If you thought 2008 was a bad year for retailers, and in particular department stores, you ain't seen nothin' yet. The new year is looking absolutely dismal as the economic slowdown deepens, unemployment grows and available consumer credit evaporates - all of which are significant factors in driving down demand for retail goods.
While there are a few bright spots in the otherwise bleak retail industry, it's important to take a step back and analyze the pressures faced by consumers. (For more on the top-down approach, read Macroeconomic Analysis.)
Slowing Economy, Unemployment and Shrinking Credit Availability
There have been many indicators of a shrinking economy throughout 2008, such as skyrocketing joblessness and the probability of the credit market shrinking; retailers will be hit hard in 2009 and, most likely, the majority of 2010. Further proof of the seriousness of this recession comes from data released on December 4, 2008; unemployed workers jumped to 4.1 million, the highest it's been since December, 1982. (To learn more about joblessness, read Surveying The Employment Report and Economic Indicators Tutorial: Jobless Claims Report.)
Employment is generally regarded as the No.1 measure of liquidity for consumers, a very important metric for determining discretionary retail purchases. The No.2 measure of liquidity is credit, and this is where things really start to look bleak: Meredith Whitney of Oppenheimer estimates a $2 trillion reduction in credit availability over the next 18 months. That's more than 14% of the United States annual gross domestic product! Although the outlook may be bleak, there are several companies that will not only ride out the economic storm, but will also benefit from reduced competition.
Department Stores For 2009
Companies that have built a strong value perception and have strong private and exclusive brand offerings will fare far better than their peers, according to Fitch Ratings. A great example of a company that has maintained gross margin through strong private and exclusive brands is Kohl's (NYSE:KSS). In fact, nearly 40% of Kohl's sales are from private brands. Macy's (NYSE:M) also has strong private brands, but the upscale nature - even more so than Kohl's - of the majority of its product mix will likely keep value-seeking consumers away in a recessionary environment.
While Kohl's and Macy's are good examples of strong private brands, TJX Companies (NYSE:TJX) is a wonderful example of a company that has built a strong value perception. TJX it sells the majority of its merchandise at prices 20-60% below other department stores, and relies very little on advertising and promotions.
Two companies that do rely heavily on advertising and promotion are J.C. Penney (NYSE:JCP) and Sears Holdings (NYSE:SHLD). These behemoth department stores are likely to perform poorly in a recessionary environment, due to both the weak private brand offerings and the necessity to continue advertising and sales campaigns to increase the perception of value.
If you must own department stores in your portfolio, TJX, Kohl's and Macy's look to be the strongest, in that order. TJX and Macy's have fairly solid dividends, while Kohl's has incredibly strong private labels and wonderful inventory management.
To continue reading about these companies, see Analyzing Retail Stocks.