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The world of retail is a finicky one where consumers’ perception of merchandise assortments can make or break a retailer’s numbers in any given year. Consumer tastes are always changing, making it difficult for corporate buyers to anticipate which fashions will captivate shoppers. That’s because purchase orders for goods are made months before the products hit store shelves. Some buyers are simply better than others at identifying merchandise people will want. The same holds true for specialty retailers that design and manufacture their own merchandise.

Although investors aren’t normally privy to precise details about upcoming collections, most management teams are forthcoming with their general merchandise strategies, particularly those that work for retailers that have fallen out of favor with consumers. In this turbulent economy, many retailers have been adopting strategies focused on value propositions. For most Americans, the days of splurging at the mall are long gone. Now, a “new normal” has emerged, in which the masses look for quality brand name merchandise at affordable prices.

A number of retailers continue to look to celebrity endorsements and lucrative private-label lines to increase diversification and prop up margins. Sometimes, these bets (or the merchandise selection in general) don’t strike the right chord with consumers, and retailers are forced to clear merchandise via increased discounts and promotions, at the expense of profitability. Also, one retailer may become more aggressive with pricing, forcing its peers to follow suit. Thus, it is important to monitor a retailer’s clearance activity.

Often times, even desirable merchandise and a solid strategy aren’t enough to overcome a challenging environment. Astute retail investors consider the buying power of a retailer’s clientele. Further, a range of macroeconomic factors, such as home prices, the unemployment rate, the savings rate, wage increases, indebtedness, and recent stock market performance, can dictate where and when people choose to spend their hard earned disposable income. Also, if a retailer's store count is concentrated in a specific region, investors should consider the economic state of that region when conducting analysis.

We have chosen to focus on companies in the Retail Soft Lines, Retail Hard Lines, and Retail Store Industries with Safety and Timeliness ranks of 3 (Average) or higher. We included only those companies that ranked in the top third for both sales growth in the prior 12 months and projected average annual sales growth over the upcoming three to five years. The result was 13 names (see below), two of which we have selected to highlight: lululemon athletica (LULU) and ANN Inc. (ANN).

lululemon athletica inc.

lululemon athletica is a designer and retailer of yoga-inspired technical athletic clothing and accessories. The business was founded on the concept that athletic clothing options for women were limited. lululemon built on this opportunity, primarily marketing to women. Since then, it has expanded its demographic it serves to men and female youth. In fact, the younger market is specifically targeted through its ivivva athletica line, a youth-focused brand that sells dance-inspired products. 

lululemon sells its products through 180 stores in Canada, the United States, Australia, and New Zealand (as of April 29th). In addition to its retail locations, LULU developed an online platform in 2009, which is now the direct-to-consumer sales portion of business.

lululemon has reported impressive year-over-year top-line gains since its start in 1998. During the fiscal first-quarter (ended April 29th), revenues increased 53% and comparable-store sales advanced 25% on a constant-dollar basis, thanks to higher inventory levels and a good “spring” selection. Moreover, direct sales (its Web site) have become a bigger piece of the pie, and have more than doubled from the year-earlier period.

All in all, substantial top-line growth is on the horizon.  In our view, annual sales have the potential to grow north of 20% in the 2015-2017 period, which will likely be fueled by new product categories and store openings, specifically in the United States and Canada. As a result, lululemon was at the top of our list for highest projected annual sales growth in the Retail Soft Lines, Retail Hard Lines, and Retail Store Industries.

ANN INC.

ANN INC., formerly known as AnnTaylor stores, is a retailer of women’s apparel, shoes, and accessories.  The company operates under two brands: Ann Taylor (approximately 40% of fiscal 2011 revenues) and LOFT (60%). Both brands offer a variety of fashionable career and casual separates, shorts, pants, dresses, tops, weekend wear, and shoes, among other items. Products are sold through its retail stores, Ann Taylor, LOFT, Ann Taylor Factory, and LOFT Outlet, as well as online through two different Web sites under the Ann Taylor and LOFT names.

As of April 28th, the company had 947 stores, down slightly from the fiscal fourth quarter, largely reflects closings in its Ann Taylor brand, which we attribute to sluggishness in consumer spending due to the soft economic climate. However, total store openings increased year-over-year, and analyst Andre J. Constanza expects the company to reach 985 stores by the end of fiscal 2012. That said, store openings should help boost the company’s customer base, increase traffic, and therefore, enable the company to outperform many competitors. Overall, this retailer has decent growth prospects over the long-term.  Revenues are expected to expand roughly 10% annually over the next 3 to 5 years, which is impressive when compared to its industry peers. 

  

 

 lululemon athletica  (LULU)
ANN Inc.                     (ANN)
Weight Watchers           (WTW)
Ascena Retail Group         (ASNA)
Chico's FAS  (CHS)
Stage Stores (SSI)
Abercrombie & Fitch  (ANF)
Family Dollar Stores (FDO)
Dollar Tree, Inc.  (DLTR)
rue21, inc.  (RUE)
Coach Inc. (COH)
Nordstrom, Inc.  (JWN)
Ulta Salon    (ULTA)

At the time of this article's writing, the author did not have positions in any of the companies mentioned.