Archive for August, 2009

Restaurant Industry Outlook Improved Slightly in July

Published August 31, 2009 Uncategorized Leave a Comment
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The National Restaurant Association said today that the Restaurant Performance Index, a monthly composite index that tracks the health and outlook for the U.S. restaurant industry, improved slightly in July to 98.1, up 0.3% from it’s June level. However, the index remained below the 100 level, which signifies contraction, for the 23rd consecutive month:

Restaurant Performance Index - July 2009

The index is comprised of the Current Situations Index and the Expectation Index.

The Current Situations Index, which measures trends in same-store sales, traffic, labor, and capital expenditures rose 0.2% in July to 96.8. This was the first improvement in 3 months, but this measure has remained below 100 for 23 consecutive months.

The Expectation Index, which measures restaurant operators’ 6 months outlook on same-store sales, employees, capital expenditures, and business conditions rose 0.5% from June to stand at 99.4. While the index improved in July for the first time in 3 months, the index has posted prints below 100 in 21 of the last 22 months:

Restaurant Performance Index Components - July 2009

Similar to results we have seen in consumer confidence and sentiment in recent months, the outlook from restaurant executives seems to be getting more upbeat. The NRA said:

“Although restaurant operators continue to report soft same-store sales and customer traffic levels, they are more optimistic about improving conditions in the months ahead. Restaurant operators reported a positive six-month economic outlook, and the proportion expecting higher sales rose to its highest level in three months”

However, digging down into the details shows that the slight improvement hardly provides for an optmistic outlook:

  • 26% of operators reported a same-store sales gain between July 2008 and July 2009, up from a record-low 22% of operators who reported positive sales in June. 58% of operators reported a same-store sales decline in July, down slightly from 61% who reported negative sales in June
  • In addition to sales declines, operators reported negative customer traffic levels for the 23rd consecutive month in July. 23% of operators reported an increase in customer traffic between July 2008 and July 2009, up slightly from 19% who reported similarly in June. 59% of operators reported a traffic decline in July, compared to 60% reported lower traffic in June
  • 31% of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), up from just 24% who reported similarly last month. In comparison, 33% of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, matching the proportion who reported similarly in the previous two months
  • 32% of restaurant operators said they expect economic conditions to improve in six months, up from 24% who reported similarly last month. In comparison, 24 % of operators expect economic conditions to worsen in six months, down from 26% who reported similarly last month



Much like the results and outlook for other retail sectors we have seen, the restaurant industry continues to struggle with weak demand from cash-strapped consumers. Most executives are hopeful things will start to improve, especially as we head into the fall and companies will be dealing with very weak comp store sales from last year. However, we don’t foresee substantial improvement for the 2nd half of this year, as consumers are unlikely to increase discretionary spending as long as worries about unemployment and income persist.

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Early Outlook: Holiday Retail Sales

Published August 27, 2009 Uncategorized Leave a Comment
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While we are only roughly halfway through the back-to-school shopping season, investment bank Global Hunter Securities put out their early estimate of holiday retail sales yesterday. The company forecasts a range of a 1% increase to a 1% decrease from the year ago period, which showed a 7.6% decrease from 2007.

While it may seem that a flat year-over-year result would represent stabilization, keep in mind that the 2008 holiday season was truly dismal, as noted by the report:

  • Average general merchandise sales for the June-to-September period 2008 was $374 billion, +1.05% year-over-year. By comparison, Dec. 2008 sales were $136.3 billion, -6.01% year over year

Whether we look at retail sales results reported by the Census Bureau or results from the 33 retailers we track on a monthly basis, the trend is pretty clear. Spending fell off a cliff after Lehman Brothers failed, the worst months were the October-December period, and sales have since stabilized at a very low level since then:

Monthly US Retail Sales - Total Retail & Food Services (YoY)

Consolidated Monthly Retail Sales - July 2009

Second quarter results recently reported by retailers showed continued sales declines, but most retailers were able to beat bottom-line results through cost-cutting and inventory management initiatives. Based on comments from retail executives on 2nd quarter conference calls, there is more hope than optimism that demand will pick up in the 2nd half of the year.

The report highlights that even though major big-box retailers posted steep sales declines, inventories fell at a much faster pace in the quarter, and the trend is expected to continue:

  • Q2 retailer results indicate widespread growth issues
  • Retailers are generally attempting to reduce inventory at a faster pace than the rate of the sales contraction.
  • Based on recent sales trends, we have little reason to believe that retailers would begin to order goods more enthusiastically
  • We expect Q3-to-Q4 industry inventory demand down approximately 7.5%
  • The inventory crisis will end after the credit crisis is over –and it is not yet over, in our view.

Based on continued weakness expected in unemployment, personal income, and foreclosure activity, it’s hard to find a catalyst that will drive consumers to significantly increase their spending in the current months. While some analysts forecast a better-than-expected back to school season, the report notes that may not be such a good thing:

  • Back-to-school (BTS) is a drag on holiday spending during periods of diminished consumer spending, in our view. A modest BTS is still a negative for the holiday season. A strong BTS could be a bigger problem (but unlikely)

While the government’s cash-for-clunkers program was a runaway success, many analyst have noted that it most likely hijacked sales for big-ticket items from retailers. When we looked at the outlook for back-to-school spending, we noted that technology and computer purchases was the only category expected to show an increase from last year. An interesting note in this holiday report is that those technology purchases will most likely pull sales from the holiday season:

  • Tech spending on BTS laptops PC’s and related gear –all of it bigger ticket items –is very likely pulling spending away from the holiday season

The bottom line for consumers is they continue to significantly change their buying behavior, and until things start to improve on the employment and income front, we won’t see much improvement in retail sales. With that being said, retailers will be contending with much easier same-store sales comps starting in the fall, so year-over-year sales results should finally start to climb from extremely distressed levels.

Here are some other themes from the report for the rest of 2009:

  • This year’s primary theme is retailer free cash flow, driven mostly by massive cuts in inventory spending. Price deflation is probably less of an issue this year, while inventory reductions should remain a drag on suppliers
  • Consumers are dragging prices lower, leading to additional changes in merchandising throughout the industry, in our opinion. Dollar stores especially are finding many new opportunities at lower price points, thus threatening other channels going into the holiday season
  • Employment was a major driver of sales weakness last year and it remains an issue this year, with little evidence of sufficient improvement at this time
  • Suppliers this year seem to be facing a double whammy: lower overall volume and a higher rate of requests for markdown and margin support from multi-line retailers
  • Holiday orders that have already been approved are generating pre-holiday off-invoice deductions seeking markdown reserves and other cushions,in anticipation that prices will decline during the holiday, based on our interpretations of industry trends
  • Easier conditions seem to prevail in dollar stores and off-price channels where purchase orders are simpler and requests for price adjustments are minimal. Fortunately, volume is still growing in these channels for those suppliers that may choose to sell these channels
  • The slightly longer season could result in some replenishment orders late in the season, a positive for those capable of responding on the merchant’s terms


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U.S. Chain Store Sales: Week Ending 8/22/09

Published August 25, 2009 Uncategorized Leave a Comment
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U.S. Chain Store Sales continue to be weak, with both ICSC and Redbook reporting declines in year-over-year figures this morning:

  • The International Council of Shopping Centers (ICSC) reported that comparable same-store sales decreased 0.2% in the 3rd week of August vs. a year ago, while same-store increased 0.6% on a week-over week-basis. “Sales continued to bounce around on a weekly basis with this period’s performance showing an improvement over the latest week, which offset some of the prior week’s dip,” said Michael P. Niemira, ICSC chief economist. “With national temperatures warmer than average and a heat wave in the Northeast, sales of fans and air conditioners were boosted–helping to drive customer traffic for discounters, in particular. Overall sales for August continue to face headwinds and with that ICSC Research continues to expect the month’s performance will be down between 3.5 to 4 percent,” Niemira added.
  • Redbook Research reported that retail same-store sales for the week ending Aug 22nd declined 4.4% compared to the year-ago period, while sales for the first three weeks of August were down 0.7% from the same period last month, and 4.4% lower than last year. The firm added that cash-for-clunkers pulled sales from the back-to-school season, and said apparel retailers are reporting back-to-school trouble. Redbook sees a 0.7 percent full month decline compared to July. Note that Wal-Mart stopped reporting weekly and monthly sales figures in May of this year, and the substantial impact they had on the index is evident in the graph below.

With most retailers having reported 2nd quarter earnings by now, over 90% of companies have beat analyst estimates. Though sales remained very weak, most companies were able to surprise on the upside with cost reductions and inventory management. However, based on comments made on quarterly conference calls, we don’t expect much demand improvement in the third quarter. Companies will be hard-pressed to be able to continue to find cost reductions, and inventories have already been slashed to be more in line with sales trends. Unless they are able to improve top-line results soon, profitability will start to suffer.


Weekly US Retail Same Store Sales 8-22-09


ICSC Weekly U.S. Retail Chain Store Sales Index
Week Ending Index(1977=100) YoY Change WoW Change
Aug 22 493.8 -0.2% 0.6%
Aug 15 491.0 -0.6% -0.9%
Aug 8 495.6 0.4% 0.0%
Aug 1 495.5 -0.7% -0.2%
July 25 496.5 -0.5% 1.0%
July 18 491.7 -0.3% 0.5%

*Source: ICSC-Goldman Sachs Index
The ICSC weekly U.S. retail chain store sales index is a joint publication between ICSC and Goldman Sachs Group Inc. It measures nominal same-store sales, excluding restaurant and vehicle demand, and represents about 75 retail chain stores.


Johnson Redbook Weekly Retail Sales Index
Week Ending Week YoY Chg MTD MoM Chg MTD YoY Chg
Aug 22 -4.4% -0.7% -4.4%
Aug 15 -4.5% -0.7% -4.4%
Aug 8 -4.2% -0.5% -4.2%
Aug 1 -5.4% -1.6% -5.6%
July 25 -5.5% -1.6% -5.6%
July 18 -5.8% -1.7% -5.7%

*Source: Johnson Redbook Index
The Johnson Redbook Retail Sales Index is a sales-weighted index of year-over-year same-store sales growth in a sample of large U.S. general merchandise retailers representing about 9,000 stores.


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The Gap Keeps Running in Place

Published August 20, 2009 Uncategorized Leave a Comment
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Gap Inc. put out 2 press releases today, the first announcing their fiscal 2nd quarter earnings, and the 2nd highlighting promotional events to celebrate the company’s 40th anniversary. The company is hoping that investors cheer the fact they were able to post earnings roughly in line with last year. If not, there will still be a celebration, as the Gap will be outfitting floor traders on the NY Stock Exchange with Gap jeans tomorrow, and hosting a nationwide simultaneous acoustic concert in its more than 700 stores tonight.

Gap reported a profit of $228 Million, or $0.33 diluted EPS, in the fiscal 2nd quarter. That was roughly in line with last year’s profit of $229 Million ($0.32 EPS), and slightly above analyst estimates for 32 cents per share. Net Sales in the quarter decreased by 7.3% to $3.25 Billion, while same-store sales declined 8% on top of a 10% drop a year ago. Comparable sales declined across all segments, with Gap NA -10% vs -6% last year, Banana Republic NA -15% vs -6%, Old Navy NA -4% vs -16%, and International -5% vs -6%. E-commerce continues to be the one bright spot for the company, as online sales grew 17% to $224 Million in the quarter.

While the company will be celebrating their 40th year in business, the results leave less of a reason to cheer. This comp decline extends their streak to 20 consecutive quarters of negative same-store sales. Since the start of the decade, they have now reported negative same-store sales in 30 of 38 quarters:

Gap - Quarterly Same-Store Sales Growth

This is the company’s take on their results:

“We’re proud to deliver second quarter earnings per share above last year, especially during a challenging environment,” said Glenn Murphy, chairman and chief executive officer of Gap Inc. “Building upon two years of work improving our economic model, we’re now putting further emphasis on changing the trajectory of our top line performance. Our focus is to find the right balance between maintaining our cost discipline and making appropriate, targeted investments to gain back market share.”

Each quarter they have pointed to economic conditions and talked about all the changes they have made to improve performance going forward. While the past 18 months have certainly presented a challenge to most all apparel retailers, Gap has been struggling for the greater part of 10 years.

They have talked about remodeling and closing under-performing stores, and doing a better job of connecting with consumers. However, their peers have proven to be much more adept at responding to the constantly-evolving consumer tastes. While cost-cutting and inventory management measures have steadied bottom-line results this year, we have yet to see any of their initiatives translate into even marginal improvement of top-line results:

Gap - Monthly Sales Growth

The company does have some things going for it, though: they have no debt and over $2 Billion in cash, cash flow & merchandise margins have been improving, and each quarter they are up against easier comps. Some analysts believe they finally have the right fashions and values for the back-to-school and fall seasons.

However, at this point we’ll believe it when we see it. Gap used to be an extremely successful retailer, with its strengths being basic apparel and value. Somewhere along the line it lost its way, no longer being able to differentiate itself from rivals or clearly define its brand identity. With the spending enviroment expected to remain weak through the end of the year, we don’t see Gap returning to its glory days any time soon.

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Retail Outlook: Retail Execs Show “Guarded Optimism”

Published August 20, 2009 Uncategorized 1 Comment
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With the majority of retail companies having reported fiscal 2nd quarter earnings by now, a picture is emerging of an industry continuing to struggle with a very weak consumer spending environment. Most retailers were able to beat earnings estimates through cost-cutting and inventory management initiatives, but top-line results have been soft as demand seems to have stabilized at a very low level.

Yesterday, KPMG released a survey titled “Surprising Majority of Retail Executives Expect Higher Revenue, Profitability, Improved Jobs Outlook in 2010.” Commenting on the results, Mark Larson, KPMG global retail sector chair, said “The KPMG survey findings reflected an expression of guarded optimism among retail executives, given the industry’s challenges as demand for goods continued to plummet during the recession,”

And the top-level results certainly seem to show some optimism: 70 percent of the executives said they expect business conditions to improve in 2010, with 68 percent expecting stronger revenue and 66 percent expecting improved profitability. However, after seeing some more of the survey findings, “cautiously hopeful” might be a more apt description of how retail executives are feeling about the future:

  • However, 44 percent of those surveyed still believe the U.S. economy as a whole could take as long as 2011 or later to substantially recover
  • When survey respondents were asked to identify the triggers they think will spur a U.S. economic recovery, the most frequently cited factors by far were increased consumer spending (52 percent), improved consumer confidence (51 percent) and an increase in jobs/employment (48 percent)
  • 49 percent of the respondents said they thought the retail industry would fully recover ahead of the U.S. economy, while 51 percent thought their industry would recover at the same time or after the U.S. economy
  • Overall, 84 percent of retail executives see an improving jobs picture in their industry in 2010, with 52 percent saying it would be stable and 32 percent saying it will be better than 2009

It seems retail executives are more “hopeful” that things “may” improve, rather than optimistic that they are seeing actual improvement. Relying on consumers to spur the recovery is a risky proposition, especially when you consider how leveraged the consumer is to further deterioration in housing and employment.


The back-to-school season isn’t expected to provide much relief, with many analysts predicting the worst shopping season in a decade. There is hope yet though, as the National Retail Federation reported that the average American family had only completed only 41.6 percent of their back-to-school shopping as of August 11, while nearly one-third of families with school-aged children haven’t even started their shopping.

Controlling costs and inventory, and providing merchandise and values that drive traffic will be key to companies improving efficiencies and gaining market share through the end of the year. As we can see from the below comments from executives on 2nd quarter conference calls, companies are continuing to adjust to a very tight consumer spending environment:

Blake W. Nordstrom – President and Director – Nordstrom

“Though July represented some improvement, our plans remain unchanged for the balance of the year. We really don’t see outside of this unique sale event a change with the customer. Our grounded plans do allow us to be able to respond timely and effectively if an upturn were to occur,”

“And we believe we’re planned accordingly, with grounded plans on expense and inventory and all the key metrics of our business to give us the necessary flexibility and upside to respond accordingly when that demand hopefully improves.”



Karen M. Hoguet – Chief Financial Officer, Executive Vice President – Macy’s

“So our guidance is not anticipating any enormous improvement. I did say that I am cautiously optimistic that we will start to get some benefit from the My Macy’s rollout in the fourth quarter, as we did in the test 20 districts last year. But that remains to be seen and obviously a lot depends on the economic environment which I don’t think any of us can predict at this point.”



Kevin Mansell – President, Chief Executive Officer, Director – Kohl’s

“all of our primary research and our own response rates on events have continued to indicate the consumer is very focused on stretching their dollar, making their budget go further, and seeking optimum value.”

“We recognize that our spring results over-achieved our expectations in both sales and earnings per share. At the same time, both our primary and our secondary research indicate the consumer continues to face economic challenges and intends to continue to shop less and looks to seek ways to stretch her dollar. We would expect the second half of this year to continue to be a fight for market share.”



Mike Jeffries – Chairman and Chief Executive Officer – Abercrombie & Fitch

“We continue to be confronted with very challenging conditions during the second quarter.”

“,consumer spending patterns domestically continue to be dictated by cost and value propositions and this is clearly a headwind for our premium brands.”



Stephen I. Sadove – Chairman and Chief Executive Officer – Saks

“As we look to fall, we expect that the economic conditions will remain extremely difficult for the balance of the year if not beyond, and we’re continuing to plan accordingly.”

“Although sales trends are undoubtedly more stable than they were in the fall of last year, the current economic and retail landscape is still uncertain and we know that predicting future sales and gross margin performance with any certainty remains very difficult.”



Gregg Steinhafel – President & CEO – Target

“Consumers remained cautious resulting in weak guest traffic and transaction size, retail prices especially in food and commodities continued to decline resulting in deflationary pressures and the economic recovery appeared to temporary stall as the country cycled the impact of last year’s stimulus checks.”



Eduardo Castro-Wright – Vice Chairman – WalMart

“we expect that the economy will remain difficult. Our own surveys point to ongoing concerns by consumers about their own financial situation. More people are concerned about unemployment.”

Mike Duke – President and CEO – WalMart

“Consumers continue to face a difficult global economy, having to do more with less.”

“Overall, our customers are more disciplined in their spending. There’s a new normal now where people are saving more, consuming less, and being more frugal and thoughtful in their purchases.”


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