Advertisement
04/01/2011

Wall Street Leaders and Laggards

TODAY’S SLOW-MOVING, uncertain economy is not winning many fans in the CvrM.jpgbusiness community, but keep in mind everything is relative. This time last year we had just begun to emerge from a meltdown that had decimated global markets and financial institutions, and plunged stock and real estate valuations to historic lows. Calamities like these make today’s sluggishness look downright rosy.

Overall, anxiety levels have tempered, but have not disappeared. In fact, they spike each time we hear about a revolution in the Middle East, a European government sliding toward bankruptcy, $150 per barrel of oil, the looming specter of inflation, and the impact of trillions of dollars in federal debt.
However, moments of panic aside, most would agree the global economy has put the worst of the Great Recession behind it. The recovery is still fragile and everyone is well aware that robust growth is elusive, but year-over-year analysis paints a favorable picture for many retailers and those with healthy balance sheets have actually begun to go on the offensive again.

WALL STREET’S VIEW
For the second year in a row, RIS teams up with wRatings, a financial analyst firm headed by founder and CEO Gary Williams, to take a comprehensive look at the top 10 and bottom 10 retailers. Williams, a member of the RIS Financial Advisory Board, tapped his team to provide RIS with an exclusive look at data usually reserved for wRatings’ clients.

The data has been crunched to identify lists in three categories:

1. Top and bottom overall wScores (individual company evaluations),

2. Year-over-year wScore change leaders and laggards, and 3. Year-over-year change leaders in stock prices.

This year we waited until the 9th week of the year to pull the data, whereas last year we pulled it from the 4th week. The change was to ensure that any effects from fourth-quarter reporting had time to be factored into stock prices and wScore evaluations. Many retailers close their quarters on January 31, so it makes sense to wait until all reports were filed.

Williams’ methodology tracks long-term performance trends and also looks for what he calls “moats.” Basic economic theory shows that in a highly competitive market business performance deteriorates as rivals imitate advantages. To achieve durable success, retailers must pro-actively defy this force.
A good example of a moat is eBay’s lock on user-controlled auction sales. Another is Starbucks’ rabidly loyal customer base. A third is Apple’s ability to create unique markets.

wRatings’ evaluations analyze moats in nine areas, comprised of three each in supply chain, products and customers. It then converts them into a numerical figure. In addition, it 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 sum up exactly what a wScore measures is long- and short-term competitive strength and ability to grow revenue and earnings.

cs1.jpgYear-Over-Year wScore Leaders
When looking at year-over-year improvement in wScores the retailer at the top of the list is drugstore.com, a $450-million online retailer of health, beauty and vision products. Although it has yet to turn a profit, recent launches in the mobile channel and social commerce (including a Facebook store) have helped it move into a strong position for 2011.

Interestingly, drugstore.com was featured as a wScore laggard last year, so fortunes have certainly turned around for this fast-growing healthcare retailer.
Several retailers that performed poorly a year ago have made big gains in 2011. Zale, listed as a laggard in 2010, made big senior-level management changes last year and the result has been a strong turnaround. Talbots was also listed as a laggard in 2010, but thanks to a $40-million store refresh and IT upgrades it is beginning to leverage the brand’s inherent strengths.

Select Comfort is the sole retailer with the honor of making the Top 10 Year-Over-Year wScore list as well as the Top 10 Overall wScore list. Considering the high ranking of Tempur-Pedic on the overall wScore list it appears high-end bedding is making a comeback in 2011.

cs2.jpgYear-Over-Year wScore Laggards
While dollar stores were Wall Street darlings during the Great Recession, the gains are largely over as consumers slowly begin to resume more confident shopping habits. Most of the dollar-store chains had double digit drops in their 2011 wScores, but 99 Cents Only Store has the distinction of topping the laggard year-over-year list.

Other value-based chains making this list are Fred’s and Big Lots. While these rankings seem to indicate that the discount category is hitting a rough patch, don’t count them out. Oil price escalation could change shopper dynamics: stay tuned.

Both Costco and Safeway have been cited for being technology laggards, which no doubt contributes to their low wScores. In addition, while Costco expects solid growth by opening 29 stores in 2011, its online business is underdeveloped.

One surprise on the laggard list is Bed Bath & Beyond (BBBY), which is an 800-pound gorilla in its segment due to being the last man standing. But this status cuts both ways, according to Gary Williams: “Their only remaining moat is what we call ‘routine reliance,’ which means the only reason customers are coming into their stores is to get immediate gratification from a purchase. All their other moats are gone. Consumers can comparison shop at BBBY, then go buy the products at Amazon.com or elsewhere, and often for considerably less.”

cs3.jpg2011 wRatings Leaders
Lululemon Athletica and Coach share the top spot on the 2011 wRatings leaders list. Lululemon, the purveyor of high-end yoga and exercise gear, has emerged as one of retailing’s fastest growth leaders. Revenue has been rising in excess of 50% a year and its e-commerce business has been growing even faster at a triple-digit rate.

Coach returns to the Top 10 wRatings spot after suffering through a down year in 2010 (it was number one in 2009). The high-end leather and accessories retailer is expanding both in the U.S. and Asia, and continues to capitalize on a strong brand identity.

As previously noted, the high-end bed market is having a good year, and both Tempur-Pedic and Select Comfort claim spots on the leaders’ list. Select Comfort has had eight straight quarters of profit growth and its larger competitor, Tempur-Pedic, has also performed impressively with a 59% increase in fourth quarter profits off a 10% increase in sales.

Tiffany and Nordstrom round out the leaders’ list. Both companies have well-established brand and customer service moats. As consumers slowly start to splurge again they stand to benefit.


2011 wRatings Laggards
Bon-Ton Stores, Fred’s, Susser Holdings (convenience stores), Syms and Sport Chalet are all regional chains that, according to the wRatings analysis, are having difficulty building moats and creating market differentiation. All face much larger competitors in their segments and have to strive harder to serve their local consituencies as the national chains become more adept at offering tailored assortments at the regional and store level.

Hancock Fabrics and A.C. Moore were fairly strong performers in last year’s ranking, as consumers turned to do-it-yourself projects to help cope with the economic crisis. However, this year both companies have returned to 2009 levels and may continue to fight for positive traction in a brightening economy.
Despite appearing on the laggards list, several retailers showed strong stock gains last year, including Bon-Ton Stores (up 54.4%), Susser Holdings (up 60%) and Fred’s (up 32.6%).

Year-Over-Year Stock Leaders
Several retailers already singled out in previous top-10 wRatings lists also have done remarkably well in year-over-year stock prices gains, including Lululemon Athletica and Tempur-Pedic.

But the big winner on Wall Street this year is home dÉcor retailer Cost Plus, which is up 837.3% in stock price year-over-year. Cost Plus is currently in the midst of an aggressive marketing campaign that includes sports and Hollywood celebrity tie-ins, targeted partnerships with entertainment companies, and
social media promotions on Facebook. These savvy campaigns have enabled Cost Plus to outperform such larger competitors as Williams-Sonoma and Pier 1 Imports.

Dillard’s also makes a noteworthy appearance on this list, up 116% in stock price. It wasn’t long ago that some retail pundits were writing off the department store segment as being ill-suited to current market forces, and Dillard’s was cited as the one most at risk.

Apparently, Dillard’s didn’t get the memo and now appears positioned for future growth.

Comparing last year’s rankings with this year, we see two retailers cited for low wScores and stock valuations that slid even further down the slippery slope – Blockbuster and Borders.

Both companies have strong brands and assets of value, but as the wRatings methodology makes clear, long-term success depends on building moats. These moats not only need to preserve key assets but also protect against market forces that chip away at a retailer’s business model, which are at the heart of problems facing Blockbuster and Borders.

One final insight: the moat metaphor is apt, but not perfect. Keep in mind that the way wRatings uses the term, a moat can be both a defensive and offensive weapon. Unlike moats of old, the best moats in 2011 are those that take an aggressive approach toward growth, innovation, new markets and capturing market share from competitors.



DIGGING DEEP TO RISE ABOVE THE NOISE

BY GARY A. WILLIAMS

OVER THE PAST YEAR, retailers that gained the most in competitive strength were almost all specialty stores. The common reason for their turnaround was pinpoint precision in serving the right consumer needs. Future success still requires precision, but the next challenge for retailers is already well in play.
To succeed in the coming year, retailers must find innovative ways to rise above the jet-engine noise created by marketing. This is a much tougher challenge than most executives understand, and few will actually succeed.

Every day shoppers are bombarded with stories and information about how companies are using social media to better communicate with their employees, customers and “fans” on Facebook or “followers” on Twitter, to name just two social media platforms.

But does your business really need to Tweet? Or launch an iPhone application?  Or run a Groupon campaign? Finding the right answers to each of these questions has nothing to do with the proliferation of new channels, and everything to do with your business framework and how you choose to compete.
 
Keep in mind that Twitter, Foursquare and Flickr are just ways to communicate using smartphones or personal computers. They are media tools just like radio, print and television except that they are significantly more personalized. And because there is a low barrier to entry the volume has been cranked to the max and all many consumers hear is noise, noise, noise.

To rise above the noise, you need to begin with the end in mind: How will this help your customers buy from you? Analyze where, when and how your customers make decisions to purchase from you. Understand why they choose you over a rival, and dig deeply until you know exactly what is truly unique about your business.

Then, create a plan that uses these new communication tools to guide consumers to your business. Technology that helps you measure and improve the mix of using these new tools will be critical to future success.


Gary Williams is founder and CEO of wRatings. To learn more about the wRatings insight into the retail industry go to www.wratings.com or see Williams in a live presentation at the 2011 Retail Executive Summit on June 21 in San Diego, CA.