Retail shake-up hitting stores soon
Here are the retailers built for good times, and the ones that can't handle prosperity.
By Jeanine Poggi, TheStreet.com
Few retailers reach the top. Even fewer stay there when they do.
The reason is deceptively simple: Those retailers best positioned for success in bad times are often poised for failure in good times -- and vice versa.
Such is the trap that faces today's most successful retailers as they attempt to navigate the transition from the Great Recession to, potentially, the Great Recovery. And three stocks in particular -- Wal-Mart (WMT), Aeropostale (ARO) and TJX (TJX) -- are facing the prospects of a sudden, and possibly swift, reversal of fortune.
Wal-Mart, of course, has been one of the biggest beneficiaries of the recession. Its prices -- low and seemingly getting lower -- have been a lure for shoppers looking to trade down.
As a result, the discount behemoth has beaten Wall Street's profit expectations in three of the last four quarters. And while Wal-Mart discontinued reporting monthly sales figures back in May, prior to the announcement it had posted 24 consecutive months of positive sales.
And as Wal-Mart picked up these gains, rival Target was getting pummeled. Stocking more discretionary merchandise like apparel and home furnishing, in the last 15 of 16 months, Target experienced negative same-store sales.
But it appears the tides are changing. Target's October comparable sales slipped just 0.1%, and their declines have been easing since the end of the summer. Target management also announced that apparel sales -- its weakest segment amid the recession -- were slightly stronger during the month compared with the same time last year.
"By adding fresh foods to stores, Target is seeing shoppers pick up consumables and then head into other departments," says Brian Sozzi, analyst at Wall Street Strategies.
Given that Wal-Mart does not have a big selection of fashion merchandise, as demand in the category grows (as it tends to do during more prosperous times), it's more likely shoppers will turn to Target than Wal-Mart.
To that end, in March, Target will launch Designer Collaborations, an ongoing program to introduce high-end fashion to the masses; the first joint project will be with famed designer Alexander McQueen. Target also has its Go International program, which features the fashions of young or emerging designers.
Like Wal-Mart, Aeropostale has also been able to capitalize -- throughout the downturn -- on its promotional stance. As a result, the company has reported nearly a year of positive same-store sales, despite the recession.
Since October, however, seven analysts have downgraded Aeropostale despite its seemingly jaw-dropping monthly numbers. That's because the company's sales growth is starting to reveal some cracks. In October, Aeropostale posted just a 3% increase for the month, severely missing analysts' forecast of a 13.8% surge.
UBS analyst Roxanne Meyer is one of the most recent analysts to downgrade the stock to neutral from buy. She also lowered her 2010 price target to $36 from $49.
And while she still views Aeropostale as a relative stand-out in a tough environment, she says its immunity is wearing thin.
Investors, indeed, have been looking for any reason to pull out of this stock and have, as of late, become hyper-concerned with the top line. A deceleration of sales could be the all rationale they need to pull that trigger.
Meyer, for one, fears this sales blip could become permanent as comparisons get significantly harder in December.
Add to Aeropostale's woes the fact that American Eagle Outfitter and Abercrombie & Fitch are both displaying improving fashion and more attractive prices.
Aeropostale once boasted prices that were about 30% lower than American Eagle's and 50% below Abercrombie & Fitch's. But that gap has narrowed on its rivals' own competitive promotions.
As if that weren't enough in the way of competition, Sozzi also says to keep an eye on Pacific Sunwear of California as a possible threat to Aeropostale. The surf-inspired retailer has been improving its product, and the appointment of new CEO Gary H. Schoenfeld, former head of Vans, could augur a rebound in 2010.
Then again, many are the investors who have stung themselves by betting against Aeropostale.
As Needham analyst Christine Chen says: "Everyone keeps wondering when is the party going to end? But I had this same conversation last year and they are still outperforming." Chen adds that she believes Aeropostale will continue to be the standout for the holiday season.
"The argument has always been that Aeropostale is a trade-down play, and if consumers get more confident they will want to trade back up," she says. "But this isn't the case. The brand is not just about price. It has become cool as the fashion improved."
Picking up the leftovers is a tactic off-pricers TJX and Ross Stores have used to their advantage throughout the downturn.
As a chunk of retailers have filed for bankruptcy and inventories have shrunk across the board, off-pricers like TJX have swooped in and picked up excess merchandise and market share -- one of the biggest having come from the liquidation of Mervyn's.
In October, TJX reported a 10% jump in same-store sales and said it third-quarter earnings will meet or slightly exceed its previous forecast of 77 cents to 79 cents a share.
Ross Stores also posted a 9% gain in comparable sales last month, easily surpassing the consensus of a 7.3% increase. As a result, it upped its third-quarter guidance between 83 cents and 84 cents a share, from prior outlook of 75 cents to 77 cents a share.
But it appears that the off-pricers may have peaked. As Citigroup analyst Kimberly Greenberg said during the Retail Marketing Society's annual holiday conference: "For these retailers to pick up more share gains would be a challenge since there is not much more left to steal."
Likewise, consider that the majority of the same-store sales growth of TJX and Ross Stores has come from an increase in traffic, while their average ticket price has been under pressure, MKM Partners analyst Patrick McKeever says.
"They are getting new customers who are trading down from department stores, but these shoppers are still spending less," he says.
And while McKeever believes TJX and Ross are well positioned for the holidays and the early stages of a consumer recovery in the first half of 2010, as the overall economy improves, their relative outperformance will diminish.
This doesn't, of course, mean TJX and Ross are wishing for a drawn-out recovery, McKeever says. It's quite the opposite. "These companies have always said they do better in a strong economy."
But while it's unlikely that what made them strong in the recession will suddenly disappear, they will clearly no longer be standouts in the sector once the real consumer returns.
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