Liz Dunn (Photo by Lonnie C. Major)

If you want to know how the American shopper feels from one month to the next you can peruse a stack of consumer sentiment surveys—or you can chat with Liz Dunn. Since graduating from Spelman College in 1996, Dunn has steeped herself in the retail industry’s most vital statistics. She has worked in corporate finance positions at Gap Inc. and Liz Claiborne, studied the sector’s ups and downs for investment clients at Prudential Equity Group, and worked as an investment banker in the consumer sector at Bear Stearns. As a managing director and retail equity analyst at Thomas Weisel Partners in New York, one of the frequent questions Dunn hears from investors these days is: “Can the economy—two-thirds of which is driven by consumer spending—rebound while Americans are still nursing post-recession shell-shock?” Dunn spoke to black enterprise recently about the economy and a handful of retailers prepared to capitalize on value-driven shoppers.

What’s your general forecast for market performance during the rest of 2010?
I think we’re going to continue to see some ups and downs. But, generally, directionally we should continue to move up. A number of my clients were concerned about the possibility of a double dip in the recession. Now, the consensus is shifting away from that. We’re probably headed for a more gradual recovery. As large funds position themselves for that—as opposed to the double dip—they’re going to continue to buy stock.

As far as economic recovery, economists are saying a real rebound can’t happen without job growth, which would give consumers confidence to start spending again. Is that your view?
Yes. But what we saw through the 2009 Christmas holidays is the consumer is becoming a bit more confident. The [sales] numbers, largely, came in better than expected. We’re beginning to see positive retail sales performance from many of the largest retailers. The jobs recovery is certainly important, and that’s going to lead us out of this. But I think that we’ve stabilized and seen the worst of it. Based on the consumer confidence numbers, that’s how the consumer is feeling as well. There’s some anticipation that things are beginning to improve, and spending patterns are reflecting that.

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.

We’re not out of the woods yet, but sooner or later our economy will recover and this latest recession will be a thing of the past. But that doesn’t mean it’s time to relax. The post-recession economy will be characterized by new opportunities, new dangers and new rules, but it will be far from robust; this is not the time to fall back into pre-2008 habits and assumptions. That said, with the following in mind, you can slingshot your way from mere recovery to newfound prosperity.

Don’t Lose Your Focus. There’s nothing like fighting for survival to focus your concentration. The temptation, as the economy improves, will be to relax and take your eyes off the prize. Don’t do it—now’s the time for businesses to take the lessons of the past two years and go from mere survival to resurgent profitability.

Convert Desperation into Momentum. Both companies and individuals made desperate moves to stay afloat during the past two years, whether by cutting personal expenses or shedding workers. It was painful, but now that you are leaner, stronger and tougher, make it your goal to dominate the new landscape.

It’s Okay to Spend, But Continue to Seek Value. Yes, in order for a recovery to be sustained, we need to spend. But we can’t return to the recklessness that helped cause our economy to crash in the first place. Spend, yes. But focus on strategic value and real ROI—whether a business or an individual, get all the bang you can for your buck.

Alfred Edmond Jr. is the editor-in-chief of BlackEnterprise.com

Don’t buy into the doom and gloom. “One of the really important things is to maintain your optimism,” says Carla Lane, CEO of Lane Staffing, a personnel company based in Houston. Lane, 36, was at the helm through the recession of 2001 and her company also felt the sting of lost business when Enron, one of their clients at the time, experienced its downfall. But “when you’re in business and you’re doing something that you love you have to remember that you’re doing this for a reason and whatever is going on right now is not going to last forever,” she says.

Reconsider every expenditure. Business owners are often passionate about what they do, which is fine, says Keith J. Davis Sr., president of Houston-based marketing and publishing company D-Mars Marketing. Having watched an economic downturn cost his company business after September 11th, as well as having experienced regional slowdowns after various hurricanes including Katrina, the 38-year-old Davis Sr. has seen business owners make the mistake of being swayed by their feelings more than the bottom line. “When you say you’re passionate about everybody and you don’t want to lay anyone off, at the end of the day you may lose your company because you’re running it with your heart,” he says. In bad times, “we have to do a reality check. If we’re not making money doing this, we need to stop doing this.”

Make use of downtime. Business may not be as steady as before, but that doesn’t mean you can’t turn this into a productive time. William Drakeford opened his first Drake’s Place Salon in 2000 and has grown his business to five locations in Southern Maryland despite the recession of 2001 and the current downturn. Though a down real estate market means businesses can get a good deal on office space, the 38-year-old Drakeford doesn’t recommend expanding right now, but rather using the recession as an opportunity to re-tool the business and make sure everything is working seamlessly. That means making adjustments to the business plan, looking for ways to increase efficiency and planning how you will expand when things turn around. “Look at every aspect of business from promotion to marketing to operation,” he advises. “So once this recession passes you’re really ready for it because your operations will be really tight.”

Become more relevant to current customers. It’s always easier to convince current customers to buy from you than to add new ones, particularly in a recession, so look for ways to target new product lines or services to your existing client base, Lane says.  For example, Lane Staffing recognized that many of their clients didn’t need personnel services because they were cutting back “so we looked at what our skills were as a staffing company and one of those is taking care of payroll,” Lane says. “That’s one of the things we started offering to our customers. We were able to maintain by looking at our business and seeing how we could become relevant in this difficult time.”