2012 was a bland but palatable year for the retail industry overall, but an impressive year for retail stocks, which consistently outperformed the market.
The S&P 500 Retailing Industry Group saw a hearty gain of 21.3%, with 19 percentage points of that gain occurring in the first three months of 2012. It outperformed the Dow by 15.4 percentage points, indicating that retail grew faster than the overall economy.
Improved consumer sentiment and higher sales were two drivers of the stock frenzy, but better fundamentals can’t explain the massive jump. Retailers also benefited from a steadily falling unemployment rate, which ticked down to 7.8% this month, a recovering housing market, and low interest rates from the Federal Reserve.
Cotton costs stabilized in 2012, giving an edge to fashion companies and wholesalers. Firms are also running tighter ships, with lower inventory levels overall, tighter cost structures, shorter lead times, and a stronger focus on e-commerce and omni-channel sourcing.
Many of these measures were kick started by the 2008 recession and cotton price spike of 2011, but have only borne serious fruit in 2012. Foreign retailers posted bigger gains than U.S. retailers. Leaders ranged from strong companies increasing their share, to a handful of turnaround stories, or new arrivals with lots of room to grow.
The Bon-Ton Stores was the biggest U.S. winner. It’s stock jumped 261.8% to $11.76 on news of more coherent business conditions and Brendan Hoffman’s rise to president and chief executive officer. Other winners included Dillards, which jumped 90.5% on its new high-end approach, and Prada, up 108.3%. Michael Kors Holdings was up 80.5% on strong luxury growth following its IPO; Gap Inc., up 66.2%, and Salvatore Ferragamo, up 65.7%.
Much of the jump can be tied to uncertainty in foreign markets. U.S. retailers have little overseas exposure. As consumer confidence improved stateside, those companies became a safe place to park investment capital.
This came despite continued uncertainty in the American market due to the fiscal cliff talks, Hurricane Sandy, and a sluggish recovery. But compared to Europe and the slowing in Asia, the U.S. economy is looking strong, safe, and confident.
Struggling retailers included J.C. Penney and Kohl’s. These major mid-priced stores have suffered from the erosion of their traditional base of middle class consumers.
J.C. Penney CEO Ron Johnson has tried a radical new vision for Penney’s, moving away from POS terminals and sales and specials, while reinventing the store layout. Investors were initially enthusiastic about the shift, but foot traffic and sales have plummeted. The stock fell 46% in 2012.
Kohl’s has struggled with inventory and with a cluttered brand perception. Its stock was down 14.3%.
Both retailers have wrestled with reinvention in the face of a changing market landscape. Consumers prefer more nimble, fashion forward companies, and Penney’s and Kohl’s spent most of 2012 trying to build the back of house skill to make that happen. A visit to either of their stores reveals approaches that are still very much in progress.
Winning firms were those that managed to trim inventories and boost foot traffic, while improving customer experience and satisfying consumer demand more rapidly. The way firms find this “special sauce,” seen at Macy’s, Zara, and others, is going to be a major determinant of success in 2013.
Additionally and critically, firms with luxury goods or luxury approaches saw strong gains, as most increases in income flowed to the top quintile of the economy, and Asian luxury surged. Whether this trend will continue depends on the recovery of growth in Europe and the United States, as the Asian juggernaut has started to slow.