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05/06/2013

View from the Street

While RIS has been covering retail for more than 25 years it is safe to say the last four have brought about the most change. This unique period coincides with the publication of the “Leaders & Laggards” cover story, which is now in its fourth year. Looking back we can see it as a record of vast fluctuations in the stock market, the economy as a whole, and retailers who have successfully or not adjusted to the gyrations.

This year we see the Dow Jones Industrial Average had its best first quarter in five years with an 11% gain, and, as of this writing, it continues to hover around all-time highs. As a result, numerous retail stocks have benefitted.

A noticeable trend that has emerged during the period covered by this annual report is the amplified attention that Wall Street has given the retail industry. This is due to several factors. First, since consumer spending has become a leading indicator of the overall economy as a whole, the performance by retailers is considered to be a key to understanding the current and future health of the business community.

Secondly, the heavy adoption of technology by consumers has had an enormous effect on retail, which has caught the attention of the mass media and financial analyst community. This new level of attention has raised the profile of retailers and their use of technology to reach their tech-savvy shoppers.

As we look at the current picture in 2013 it is hard to form a clear picture of the remainder of the year and make assumptions. Long-lasting winter weather in much of the country put a damper on March retail sales, which dropped by 0.4%. However, first quarter aggregate sales were up 3.7% year-over-year.

The end of the payroll tax break and the impact of the sequestration budget cuts appear to have had little impact on retailers to date, although it has hurt the job market, which shows weak prospects of recovery.

Based on the above facts and others, savvy retailers have already begun finalizing their strategies for the final quarters of 2013, including the critical end-of-year holiday season. By looking at data from last year we can see how well they rode the wave in 2012 and the first part of this year.



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Wall Street View
This is the fourth year RIS has teamed up with wRatings, a financial analyst firm headed by Gary Williams, founder and CEO, to take a detailed look at the top 10 and bottom 10 retailers from a Wall Street perspective. Williams is a member of the  RIS Financial Advisory Board and an upcoming keynote speaker at the  RIS 2013 Retail Executive Summit, which takes place June 19-21 in Del Mar, CA.

What makes this annual report unique is that it is an exclusive look at data and analysis usually reserved for wRatings’ clients – investors, fund managers and financial executives at major corporations.

The data has been crunched to create lists in three categories: Top and bottom 10 overall wScores (numerical evaluations based on criteria explained below); Top and bottom 10 year-over-year wScore change leaders and laggards; and  Top and bottom 10 year-over-year leaders and laggards in stock prices (which refers to year-over-year change).

All data was pulled after the 13th week of the year to ensure inclusion of all financial reports for the full year of 2012. Any effects of these results were factored into stock prices and wScore evaluations.

The methodology that Williams uses to create wScore evaluations is based on tracking long-term performance trends and examining “moats.” Basic economic theory shows that in a highly competitive market, business performance deteriorates as rivals imitate advantages. To achieve durable success, retailers must defy the force of imitation that causes advantages to deteriorate.

wRatings’ evaluations analyze moats in nine areas – three each under the general headings of supply chain, products and customers. wRatings then converts the evaluations into numerical figures. In addition, the wRatings evaluation takes into account five years’ worth of financial metrics and then weights each company relative to other scores within their verticals.

The best way to think about a wScore is long- and short-term competitive strength and the ability to grow revenue and earnings.

This year’s Leaders & Laggards story has added an additional component to its wRating scores – Social Strength. With consumers now in charge of the shopping journey, Williams believes it is important to factor in the relationship a retailer has with its customers. Social Strength, therefore, measures the authenticity of a company’s relationship with its customers on a scale that peaks at 100%. Companies with high social strength build transparent and emotional bonds with customers that translate into pricing power and preference.

The Social Strength score was developed by Barbara Gray of Brady Capital Research. This proprietary algorithm identifies nine key customer needs (both functional and emotional) and tracks them against key business areas associated with supply, product and delivery chains. A perfect Social Strength score is 100%.


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What follows is a unique overview of the top and bottom players in the retail landscape based on in-depth business analysis and stock performance.

Leaders are typically leaders for a reason. They execute better, they have a unique product or service, and they create brand affinity.  The 2013 wScore leaders certainly fit that bill with Coach, Lululemon, Vera Bradley and The Buckle repeating as the top four retailers from 2012. Coach and Lululemon have appeared among the leaders since 2011.  

Fossil, Select-Comfort and Tiffany also make returns to the top 10 list this year. The common denominator among the wScore leaders is a strong focus on selling private-label products, which creates a powerful element of differentiation in the marketplace and inspires brand loyalty.  

New entries on the 2013 top 10 list include Urban Outfitters, Advance Auto Parts and GNC Holdings. Urban Outfitters has made significant effort to deliver a unique shopping experience with a trendy merchandise mix and an aggressive adoption of technology throughout stores.

Interestingly, nine of the top 10 wScore leaders rank in the top 10% of all retailers rated on social strength. 

While consistency reigns among 2013 wScore leaders, the laggards list is flush with new names. However, three retailers returned from 2012: CVS, Rite-Aid and Bassett Furniture. The commoditization of products in this retail segment accounts for a lack of real differentiation in the marketplace. As a result, retailers in the drug category are locked into price wars, especially with online competition, making it difficult to preserve margins and create business value. Because of this, Walgreens joins CVS and Rite-Aid on the 2013 wScore laggards list.

Not surprisingly, the social strength of these retailers also ranks near the bottom, which lends credence to viewing social media skills as an indicator of customer engagement and business strength on par with the more traditional metrics used in the financial community.




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2013 wScore Growth Leaders and Laggards
Of the six charts developed for this report, the two showing year-over-year growth in wScores offer the most interesting glimpse into the retailing industry. The top 10 list for growth leaders is a testament to a successful year, but there is a caveat: In most instances, the wScore growth leaders were so far down last year that they had nowhere else to go but up.

This year’s biggest gainer, Pacific Sunwear, had the second lowest wScore last year and essentially returned to its previous mid-tier level after a precipitous drop caused by deteriorating business performance. Trans World Entertainment, which is the second highest gainer, had the lowest wScore last year of all retailers ranked. Again, righting the ship is a good thing, but it does not necessarily indicate the company is on a tear.


Hot Topic and GNC Holdings are in a different class and deserve special recognition because they not only  righted the ship year over year (both had wScores so low they nearly made it onto the wScore laggards list), but they also came back so strongly they nearly made it onto the 2013 leaders list.

No doubt Walmart benefitted from having finally halted a long string of consecutive quarters with reduced comp store sales. Lowe’s is enjoying the benefits of the steady rise in nationwide home construction and home improvement projects, which appear to be spurred on by increasing consumer confidence.

The story told by the list of retailers on bottom10 wScore growth list is one of competitive and marketplace erosion. Recreational goods are the common denominator for Big 5 Sporting Goods and West Marine, and both are feeling the pressure of aggressive online competitors and product commoditization that makes it difficult to stand out in a crowded field.

eBay is an interesting story because of its role as a dot-com high flyer. While there is no single competitor emerging to challenge eBay’s dominant status in the online auction segment, a number of small but thriving competitors are chipping away at its potential for growth by offering lower seller fees.

Regarding social strength scores among the growth leaders, most fall into the average category or a little higher, which bodes well for their business value over time. Two, however, are well below average – Trans World Entertainment and Walmart. Both would be well advised to raise the bar on their social media skills.

For the laggards, three retailers fall well below the average mark, which means they are in line with their low wScores. They are Big 5 Sporting Goods, Citi Trends and Walgreens.


2013 Stock Leaders and Laggards
The 2013 stock leaders’ list reflects a mixed bag of business stories with one common denominator – the overall stock market has been on a steady incline for the past year, especially the first quarter of 2013. Most stocks have benefitted from what Gary Williams calls a “regression to the mean, which refers to a period when extreme prices start to move closer to the average. Periods of extreme pricing are difficult to maintain over long periods of time, so even companies that aren’t making big changes in creating value start to move upwards in their stock price and higher priced stocks that are truly worth more start to move down.”

For Trans World Entertainment there was little room left for a further drop and even though its stock edged up less than two dollars a share it was a significant jump considering the price it had reached. Although not as extreme, a similar scenario occurred with Tuesday Morning, PC Connection and Big 5 Sporting Goods.

The previously noted improvement in consumer confidence levels and steady growth in the housing market clearly gave a boost to Lumber Liquidators, Haverty Furniture and Conn’s.

But not every retailer has benefitted from the rising stock market and regression to the mean. JCPenney appears on this laggard’s list to no one’s surprise, having dropped half its value over the course of a year characterized by highly publicized struggles.

(Note from the Editor: This story has changed since it was originally posted. A reference to Dollar Tree was made in the Bottom 10 Year-Over-Year Retail Stock Price Laggards chart shown above. However, the calculation used for the chart did not reflect a stock price split that occurred in 2012, which materially affected the ranking. The chart is now up to date and accurate.)

Social strength in an era of rising stock prices is not always a short-term indicator. Most of the 2013 stock leaders in year-over-year growth fall into the average range, with four falling well below. These four are Lumber Liquidator, Big 5 Sporting Goods, Haverty Furniture and Trans World Entertainment.

On a similar note, the social strength profile of the 2013 stock laggards matches the stock leaders, with most falling into the average range and only a few falling a bit below.

So, takeaway from this finding is that while social strength is an indicator of business value it should be combined with other factors examined in this report and others to determine the true business value of retail company.

Can Social Media Impact Business?
If by impact business you mean grow revenue and a lot more, the answer is “yes”

Back in 2006, how many of us thought Twitter was just a fad? How about Facebook being just for kids? And LinkedIn a nice rÉsumÉ website? Be honest. Most of us thought they were interesting and even entertaining. But could they really impact business? Could they help grow revenues? Are they even viable companies themselves that can generate profits?

Yes. Yes. Yes. We have now come to understand that social media is a means of interaction among people in which they create, share and exchange information and ideas in virtual communities and networks. Now, take out the word “virtual” and what do you have? The most famous bar and TV show from the 1980s, “where everybody knows your name.” Yes, the concepts and practices we call social media today are similar to “Cheers” and have been practiced for centuries. Social media just makes it a lot faster, more frequent and more forceful...fortunately without the hangover!

When explaining the power of social media to CEOs today, the best analogy comes from a social media guru wRatings works with, Barbara Gray. She reminds us to think back to 1982 when Tom Peters
and Robert Waterman published the best-selling book “In Search of Excellence.” 

In describing the management practices at Hewlett-Packard in the 1970s, the authors coined the term “management by wandering around” (MBWA) to spotlight how leaders made spontaneous visits to find out what’s happening. Today, CEOs can simply read their Twitter feeds or browse their Facebook page to instantly achieve MBWA. Almost all CEOs know the power of MBWA.

Social media impact is not based on the number of Twitter followers or Facebook “likes.” Social media is about creating authentic, transparent and emotional relationships with customers. This occurs in every single interaction your business has.


Who does this well? Zappos is pretty darn good. Starbucks is too, as well as Lululemon (at least until taking transparency to a new level). A company can operate without being authentic and transparent, but in the era of social media the risks to business are high.

Gary A. Williams is founder & CEO for wRatings. For more information go to www.wratings.com. Also, see Williams’ keynote presentation at the 2013 Retail Executive Summit on June 20 in Del Mar, CA.