Zacks Industry Outlook Highlights: Zumiez, L Brands, Rite Aid, Costco Wholesale and Fred's - Press Releases

For Immediate Release

Chicago, IL – March 10, 2015 – Today, Zacks Equity Research discusses Retail, including Zumiez Inc. (ZUMZ-Free Report), L Brands Inc. (LB-Free Report), Rite Aid Corp. (RAD-Free Report), Costco Wholesale Corp. (COST-Free Report) and Fred's Inc. (FRED-Free Report).

Industry: Retail

Link: https://www.zacks.com/commentary/38363/retail-stock-outlook---march-2015

What's in Store for Retail Stocks?

Retailers procure goods in large quantities directly from manufacturers or wholesalers and sell them in smaller quantities to customers through retail shops or online platforms. Consumer spending being a key to the viability of any economy makes the health of the retail industry an important economic indicator.

As a leader in the retail business, the United States provides ample growth opportunities for all types of companies in the sector. From a growth perspective, the retail industry ranks among the dominant U.S. industries and employs an enormous workforce. Retail sales represent approximately 30% of consumer spending, which itself accounts for more than two-thirds of the economy.

The U.S. economy is sending out signals of growth driven by lower oil prices and an improved job market.

According to recent data from the Bureau of Labor Statistics, the unemployment rate for February has declined to 5.5% from 5.7% in January and reached its lowest level since Sep 2008. In February, companies hired 295,000 people with improved employment prospects in almost all industries including food services and drinking places, professional and business services, construction, health care, transportation and warehousing.

This improvement in the job scenario is likely to provide consumers with a sense of security when it comes to their purchasing power, thereby boosting consumer spending. This, along with cheaper oil, is likely to lower transportation costs and the price of raw materials, thus facilitating improvement in business profits and economic growth.

We expect this positive sentiment to encourage consumer spending. The Commerce Department revealed that consumer spending for January fell 0.2%, after a 0.3% decline reported in Dec 2014, mainly due to lower energy prices. However, adjusting for inflation, consumer spending rose 0.3% for the month due to higher wages and salaries, as the labor market tightens.

Looking ahead at 2015, economists expect consumer spending to remain on the upside, driven by wage gains in an improving job market.

However, concerns over the unexpected slowdown in GDP growth rate remains, and is hampering consumer confidence to some extent. According to the Bureau of Economic Analysis GDP expanded at a rate of 2.2% in the fourth quarter of 2014, lacking the vigor of 4.6% and 5% growth portrayed in the second and third quarters, respectively.

Moreover, the Conference Board’s recent data on Consumer Confidence Index reflected a 7.4 points decline to 96.4 in February, following the January reading of 103.8. Meanwhile, the University of Michigan’s Consumer Sentiment survey showed a 2.8% sequential decline to 95.4. However, it was well ahead of Feb 2014 sentiment of 81.6.

We believe though the consumer confidence data remains soft, other positive calls from an improving labor market, the gradual recovery in the housing market, strengthening of the manufacturing sector and lower energy prices indicate stronger times ahead for the U.S. economy in 2015.

The above view is seconded by National Retail Federation’s (NRF) projection of a 4.1% rise in retail sales this year, compared with 3.5% growth in 2014. Further, the nation's largest retail trade group expects non-store sales to grow 7%-10% in 2015. The assumptions behind this projection is expected GDP growth of 2.7% to 3.2%, unemployment rate of 5% job gains between 220,000 – 230,000 per month throughout the year and an improving consumer confidence and household spending.

Key Metrics

The key data in the retail industry analysis is comparable-store sales (comps), as it excludes sales at newly opened and closed stores. The February sales data of most retailers were disappointing as compared with the estimates. However, the latest key metrics data released last week reflect overall positive sentiment as all but 3 of the retailers that reported monthly comps emerged as winners.

Retailers mainly blamed adverse weather conditions during the month and negative foreign currency translations, as well as impacts from West Coast port disruptions, for the fall in comps.

The list of gainers in February was led by Washington-based retailer of sports-related teen apparel Zumiez Inc. (ZUMZ-Free Report), which reported a 6.9% increase in comps while sales improved 11.6% to $54 million from the year-ago period. This was followed by clothing retail chain L Brands Inc. (LB-Free Report), which posted comps gain of 6% while sales also improved by 7% to $750 million.

The drugstore retailer Rite Aid Corp. (RAD-Free Report) occupied the third spot with a 3.3% rise in comps. Total sales for Rite Aid grew 1.7% to $2.557 billion.

Moving forward with the list, off-price retailer of apparels, footwear and accessories Stein Mart Inc. registered a 2.6% increase in February comps while total sales rose 4.9%. Further, warehouse retailer Costco Wholesale Corp. (COST-Free Report) posted a 1.0% rise in comps for February, while total sales climbed 4% to $8.18 billion for the month.

Discount store operator Fred's Inc. (FRED-Free Report) reported flat comps as against a decline of 2.2% last year. Fred's net sales for Feb 2015 were down 2% to $154.1 million.

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