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The Best Retail Money Makers in the Business

The Profit Picture

Chris Schultz -- Home Textiles Today, June 9, 2011

NEW YORK - When it comes to retailing in the current climate, bigger is not always better. An analysis of the key publically traded retailers tracked by Home Textiles Today revealed performance dominance by off-price Ross Stores Inc. and the TJX Cos., which nabbed the No. 1 and 2 spots, respectively. Coming in third was specialty home goods retailer Bed Bath & Beyond Inc., with Family Dollar Stores Inc. claiming the No. 4 slot and specialty retailer Williams-Sonoma Inc. closing out the top tier at No. 5.

The retailers garnered their positions via a performance rating composed of five key metrics: profit and operating margins (which are measures of profi tability); return on assets and return on equity (which are measurements of management effectiveness) and operating revenue growth (which show yearly topline growth). The data compiled reflects the most recent trailing 12-month period - year over year.

The data also shows why recent first-quarter results for 2011 came in the way it did, with bumps and misses on the profit line and sagging same-store sales growth, which we'll get to in a minute. But fi rst, let's take a closer look at the fi nish line, which refl ects why the off-price segment has been such a sweet spot in the market - at least over the past few years.

For some perspective, roll back two years when consumers got pummeled by macroeconomic woes that centered on less household income and a poor job outlook. As a result, shoppers tightened their belts. But they managed to sock away some money in their savings accounts, and when it came to spending they honed their shopping skills. That's when trouble hit the retail market. Consumers prowled for bargains and deals, and the results were mixed at retail except for the off-price players and some of the crafty specialty folks such as Bed Bath & Beyond that positioned themselves smack in the sites of the bargain hunt while retailers such as Williams- Sonoma (with its cadre of loyal shoppers) expanded its e-commerce business to new, deeper levels.

In the latter half of 2010 - as a Bull Market raged on Wall Street - consumer confi dence returned. Holidays sales were better than expected. Pent-up spending was released. In the home space, Pottery Barn and HomeGoods shared equal attention for shoppers looking to dress up the house. But most of the smart and savvy shopper habits remained, which is why the companies that managed their inventories well and ran their businesses with machine-like precision scored well.

Add to that a desire by consumers to get top brands at a discount, and it becomes clear why the off-price players are some of the best performers in the industry.

From here, it's hard to pin down who will fare best. Wall Street is knee-deep in transitioning into a Bear Market - or so the pundits say. Meanwhile shoppers face higher energy costs (gasoline and home energy) and infl ationary pressure on their food bills, among other factors - all of which has left shoppers jittery to say the least.

Brian Sozzi, senior retail analyst at Wall Street Strategies, said in a recent research note that "not all retailers win in a trade-down movement." He's talking about a seismic shift in consumer spending. "I can just sense the changes the consumer made in terms of purchase habits [in April] - an analytical intangible you pick up along the way," Sozzi pondered. "Who offers the best weekly food values? Where do we go to get the best price on a splurge? These questions were generally off the table in 2010 as rising confi dence and merchandise defl ation made it less of a discussion worth having."

But now, egads. Sozzi and other experts warn "never to bet against the U.S. consumer."

"That old adage was tucked away in the memory banks in 2008 and 2009," Sozzi said in his report, "but has begun to resurface as the consumer has spent more freely. Is there suffi cient data to support a bearish bet on the consumer during the summer months? I think the April retail sales report showcases the stress on the average U.S. household from mounting cost of living increases, and therefore stock selectivity where companies have outsized consumer exposure remains key to success."

Those are disconcerting words if you are a retailer sitting on a load of inventory right now and your stock price is stuck in the middle of your 52-week high and low. Even as fuel prices inched up slowly in the fi rst quarter of this year, consumers remained confi dent but cautious in their spending.

"Retail sales in very discretionary categories, say sporting goods, health and personal care, furniture, and electronics have started to transition from solid recovery in 2010 to mixed or weakening trends," Sozzi added. "The lag effect is obvious when drilling into the data. To me, the retail sales reads [year-to-date] depict a consumer that is cognizant of the factors nipping away at wages and the payroll tax credit funds, as well as being mindful of the downside of spending with reckless abandon circa 2007."

Time will tell if the summer doldrums rip away at the retail market. In the meantime, it pays to look at some of the fi rstquarter results to gauge how the market is positioned for the next two quarters.

In its most recent quarterly report, Ross Stores - our top performance hero - delivered stellar results with home goods a key category. The company said home, dresses and footwear were its best categories with single to low double-digit sales increases in these segments.

Meanwhile, total sales and earnings per share came in better than expected - despite diffi cult year-over-year comparisons, said vice chairman and ceo Michael Balmuth during a conference call with analysts. Earnings per share swelled 28% on sales that gained 7% to $2.1 billion. Noteworthy was that management said it is well-positioned as it continues to get access "to increasing availability of product in the marketplace." Excess inventory in the market is pure gold for off-pricers.

"We're seeing sizable amounts of product in the marketplace," Balmuth explained on the conference call. "We don't know if it is directly attributable to the price increases or to sales not materializing to the degrees of forecasts. But it's a very good buying market out there, as our pack-away models show." Just to clarify, Ross' pack-away model is seen as risky to some analysts who have

been trained to scorn over-inventoried positions. But as an off-price retailer, one company's excess inventory is another's profi t. As a result, the pack-away model may continue to bolster Ross Stores in the coming quarters. Pack-away inventory involves off-price retailers buying a large supply of branded merchandise at the end of a season at a steep discount. This inventory is then stored in a facility until the next season.

At TJX Cos., fi rst-quarter results were good even as the off-pricer faced diffi cult year-over-year comparisons. Carol Meyrowitz, ceo, told investors and analysts that the sales growth in 2010 was "overwhelming" and will make 2011 comparisons diffi cult. Still, due to its market position, the retailer will likely continue its love affair with savvy shoppers - especially those who sift through the top brands in its HomeGoods unit.

For other retailers such as Walmart and Target Corp. in the mass segment and moderate department stores like J.C. Penney, the fi ckle and unsettled - yet, well-trained - shopper presents a massive challenge. Analysts see lower-income shoppers buying less while middle-income consumers will begin trading down and the excesses and splurges of the higher ranks are expected to subside.

It looks like it's time to batten down the hatches.

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