers once the economy normalizes.

However, this won't be an easy task. Moving forward, the intense competition and price wars will definitely hurt margins. Furthermore, the rate of converting consumers as shoppers will still largely depend on the continued economic recovery and improvement on unemployment rates. Until we see clear improvement from the economic indicators, it will be a difficult task for both traditional and online retailers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.