Buying Retail

Analyst Liz Dunn identifies merchants that are boosting their consumer (and investor) appeal

Before the economic downturn, U.S. consumers had become extremely undisciplined in their spending and saving habits. Do you think the recession will have a lasting influence in reversing these behaviors?
We could see a decade-long change in spending patterns. Not that we won’t see growth, but the type of spending that’s done will be a lot less conspicuous. The consumer has had a sobering moment as a result of the downturn. Everyone has looked at their household P&L [profit and loss statement] and said, “You know, there were a lot of things that were going on back then that weren’t necessarily appropriate or needed.” There will be a lot more of a frugal attitude among consumers at all levels—and a lot more focus on value. You can always count on the American consumer to spend. But at the height of the housing bubble, we saw people with relatively modest incomes driving great big SUVs, and putting flat-screen TVs in every room of the house. That’s changed. It’s now become trendy to talk about how you’re saving money and how you’re being value conscious.

So, I assume the stocks you like right now are retailers positioned to benefit from this new attitude among consumers?
That’s right. My first company is Ulta Salon, Cosmetics & Fragrance Inc. (ULTA). It’s a growth story. One thing that we’ve seen as part of this downturn is that growth has been cut way back. Among the companies I cover, we’ve seen annual square footage growth go from 15% in 2007 to 4% on average in 2009. Ulta, though, still has a strong pipeline of growth ahead of it. They’re about one-third of the way to their goal of having 1,000 stores by 2017. They have several years of strong double-digit growth ahead of them. Their aim is to be a category killer and dominate the beauty category. If you look at how the average woman spends in the beauty category, she may go to the drug store for a $12 mascara, and then to a department store for a $30 lip gloss. Ulta’s strategy is to sell all of those products under one roof and really meet all her beauty needs. Through this downturn, there was only one quarter where Ulta saw negative store traffic trends and then they rebounded, which is much, much better than the industry overall. So, there’s a lot of leverage that is driving them to what I believe will be 30% earnings growth over the next five years. My year-end price target is $25.

Any other growth stories like that in your coverage area?
Urban Outfitters Inc. (URBN) is also a bit of a growth company. It’s more of a proven concept. I expect their revenue growth to be in the range of 20% over at least the next five years. They’ve got two main concepts: the Urban Outfitters brand and the Anthropologie brand. But the company is extremely innovative. They’re still adding stores. Additionally, they have newer concepts like Free People (a clothing boutique for young women) that they’re working on to be future drivers of growth. Also, recently they’ve talked about Europe a lot more than they have historically. They’ve had a handful of stores in Europe for 12 years. But recently, they’ve increased their focus on Europe and added some talent there. Now, it’s becoming a much more well thought out strategy for growth. What’s interesting about this company is that it has matured as an organization. Before, it was run like a boutique and small business. But, during the downturn they took a look at their processes. They changed CEOs, looked at both main divisions and rethought their strategy. They used to chase trends—sometimes inappropriately. They’re now doing more customer research and segmenting their customer base. I have a year-end price target of $39.

And your final pick?

My last pick, Ann Taylor Stores Corp. (ANN), is a turnaround story. It’s interesting for a number of reasons. In recent years, they’ve disappointed their target customer—a 30-year-old woman. The issue was their product was too basic and too safe. There was not enough color or novelty. In downturns, retailers typically lose their confidence. They think: “We know black pants sell. So, let’s make black pants.” Ann Taylor was lacking the something special. Sometimes they were targeted to the conservative woman and sometimes the party girl. They lost their way and the brand vision was muddled. Ann Taylor added new management talent in 2008 and 2009 and promised that we’d see some improvement in the product line. They’ve also made some dramatic expense cuts, cutting a third of their headquarters staff. That provides them with a cost base where they can capitalize and deliver much better profitability. My year-end price target is $18.

This article originally appeared in the April 2010 issue of Black Enterprise magazine.

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