Zacks Industry Outlook Highlights: Walgreen, Costco Wholesale, Rite Aid and Zumiez

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Jul 16, 2014, 09:30 ET

CHICAGO, July 16, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Retail, including Walgreen Co. (NYSE:WAG-Free Report), Costco Wholesale Corp. (Nasdaq:COST-Free Report), Rite Aid Corp. (NYSE:RAD-Free Report) and Zumiez Inc. (Nasdaq:ZUMZ-Free Report).

Industry: Retail

Link: http://www.zacks.com/commentary/33448/retail-begins-picking-it-up

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. As consumer spending is the key to the viability of any economy, the health of the retail industry becomes an important economic indicator.

As a leader in the retail business, the United States provides ample growth opportunities for all types of retail companies. The retail industry covers everything in its scope, ranging from internet catalog sales, auto dealers, convenience stores, vending machines and clothing -- thus dividing retailers into numerous categories. Retailers of all sizes, including individual direct marketers or direct sellers, small- to medium-sized franchise unit owners, and large "big-box" store operators compete in the U.S.

From a labor intensity 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 two-thirds of the economy.

Correlation with the Economy

Although the U.S. economy commenced the year on a sluggish note, the stock markets have shown momentum so far. The S&P 500 has gained roughly 7.0%, The Nasdaq Composite Index jumped about 6.6%, while the Dow Jones Industrial Average rose 3.1% year-to-date.

The economic outlook for 2014 remains positive based on favorable economic data and an improved consumer and business outlook.

According to the data from Bureau of Labor Statistics, the unemployment rate for June declined to 6.1% from 6.3% in May, and reached its lowest level since September 2008.

The recent Conference Board's data on Consumer Confidence Index reflected a 3.0 points improvement to 85.2 in Jun 2014, following a rise in May to 82.2. Meanwhile, the University of Michigan's Consumer Sentiment survey showed a 0.7% sequential improvement to 82.5. However, it declined 1.9% year-over-year.

Another data by the Commerce Department shows that consumer spending for May 2014 was up 0.2% after being flat in Apr 2014. Despite growth in personal income during May, spending remained cautious. Looking ahead, the Federal Reserve has been projecting stronger growth as it winds down its bond-buying program designed to stimulate the economy.

With economic activities gradually gaining traction, the Federal Reserve has so far reduced its monthly bond purchases to $35 billion, in 5 rounds of $10 billion tapering each month. The minutes of the latest Federal Reserve meeting indicate that it will likely reduce the pace of asset purchases in further measured steps.

The Federal Open Market Committee (FOMC) now plans to end its bond purchase program in October with a final reduction of $15 billion provided the economy stays on track. Till that time, the Federal Reserve plans to trim its bond purchases by $10 billion at each meeting.

However, the central bank said the decision to end bond purchases in October shouldn't be interpreted as a sign that a hike in key interest rates is likely to begin sooner. The central bank plans to keep the rates near zero for a considerable period.

The strengthening manufacturing sector and improving labor market are positive indicators no doubt, and the retail sector is likely to hog all attention. These feel-good factors have abated fears of a derailed economy that arose after the first quarter of 2014, when GDP data revealed a 2.9% decline. While the BEA is expected to release the Real GDP 'Advance estimate' for the second quarter on Jul 30, market analysts' continue to suggest about 3% economic growth (GDP) in 2014.

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 sales data of most retailers reveal that the industry has been picking up with better-than-expected comps reported for the fourth straight month, owing to huge promotional activities, favorable weather, Easter Sales, Memorial Day weekend sales and the recently improved employment and consumer credit data.

The latest key metrics data released last week reflect a positive sentiment with all but 2 of the 11 retailers that report monthly comps emerged as winners. The improved results in June were mostly attributed to a rise in traffic resulting from the positive economic factors like a 0.2% decline in unemployment rate and 7.4% rise in consumer credit as well as heavy promotions and favorable weather.

The list of gainers in June was led by drugstore operator Walgreen Co. (NYSE:WAG-Free Report), which posted a 7.5% rise in comps and an 8.9% increase in total sales. This was followed by Costco Wholesale Corp. (Nasdaq:COST-Free Report) which posted a 6% rise in comps for June. The warehouse retailer Costco Wholesale's sales grew 10% to $10.89 billion.

Drugstore chain retailer Rite Aid Corp. (NYSE:RAD-Free Report) occupied the third spot with 3.9% growth in comparable-store sales for Jun 2014, while total drugstore sales climbed 3.5% to $1.995 billion for the month.

Moving forward with the list, Washington-based retailer of sports-related teen apparel Zumiez Inc. (Nasdaq:ZUMZ-Free Report) reported a 3.1% increase in comps while sales improved 11.1% to $65.3 million from $58.8 million in the year-ago period.

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