A relatively stolid sector in the retail industry, the automotive aftermarket segment was roiled during the past year by a major bidding war between activist investor Carl Icahn and Japanese-owned tire and rubber company Bridgestone. The prize: Philadelphia-based Pep Boys.
Though Pep Boys was not performing particularly well, it is the only major player in all four segments of auto aftermarket retailing: do-it-yourself, do-it-for-me, replacement tires and buy-for-resale. Pep Boys boasts some 800 stores in 35 states and Puerto Rico with more than 7,500 service bays. The bidding war was sparked last October when Bridgestone Retail Operations announced an $835 million offer for publicly held Pep Boys. After several escalating offers, the deal was clinched by the end of the year when Icahn’s publicly held Icahn Enterprises said it was willing to lay out just over $1 billion for Pep Boys, which joins the 270-location Auto Plus chain Icahn acquired in June 2015.
Last year the U.S. Department of Transportation said consumers were keeping their cars and other vehicles 18 months longer than they did in 2007, when the average age of a family vehicle was 10 years.
“The fact that these oldest vehicles are growing in number is a great trend for the aftermarket repair business,” IHS Automotive notes. “In fact, by 2020, there will be approximately 76 million vehicles in operation that are 16 years or older, up from 35 million in 2002.”
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General apparel
Much is happening in the apparel sector, not a lot of it positive for some familiar names found in malls across America. “Apparel is structurally changing,” says Bryan Gildenberg, chief knowledge officer with Kantar Retail. “TJX is now the biggest apparel seller in the country more apparel than Macy’s, more than Walmart, more than any other specialty chain.”
TJX, parent of TJ Maxx and Marshall’s, rang up corporate sales growth of 6 percent last year. After posting a 7 percent same-store sales increase in the first quarter of this year, CEO Ernie Herrman declared, “We are convinced that we are growing our customer base and gaining market share.” Herrman, who replaced longtime leader Carol Meyrowitz earlier this year, credits strong marketing efforts for boosting positive results.
Urban Outfitters is fashion-oriented but still pays attention to nuts and bolts, metaphorically speaking. The quirky retailer — which operates eponymous stores as well as the Anthropologie and Free People chains — has invested in technology infrastructure and enhancing inventory management. Merchandise turns over about 6.5 times annually and stays in inventory just over 56 days; averages for its peers are around 4.9 turns and closer to 80 days in inventory.
The technology effort has focused equally on in-store and digital commerce. “Our brands were early direct-to-consumer adopters,” says Richard Payne, UO’s chairman and chief executive. “While we continue to invest more in electronic shopping capabilities, we also strongly believe that bricks is synergistic with clicks, and that a well-conceived and executed store strategy is a powerful competitive advantage.”
Small-format value
Kantar Retail projects small-format value will be the fastest-growing bricks-and-mortar segment over the next five years, expanding 6.6 percent annually through 2020.
Segment leaders Dollar General and Dollar Tree, which is currently digesting its acquisition of Family Dollar Stores, have been adding more coolers and freezers to their stores to better compete with traditional supermarkets. “Dollar stores’ consumable goods now represent over two-thirds of their total SKUs,” says Richard J. George, professor emeritus of food marketing at St. Joseph’s University’s Haub School of Business. “The dollar store phenomenon will only continue to grow.”
George’s research indicates that 38 percent of Millennials shop for groceries in dollar stores. He also says that in the post-recession era of value shopping, “frugal fatigue” hasn’t occurred in food shopping. In the first quarter of this year, both Dollar General and Dollar Tree saw same-store sales increase 2.2 percent.
Dollar General expects to grow to 20,000 stores by 2020, and is focusing its merchandising efforts on traditional supermarket categories like perishables and health and beauty care. In June the company opened its 13th distribution center, located near San Antonio, Texas, to serve 800 stores in that state as well as Louisiana and New Mexico. Dollar General has introduced a smaller (roughly 6,000 square feet) format for deeper penetration into densely populated urban areas. After a pilot program involving 30 stores, the company plans to open approximately 80 more this year.
“Sales productivity and returns based on the early results are very encouraging,” says Todd Vasos, Dollar General’s chief executive. “By eliminating less-productive product segments and adding or expanding product departments to meet the needs of our urban customers, we believe this smaller-format store will allow us to have a higher capture rate per site selection.”
While Big Lots is larger than most of the players in this category, with stores averaging 30,000 square feet, their size is not large enough for inclusion in the Mass Merchants category.
Supermarkets
With a marriage of their corporate parents taking place in Europe, Dutch-controlled Ahold U.S.A. and Belgian-owned Delhaize America are combining to create a unique network of grocery stores along the East Coast.
The chains include Ahold’s Stop and Shop in New England and eastern New York State, two Giant chains and the more recently acquired Martins in Virginia. Ahold also operates Internet grocer Peapod. The Delhaize holdings straddle Ahold’s like bookends, with Hannaford Brothers in New England and Food Lion in 10 mid-Atlantic and Southeast states.
The European merger will take place, having received shareholder approval, but the Federal Trade Commission could throw a monkey wrench into the deal. It remains to be seen how many stores Ahold and Delhaize will have to shed and when — perhaps even if — the merger first advanced in June 2015 will be completed.
Publix is one of those supermarkets with a cult-like following that has propelled to the top of the list of retailers rated for customer experience in the annual rankings by Temkin Group. With a calling card like that, Publix has been able to keep pushing northward from its Florida base and is heading for the nation’s capital.
Publix unveiled its initial thrust into Virginia with stores slated to open in Bristol and Glen Allen as early as next year. The company is scouting for sites throughout the commonwealth, including northern counties near Washington, D.C.
Department stores
Premature or not, it seems the obituaries for players in this segment are dusted off with every quarterly earnings report: Off-price retailers and superstores, combined with online and mail-order shopping, are knocking the stuffing out of department stores.
To be sure, first-quarter results weren’t rosy: JCPenney’s sales were down 0.4 percent, Nordstrom’s were off 1.7 percent, followed by Kohl’s, Macy’s and Sears Holdings. But these venerated industry stalwarts aren’t ready to fold the tent and steal away silently.
“We are absolutely not pulling back our commitment to digital and omnichannel retailing. Mobile remains a very high priority and we continue to invest,” Macy’s CFO Karen Hoguet said to investors and analysts recently.
“We are continuing to see double-digit year-over-year sales increases in online sales. While we have already somewhat downsized our fleet of stores, we continue to see value and opportunity in physical locations that sync with desktops, websites, apps and mobile in giving customers choices and meeting demand in new and different ways.”
One strategy is to offer merchandise not readily available anywhere else. “One of the things we’re all focusing on is having more exclusive merchandise that you could only get at Macy’s and you can’t price-compare easily,” Hoguet said, “but also giving the customer just a better experience so that she’s more likely to come in and buy from us at regular price.”
While Macy’s wasn’t very optimistic about the outlook for its department stores through the end of this year, the company did say it was going to try to offset that by accelerating the expansion of its Backstage off-price stores. Fitch Ratings views Macy’s as well-positioned in the mid-tier department store space as it continues to benefit from the My Macy’s localization initiative, omnichannel and other growth strategies.
Restaurants
All-day breakfasts boosted some fast food chains, as did the bundled promotions of the four-or-five items for $4 or $5 variety. But a fickle public looked elsewhere to satisfy its hunger once the weather started turning warmer, with customer traffic increases slowing to less than 1 percent, according to some industry trackers.
For the restaurant industry as a whole, year-to-date comparable sales growth peaked in February at 3 percent. Things aren’t very hot at pizza joints, either, where deliveries slid from $11.9 billion in 2004 to $9.7 billion last year, reports Statista.
“Dramatic increases in labor costs have a significant effect on the restaurant industry, where profit margins are pennies on the dollar and labor makes up about a third of total expenses,” says Andrew Puzder, chief executive of CKE Restaurants. “As a result, restaurants are looking to reduce costs while maintaining service and food quality.”
CKE is the corporate parent of the Carl’s Jr. and Hardee’s chains, where the complex menus make automation implementation more difficult, Puzder says.
Another Power Player, Chipotle Mexican Grill, faces an entirely different challenge: winning back customers and public favor after a series of food-related illnesses hit the company, which prides itself on fresh and natural ingredients.
“It will take some time to rebuild trust with customers,” co-CEO Steve Ells says. There is some evidence that is already happening: Negative vibes about Chipotle hit their low point in February and are now trending positive, according to YouGov BrandIndex, which measures consumer attitudes toward companies and brands. Wall Street analysts anticipate Chipotle’s comparable sales should turn positive by the fourth quarter.
Home goods
It may be the result of increased activity in the housing market, but home goods retailers are on a roll. New home sales posted double-digit increases this spring and there’s still “a shortage of shelter,” says Ivy Zelman, chief executive of Zelman Associates.
“The U.S. is at a 30-year low of inventory available for sale,” she says. “We are predicting double-digit housing starts growth this year, next year and in 2018.”
Home goods retailers are benefitting as people change residences and add furniture, housewares and home décor when they do. Wall Street stock touter Jim Cramer credits retailer HomeGoods for the increase in parent TJX Cos.’ stock this year. HomeGoods registered a billion-dollar sales quarter in the first three months of this year, boosted in part by 9 percent same-store sales gains.
HomeGoods is the bricks-and-mortar counterpart to Wayfair, which sells home furnishings and décor items online at sharp discount prices. In May, Wayfair announced the opening of the Wayfair Next research and development laboratory “dedicated to accelerating the shift to online shopping by improving the visualization of products through first-party technologies.” The company says it is exploring novel 3D scanning techniques to digitize Wayfair’s vast catalog for use with augmented reality, virtual reality and 2D rendering.
The new Wayfair Next lab hosts a virtual reality experience described as a hands-on demonstration that allows users to transform a room by customizing the model, material, color and layout of furnishings and décor.
“Technology innovation has always set us apart from every other player in the home space,” says Steve Conine, co-founder and co-chairman of Wayfair. “Wayfair Next represents our commitment to constantly raising the bar to create the best possible shopping experience for the home, adapted to how consumers shop today and in the future.”
Jewelry and accessories
Tiffany took a stance on counterfeit merchandise when it withdrew from the International Anticounterfeiting Coalition to protest the organization’s acceptance of Alibaba Group Holding as a member. Tiffany and fellow Power Player Coach are routinely victimized by counterfeiters selling wares on e-commerce portals operated by Alibaba. The anti-counterfeiting group later expelled Alibaba from the special membership category to which it had been voted a month earlier.
Not that Tiffany has anything against e-commerce. This spring the New York-based jeweler launched a collaboration that makes Net-A-Porter.com the only authorized venue outside Tiffany’s own channels where its goods are available. Tiffany’s worldwide sales rose 2 percent last year on a constant exchange-rate basis, but because of a strong U.S. dollar, declined 3 percent when stated in native currency.
Signet, on the other hand, had a much more upbeat year, with annual sales growing 14.2 percent among its brands that include Kay Jewelers, Zale, Jared, People and Piercing Pagoda. Same-store sales rose 4.1 percent. In addition, Signet’s acquisition of Zale cleared its final hurdle in May when the Delaware Supreme Court turned back a challenge to the deal.
As Signet CEO Mark Light notes, “The integration of Zale continues to go well and we remain confident in our recently raised synergies. We see an expanded and accelerated level of financial contribution from the deep pipeline of initiatives our teams are working on to unleash the long-term potential of a fully integrated Signet.”
Hobby and craft
Hobby Lobby plans to add 50 stores this year, including a milestone 700th location in Fresno, Calif., that opened in May. Hobby Lobby has also redesigned its website in order to make it more mobile-user friendly, even though an internal survey revealed that about 18 percent of its customers didn’t even know they could make purchases online and two-thirds said they would rather shop in stores than online.
Earlier this year, Michaels Stores paid $150 million to acquire Pat Catan’s, an iconic arts and crafts retailer with more than 30 stores spread over northeast Ohio, Pennsylvania, West Virginia, Michigan and Indiana. Among Michaels highlights were a 15 percent gain in operating income and a 25 percent increase in free cash flow. It has budgeted capital spending of around $130 million this year, which includes opening 33 Michaels Stores and one Pat Catan’s.
Jo-Ann Fabric and Craft Stores is in management transition, having brought in chief executive Jill Soltau last year from Shopko and recently recruited Wade Miquelon, formerly with Walgreens, as CFO. Jo-Ann’s is functioning now as “a leaner, more nimble organization,” it says, after streamlining operations and cutting more than 100 jobs at its headquarters store support center in Hudson, Ohio.
Women’s apparel
Women’s apparel is not a scintillating segment right now, and the biggest specialty store seller of ladies’ apparel is showing a little wear and tear. L Brands, parent of Victoria’s Secret, reports that comparable store sales slumped in the early months of this year, coming off a 2015 in which Victoria’s Secret enjoyed a 5 percent same-store sales increase. To stir things up, and cut some costs, Victoria’s Secret will stop publishing its catalog, and also get out of the swimwear business. The moves are part of a corporate-wide reorganization and streamlining effort that includes cutting 200 jobs from its New York and Columbus, Ohio, offices. Eliminating the catalog — 300 million of which were printed annually — should save the company up to $150 million a year.
Charlotte Russe is in the right niche as a fast-fashion retailer, but it’s facing its share of challenges as a mall-based chain. In attempting to right the ship, Charlotte Russe has been focusing on bolstering it digital commerce, particularly the mobile platform. Debra Jensen, Charlotte Russe’s chief information officer, says the company’s app has more than 1 million users, a quarter of whom also patronize the bricks-and-mortar stores. Jensen says the current project is enabling inventory visibility across all channels.
HEALTH AND BEAUTY
Sally Beauty Holdings is striving to turn its stores around, even as it ran into “some modest sales headwinds” earlier this year, Chris Beckman, president and chief executive, said recently. Looking ahead, Sally Beauty “will continue to bring more innovation to our business” by introducing a color education center in approximately 1,600 stores, launching the BITZY cosmetic brand and releasing a mobile app through its BSG business “to help enable stylists to run their businesses via their smartphone.” In the second quarter of the current fiscal year, Sally Beauty increased spending on such things as upgrading its information technology systems, higher recruit and compensation expenses, and increased advertising. Sally Beauty opened its 5,000th store, globally speaking, in Fort Worth, Texas, earlier this year and has added well over 100 units over the last 12 months.
Ulta has been something of a Wall Street darling, with the price of its shares soaring more than 50 percent over the last 12 months. Ulta has an unusual model for its bricks-and-mortar operations, in part because it offers mass, prestige and private label goods as well as salon products and services under one roof. Analyst Rupesh Parikh of Oppenheimer & Co. expects Ulta “to continue to benefit from store maturation with stores generally comping mid-teens the first year in the comp base,” and that Ulta will continue to add approximately 100 stores annually for the next few years.
SPORTING GOODS
Sports Authority’s much-dissected demise — the company is wrapping up going-out-of-business sales and store closings under the watchful eye of the bankruptcy court — opens plenty of opportunities for its former rivals in the form of both store locations and increased leverage with sporting goods, footwear, and apparel suppliers.
Sports Authority had been ailing for quite some time and initially thought it could reorganize in Chapter 11 bankruptcy proceedings, shed most of its stores and emerge a trimmer chain. But the retailer failed to pacify suppliers — at one point the company was facing more than 160 lawsuits — and in May the decision was made to cease operations and liquidate stores and inventory. An auction of Sports Authority’s leases is expected later this year.
This is what such competitors as Dick’s Sporting Goods, Modell’s and others are waiting for. “There is a small group of stores we would love to get,” Dick’s chief executive Edward W. Stack told Wall Street investors and analysts on a recent conference call.
Turmoil might be a good word to describe the sporting goods segment right now. Vestis Retail Group, parent of Eastern Mountain Sports and Sports Chalet, also filed for protection and said it intends to shut down Sports Chalet. And then there’s Cabela’s, an underperforming, family-controlled business that was shaken up last fall when activist Elliott Management bought a large stake and immediately called for the company to sell itself. Bass Pro Shops expressed interest in buying Cabela’s, but nothing conclusive has come of it.
FOOTWEAR
Buster Brown and his dog Tige still live in their shoes, but the erstwhile Brown Shoe Group is moving ahead as Caleres, a name derived from the Latin verb meaning “to glow.” The company’s retail operations are divided into two segments: Famous Footwear, which operates a chain of shoe stores, along with the e-commerce site Famous.com, and the Brand Portfolio featuring such names as Naturalizer, Sam Edelman, DVF, Via Spiga and Dr. Scholl’s.
Sales at Brand Portfolio dropped 9 percent from the same period last year, in large part because of a planned reduction in offerings. Athletic footwear is driving sales at the Famous Footwear chain, which accounts for roughly half of Caleres’ sales, says Christopher Sevia, analyst with Susquehanna Financial Group.
As the Footwear Power Player leader with sales more than double those of runner-up DSW, Foot Locker operates a number of different formats and is constantly adjusting its real estate portfolio by opening, closing, relocating and sometimes rebranding its stores, all the while focusing on improving productivity. Foot Locker generated record sales in 2015 and in the first quarter of the current fiscal year, improved in the earnings department.
“We produced the most profitable quarter in the company’s long history,” said Richard Johnson, chief executive and chairman. “Our team navigated well through a variety of challenges, not the least of which were rapidly shifting product category preferences by our customers,” to achieve a 25th consecutive quarter of year-over-year sales and profit increases.
DRUG STORES
If all goes according to scrip, er, script, this group’s lineup will be reduced when Rite Aid joins Walgreens Boots Alliance later this year.
Many industry watchers believe the Rite Aid acquisition will be approved, albeit with the sale of a good number of stores as a condition.
Walgreens encountered a stumbling block after committing to a partnership with Theranos that called for a number of “wellness centers” in its stores and employing a proprietary blood testing technique with “minimally invasive” finger pricks and rapid turnaround of results. Those plans came to a screeching halt after questions arose about the efficacy of Theranos’s technology, as well as the company’s finances.
CVS Health, which has trailed Walgreens in implementing consumer-oriented technology, has unveiled an app that lets customers order items and pick them up in store. The CVS Express app is being tested in Atlanta, Charlotte, N.C., and San Francisco. CVS planned CVS Express to work with Curbside, an app used by Target and other retailers, now that CVS is operating the pharmacies inside Target stores.
“We believe digital tools are the key to making health care convenient, personal and affordable for our customers and CVS Express is a perfect embodiment of our digital mission,” says Brian Tilzer, senior vice president and chief digital officer for CVS Health.
MASS MERCHANTS
Amazon.com may not sell everything consumers want to buy, but it sells enough different kinds of merchandise to warrant inclusion with a group of retailers characterized as mass merchants, warehouse clubs and supercenters.
As influential and disruptive as Amazon is, it still ranks as the smallest retailer in this Power Player category. The largest, Walmart, is responding to recent tepid financial performance by “improving our stores, adding critical capabilities and deepening relationships with customers,” President and CEO Doug McMillon said. “We want to make every day easier for busy families,” he told 14,000 attendees of the company’s annual meeting last month. “We’re connecting all the parts of Walmart into one seamless shopping experience with great stores, easy pickup, fast delivery and apps and websites that are easy to use.”
Addressing digital commerce specifically, McMillon said, “We get to reimagine retail again, and that’s what we are going to do.”
Costco has been holding down costs as it strives to modernize its technology infrastructure, and sales have been facing some headwinds in the form of low gasoline prices. One of the retailer’s tools for drawing shoppers to its stores is cheap prices at its fuel pumps. Costco has been slow to exploit e-commerce and mobile apps with curbside delivery and makes no bones about its choice. “We want to do everything possible to get them in the store and not just come and pick up something,” says Costco CFO Richard Galanti. “We know that when you come in-store, you’re going to buy a lot more than when you shop online in general. I don’t see it as being a strategic focus of ours, at least in the near term.”
HARDWARE AND HOME IMPROVEMENT
The Home Depot is a good example of how retailers in the physical world can compete with cut-rate rivals operating solely online. CEO Craig Menear has said that as much as a quarter of the merchandise Home Depot carries could be vulnerable to price-cutting competition from web merchants, yet that certainly has not been true this year.
The Home Depot is one of the 10 biggest e-commerce retailers in the country by most measures, generating close to $5 billon in business online last year. The momentum carried into 2016, with the company reporting web sales jumped 21.5 percent in the first quarter.
The company’s approach to online sales utilizes the physical stores with its buy online, ship to store (BOSS) program, notes Matthew McClintock, an analyst with Barclays Capital. “This interconnected retail approach has resulted in over 40 percent of all online orders leveraging the actual physical store infrastructure for pickup, as well as 10 percent of orders taking pace from a device within the store itself,” McClintock says. “Furthermore, approximately one-fifth of the customers who come into the store to pick up items end up purchasing additional items as well.”
In some markets, the BOSS program has been supplanted by BODFS, says Ted Decker, executive vice president of merchandising for The Home Depot. “In certain markets where BODFS has been introduced, the demand has been much stronger than we anticipated,” Decker said on a recent analysts call.
ENTERTAINMENT AND ELECTRONICS
Given the impact that e-commerce, downloads and streaming has had on the sales of books and media, it’s a wonder that a bookselling retailer still qualifies as a Power Player. But that’s what Barnes & Noble has done.
The niche in which it operates is not particularly strong; bookstore sales increased 2.5 percent to $11.2 billion in 2015, according to Census Bureau figures — and that was the first increase since 2007.
Barnes & Noble isn’t what it once was, either: locations are down 12 percent from their 2008 peak, and sales are down 20 percent over the same period. And the company won’t be the same moving ahead now that founder and executive chairman Leonard Riggio plans to retire after the company’s annual meeting in September.
The company is cutting its losses related to Nook, the e-reader designed to compete with digital offerings from the likes of technology giants Amazon and Apple. The current success of adult coloring books has been a boon for B&N and the company has posted some positive comparable sales figures in recent quarters. The retailer has also been testing personalized children’s books, and will unveil four new prototype stores by next spring.
CEO Ronald Boire says vision for the company includes making it a “lifestyle brand” with stores stocked not just with books but also giftware, gadgets, games and toys. “There a lot of opportunity,” he says. “Everything we do around learning, personal growth and development fits our brand.”
Date: July 12, 2016