S&P Equity Research Issues Retail Sector Predictions for 2011

Jan 18, 2011, 15:38 ET from Standard & Poor's

NEW YORK, Jan. 18, 2011 /PRNewswire/ -- While the majority of publicly traded retailers were able to capture share in 2010 from smaller competitors or those that were forced to declare bankruptcy, and also increase profit margins, retail analysts at S&P Equity Research see 2011 as another good year and are projecting that consumer spending will rise 3% this year.  

"The most important driver of retail sales is the trend in the labor market, and we think the employment situation will continue to stabilize with some slight improvement," said Marie Driscoll, Group Head of the Consumer Discretionary Retail analysts at S&P Equity Research. "We think this will be a slight positive for retail sales this year, although we admit that various aspects of the labor market are still extremely poor."

"Perhaps the biggest catalyst for improving retail sales in 2011 will be the extension of the Bush Era tax cuts and the 2% payroll tax cut for all workers one year, said Driscoll.. "We think this 'tax holiday' will have a significant impact on spending, as the median income family earning about $50,000 per year will receive an additional $1,000 in its paychecks and those earning $106,800, the current limit of FICA taxes, and above will take home about $2,100 more this year."

The analysts have identified the following ten trends for retailers in 2011 and the medium-term future.

1. Retailers such as Abercrombie & Fitch (ANF 52 ****), Polo Ralph Lauren (RL 110 *****), and Tiffany (TIF 60 ****) plan to increasingly focus on international markets (in particular, emerging markets) to boost growth rates. On that same note, we expect opportunistic domestic store closures for many retailers.

2. We project aggregate online retail growth of 10% in 2011, as consumers increasingly migrate to online sites for convenience and value. It seems apparent to us that consumers are becoming more channel agnostic, with retailers such as Amazon.com (AMZN 189 ***) likely to gain additional market share.

3. We expect m-commerce to become more common, as demands by consumers to price comparison shop prompt retailers to enable Wi-Fi hot spots in their stores. It is estimated that about 50% of consumers will have smartphones by the end of 2011. In addition, we think that sales clerks, like consumers, will also be empowered by greater access to information.

4. Companies will likely rely more on social media, not only by responding to consumer complaints, but also to market products and unveil promotions. This should be an effective way for companies like Coach (COH 54 *****) and Urban Outfitters (URBN 36 ****) to manage their image and brands.

5. We expect consumers to increasingly seek out organic or green products that are better for the environment, but not at the cost of foregoing fashion. We think retailers like VF Corp (VFC 84 *****) are at the forefront of this trend.

6. Retailers will likely increasingly cater to (and meet) individual consumer demands by providing greater service and marketing. We think this will be accomplished through the use of computer algorithms to analyze past shopping activity. My Macy's is a great example of this, as Macy's (M 23 ****) now individualizes 1,000 mailings to its customers.

7. We expect continued bifurcation of the retail market with high-end luxury stores benefiting from the wealth effect and low-end stores being aided by value-seeking consumers.

8. Consumers are always seeking new and exciting experiences. Retailers that are able to thrill, surprise, delight, and engage, will probably win, in our view. Destination stores such as those from Disney (DIS 39 ****) and Apple (AAPL 348 *****) are increasingly becoming a source of additional entertainment for consumers.

9. We expect retailers and brands to test the waters of mass collaboration, providing the consumer community input in product design. This further engages the consumer, and brings about a whole new meaning to the word "personalization".

10. Coupons are fast becoming ubiquitous through increased connectivity. Be it online or on their mobile phones, more and more consumers are searching for coupons as a means for creating value from their purchase. "Caveat emptor" could become "mercator emptor" given consumers' newfound and increasing knowledge base, with retailer margins likely to decline as a result.

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