Retailers Get Prioritized Right Down to the Bottom

Jane Doe really wants that sweater. The fall chill is setting in, and her wardrobe from last year is looking tired and dated. But Jane also would love to fix her car, or replace her boiler, or pay off some credit card debt, so she walks right by Gap (NYSE: GPS  ) .

This scene is playing out across America, as consumers are putting off smaller purchases to put money toward the larger issues in their lives. After a heady year of spending in 2012, it seems everyone has pulled back in 2013, leaving Retail America out to dry.

The problem first reared its head last holiday season, when retail sales rose disappointingly slowly compared with the strength they showed in 2011. Consumers haven't gained their strength back yet, and 2013's holiday season is looking like a bust already. While some areas will undoubtedly have strength -- the next generation of video-game consoles, for instance -- most retailers are looking forward to coal in their stocking.

Widespread retail weakness
Across the mall, the effects of Americans' hesitance are being felt. Back-to-school shoppers held off for sales, pushing growth down during what is usually a very strong season. With soft sales working so hard against companies, only a few have managed to buck the trend. Especially hurt have been weaker companies such as J.C. Penney (NYSE: JCP  ) , which has been desperate to engineer a comeback all year.

The damage being done to retailers -- stocks have been at a standstill for months -- is in sharp contrast to the success that visited home-improvement stores and auto manufacturers. Shoppers are still adjusting to the increase in payroll tax and the realization that big raises may be a thing of the past. That's led many to prioritize their spending, leaving little behind for the frivolities of fashion.

Apparel retailers have been among the weakest performers, with companies reporting generally low monthly and quarterly sales increases. Gap had its comparable sales drop in September compared with the strong rise it managed in September 2012. Denim retailer Buckle (NYSE: BKE  ) also watched comparable sales fall, with total revenue holding flat against 2012.

Most telling is that neither Gap nor Buckle is a poorly managed business. They both have strong balance sheets and good brands, but neither has been able to make the same sort of headway in 2013 that they saw in 2012. Gap's stock is up 18.7% year to date, while Buckle has risen just 6% -- the S&P 500 is up 19.4%.

With priorities being set, businesses that have fallen behind are getting hurt even more. J.C. Penney has fought and fought through 2013. The company changed CEOs, refreshed stores, and has revamped its image to try to appeal to consumers. Even so, comparable sales have fallen sharply every quarter, and the stock is down 59% so far this year.

A few winners at the end of 2013
On the other side of the coin, companies that focus on the home have had a soaring year. Restoration Hardware's (NYSE: RH  ) stock is up 86% year to date, with the business recently increasing its 2013 earnings guidance. The company's success has come at the cost of apparel retailer's success, and the dynamic seems unlikely to shift in the near future.

On the whole, retailers are merely scraping by just a year after they saw great gains from a refreshed consumer base. The combination of macroeconomic factors and household concerns has pulled spending back, or at the very least refocused its target. The holiday season is shaping up to be a letdown, and investors should be careful not to get their hopes up. Gridlock in American politics certainly isn't going to help, and it's setting everyone up for a long, cold winter.

Changing up the system
Not every business is willing to give into the change in customer spending without a fight. Three businesses have continued to develop their brands, products, and customer interactions to stay ahead of the game.You can read about these 3 Companies Ready to Rule Retail in The Motley Fool's free special report. It's an insight into the mind of American retail, and it shows what lengths brands will go to just to stay on top. Click here to read more.


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