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Our Top Five Most Successful Retailers of 2016

One week ago in this space, we covered our list of the five retailers that struggled most in 2016.  It was not all gloom and doom for the retail industry, however—despite negative headlines about traditional shopping mall-based retailers fighting against headwinds and possible rough times ahead for brick-and-mortar retailers, there were plenty of success stories in retail during the past calendar year.  And, although e-commerce saw the lions’ share of media positivity in 2016, some retailers without a robust e-commerce presence experienced massive gains last year.

Rubric

As we covered on the Retail Focus Podcast last week (and noted in last week’s rundown of least-successful retailers), we wanted to go beyond media hype and clickbait headlines to find retailers who enjoyed a successful 2016.  Certain retailers—especially e-commerce startups—garnered their share of praise for “disrupting” one retail segment or another.  However, recognizing new or emerging companies as the “most successful” retailers in a space can prove problematic; we don’t have a large enough sample size to properly assess year-over-year performance for some of these companies, for one.  Additionally, though they may be on the verge of “disrupting” a particular facet of retail, in most cases, their market share is still dwarfed by some of the slightly more traditional retailers.

That being said, we looked at a number of different factors to determine 2016 success.  In addition to the three most typical ways in which the market assesses success of a company (comparable store sales, top line revenue, and earnings per share), we also included additional, less traditional factors.  These include cash flow throughout the year, closures or openings of brick-and-mortar locations, supply chain and inventory management, and a company’s relative success across all channels.  As difficult as it was, we omitted retailers for whom the number of year-over-year comps are not substantial enough from which to glean much information—because of this, upstart retailers that had a banner year in 2016 (Duluth Trading Company, for example) were left off the list.

Considered: Ross, Tractor Supply Co., Sherwin Williams, Foot Locker

Each of these retailers saw success in one form or another during calendar year 2016.  In the case of Foot Locker, they were able to buck the trend of some scuffling mall retailers to show significant same store or comparable store increases during the year.  Because of their increased focus on “athleisure” wear, and their increasingly streamlined approach, it would be unsurprising to see them appear in the top five in 2017.

Tractor Supply Co. was on track to potentially make the list by mid-year, with their steady management of growth and acquisition of Petsense stores impressing retail onlookers.  However, a comparable store sales decrease of 0.6% in Q3 of FY2016 was enough to omit them from our top five.  Ross rode the surging off-price retailing wave of 2016, and saw massive footprint expansion as the company eliminated much of the perceived white space in the U.S. with multiple store openings.  However, same store sales growth was a tick behind another off-price retailer that does make an appearance below.

Sherwin Williams is a somewhat glossed-over retailer at times, because they exist in a niche segment and because they glean a high amount of sales from wholesale avenues.  Still, net sales in their “Paint Stores” group shot up 6.7% during Q3 of FY2016 (over the previous year), following a 6.1% increase in Q2 and an incredible 10.5% in Q1.  Same store sales were remarkable, topping out at an increase of 9.4% in Q1 over the previous year.  By far, Sherwin Williams was the most difficult omission from the list, and it will be notable if they can continue to grow next year against very solid comps.

#5: The Tile Shop

It has been an incredible last two years for The Tile Shop (TTS).  Somehow, the niche retailer was able to build on a fantastic 2015 by delivering comparable store sales increases consistently in the mid- to high single digits (5.7% comp growth in Q3 FY2016 over Q3 FY2015, for example).  The Tile Shop has added to their overall selection, managed to build out their e-commerce platform, and appears to have seen some benefit from a bevy of now-popular home renovation television shows.

For each quarter in fiscal year 2016, The Tile Shop showcased growth in multiple metrics, and often all three of the important areas mentioned above—comparable store sales, top line revenue, and earnings.  Their third quarter saw net sales grow 8.5% over the prior year’s net sales, but beyond that, they are making giant strides on the margin front, as evident by their 21.9% net income growth in Q3 and diluted earnings per share growth of 44.4% in Q2.

The Tile Shop closed out 2016 by opening two retail showrooms—one in the Chicago metro area, and one in Washington D.C. (their first such showroom in that market).  This brought their total new openings in 2016 to ten, increasing their store count to 123 in 32 states.  Despite the growth over the past two years, TTS seems to have plenty of white space in which to expand—investors likely see the same thing, as the company bears a P/E ratio of around 45.  Their stock price has grown by leaps and bounds since bottoming out around $7.50 per share in 2014; TTS is currently flirting with the $20.00 per share mark.

#4: TJX (TJ Maxx, Marshalls, HomeGoods, Sierra Trading)

Like Ross mentioned above, TJX saw great success in 2016 despite not having much in the way of an e-commerce platform.  Although their “Marmaxx” stores (Marshalls, TJ Maxx) do maintain e-commerce sites, the majority of the company’s increase in net sales during calendar 2016 came via increased foot traffic to their brick-and-mortar stores.  And, unlike some other multi-brand retail companies, this isn’t a success story based around the success of only one brand—TJ Maxx, Marshalls, HomeGoods, and their Canadian division all saw mid-single digit comparable store sales increases in the third quarter of FY2017.

TJX still sees company-wide comps coming in at around 4% for FY2017, which some analysts believe may still be a bit low, given the high ceiling for the retailer.  As with the other companies on this list, TJX isn’t only seeing growth in comparable store sales; their net income for Q3 came in at $550 million, and their adjusted diluted earnings per share saw a bump up to $0.91 from $0.86 during the prior year.  Following the third quarter results, their nine month figures show a general growth pattern across all three major metrics.

In addition to the company’s strong financials, TJX opened 110 new stores during the last quarter alone.  These new openings are evenly spread across platforms, with openings in all four of their domestic brands, all three of their Canadian brands, and their two brands in Europe.  One of the more intriguing stories of 2017 for the company is how they decide to handle the expansion of their Sierra Trading Post concept.  The outdoors and activewear-themed store has a clear path to expansion in front of it (currently only 11 stores in the U.S.), and with the relative success of full-price retailers The North Face and REI, it would not be surprising to see growth in the brand in 2017 and beyond.

#3: Amazon

There isn’t a whole lot to say about Amazon that hasn’t already been covered by major media outlets in the United States.  On hype alone, one might suspect that Amazon (AMZN) might end up at #1 on this year’s list of most successful retailers.  However, when looking beyond the headlines, there are still a few reasons to restrain the unbridled optimism surrounding Jeff Bezos and company.

First, the good: Amazon had an amazing holiday shopping season, based on late November numbers alone.  According to Slice Intelligence, Amazon captured 43% of all online sales in the U.S. during the week after Thanksgiving; brick-and-mortar giant Walmart earned just 2.3% of all online sales.  Additionally, 51% of U.S. consumers indicate that Amazon is included in their list of online shopping destinations.  During their latest quarter of financial results (Q3 of FY2016), Amazon posted earnings of $0.52 per share on massive revenue of $32.71 billion, the latter number trumps the other companies on this very list.  Prime membership retention remains high, as well—Prime members were said to have purchased more than one billion items on Amazon during the holiday shopping season.

However, there are reasons to remain measured about the company’s future growth.  Their retail margins are still slightly behind some of the more successful brick-and-mortar retailers.  The drone technology Amazon continues to make headlines about is still some years away, and there are many regulatory issues that will need smoothed over before widespread drone-based delivery services become an everyday facet of Amazon’s arsenal.  Their grocery program remains somewhat limited for a few reasons—one being price point (Amazon Fresh prices often carry a 30%-40% premium on grocery store prices for fresh produce), and another being geographical limitations in terms of available markets.  Finally, their first Amazon Go concept location (a store where customers can pick up items and walk out without the traditional checkstand) seems to be behind schedule in Ballard, WA.  Even at that, they have a long way to go before competing against more traditional convenience store brands, such as 7-Eleven, who are working on implementing similar technology.

All that being said, Amazon’s share price reached an all-time high during 2016, hitting $845 per share in October.  Certain analysts predict a 52-week price target as high as $1,000 for the company.  We would be remiss to leave them off the list entirely.

#2: O’Reilly Auto Parts

It was an up-and-down year for other major retailers in the auto parts segment, including AutoZone (mostly positive) and Advance Auto Parts (mostly negative).  For O’Reilly, though, there were very few negatives in 2016, as they continued managed growth while capturing market share and executing on a store-by-store level.

While their top line sales numbers might not be as eye-popping as Amazon, O’Reilly was still able to grow revenue by 6.8% in Q3 of FY2016 over the same quarter in FY2015.  Perhaps most impressive for O’Reilly in 2016 were their margins—their third-quarter operating margin hit 20.2%, which set a new company record.  For the fiscal year overall, the retailer expects diluted earnings per share of $10.58 to $10.68.  The growth in the bottom line comes at a time where the company is continually expanding their store count—O’Reilly expanded their number of locations by over 7% from the end of 2014 to the conclusion of 2016.

As if all of this weren’t enough to award O’Reilly with second place on our list of most successful retailers in 2016, the company’s cash position doubled through the first nine months of the year.  Also, their comparable store sales have consistently been in the mid-single digits over the past three quarters—remarkable, considering nearly double-digit increases in comparable store sales during the previous year.

#1: Ulta Beauty

There was no debate as to the top store on our list of most successful retailers, as Ulta Beauty saw success in nearly every category in 2016.

Any time a retailer displays double-digit comparable store sales (against difficult comps in the first place) it commands attention, especially in a retail landscape where 2%-3% same store sales growth is considered solid.  Ulta’s comps are growing through both average ticket size (5.6% growth in Q3 FY2016 over 3Q FY2015) and brick-and-mortar store traffic (up 11.1% in Q3).  Additionally, it isn’t just one facet of their business witnessing growth—their retail sales, salon sales, and e-commerce sales all grew by leaps and bounds during 2016.  In the last fiscal quarter for which information is available, retail comps were up 14.3%, salon comps up 16.7%, and e-commerce sales grew by an amazing 59.1%.

Outside of comparable sales increases, Ulta built out their overall store footprint by adding 75 locations in the U.S. through the first ten months of 2016—this, when combined with the positive comps, grew top line revenue by 23.3% during that same span.  They appear on track to edge past the 1,000 store mark in 2017.  Also, their gross profit marks increased from 35.6% to 36.7% from February through October, owing largely to product margin expansion (a benefit they should continue to reap as they grow further).

Beyond just the numbers, it is important to note how Ulta uses social media and their e-commerce platform to drive customer engagement.  By posting rich tutorials, how-to videos, and beauty ideas on their various digital outlets, Ulta is able to produce a sense of consumer interaction that few other e-commerce retailers have.  Their commitment to tie-ins with well-known YouTube personalities goes above and beyond the traditionally stiff corporate video production employed by many brick-and-mortar and e-commerce retailers.  In conjunction with a robust rewards program, customer service that works with the consumer rather than against, and one of the most forgiving returns policies in retail (which, surprisingly enough, impacts their bottom line very little), it is plain to see how Ulta has surged to the top of this list.

The major question for Ulta going forward is whether or not they can continue to sustain double-digit comp growth against now two consecutive years of double-digit comps.  The major question for most other retailers, now, is how they can use the outline provided by Ulta to achieve strong growth of their own in 2017.

On the next Retail Focus Podcast, we’ll discuss the stores that went bankrupt or disappeared from the retail landscape in 2016, and the lessons retailers can glean from those failures.  It will be accessible on this website, iTunes, Podbean, or wherever fine podcasts are distributed.

Our List of 2016's Five Least Successful Retailers

This past year saw the continuation of ongoing change in the retail landscape—certain retailers in the brick-and-mortar segment struggled, causing widespread pessimism regarding traditional retail in the United States.  Although there were many positive retailing storylines in both brick-and-mortar and e-commerce in 2016 (we’ll cover those later in the week), today we look at the companies that struggled most during the past calendar year.

Rubric

As we covered on the Retail Focus Podcast this week, it isn’t enough to simply list retailers that caught the most media flak in 2016 in this list—companies like Nordstrom, who actually had a decent calendar year, got their share of negative headlines because of analyst or media outlet overreaction.  So, we looked at a number of different factors in crafting this list, beyond which companies grabbed headlines. 

In addition to the three most typical ways in which the market assesses success of a company (comparable store sales, top line revenue, and earnings per share), we also look at additional, less traditional factors.  These include cash flow throughout the year, closures or openings of brick-and-mortar locations, supply chain and inventory management, and a company’s relative success across all channels.  We also eliminated any retailers that entered bankruptcy or folded altogether during the calendar year—those will be addressed in a future post.

Considered: Whole Foods, The Container Store, Tuesday Morning, GNC

Although it was a trying year for each of these retailers, they were just proficient enough to stay out of the bottom five.  Whole Foods spent much of calendar year 2016 spinning their tires, but did close with Q4 sales that increased 2% to a record $3.5 billion for the grocer.  This, along with their 365 initiative and cost-cutting measures with an eye towards reducing prices, kept them off the list.  The Container Store, meanwhile, saw a drastic reduction in comparable store sales (down 4.2% in Q2 of FY2016 alone), but did see a small bump in top line revenue as well as overall store count.

Tuesday Morning and GNC were closest to cracking the top five.  Tuesday Morning is still showing losses on the balance sheet, despite comparable store sales increases of 5.1% in the most recent fiscal quarter.  However, their initiatives to relocate and remodel a solid chunk of their store base keep intact optimism for the future.  GNC was hit hard in nearly every metric during 2016—same store sales decreased 8.5% in Q3, accompanying top and bottom line decreases during the same period.  This followed same store sales declines of 2-4% in Q1 and Q2.  The specialty retailer announced plans earlier this month to close for one full day (December 28) as part of a plan to retool their stores and reform their image heading into 2017.

#5: Neiman Marcus

Despite the fact that Neiman Marcus is a private company (rumors of an IPO were teased in 2014 and 2015), there is still a decent amount of information on the premium retailer’s finances.  The information released to the public wasn’t good for much of the year—they concluded 2016 with three consecutive quarters of comparable store sales declines, including a decline of 5.0% in Q3 of FY2016 and 8.0% in Q1 of fiscal 2017.  Their bottom line didn’t fare any better, as they reported a net loss of $23.5 million in their Q1FY17 results.

This, in turn, led to a series of fairly defensive question-and-answer sessions during their earnings calls, where the company blamed everything from a brick-and-mortar retail downtown to a decline in income for oil-rich communities in states like Texas.  In reality, the company is having a difficult time executing at multiple levels.  Their e-commerce platform was called into question on social media earlier in the year, when their sale of collard greens from a third party vendor was criticized for its expense.  For a short time on Twitter, the hashtag #gentrifiedgreens began to trend, sending a strong amount of negative media attention towards Neiman Marcus.

Overall, despite continually worsening comps, salvation for Neiman Marcus may lie in their Last Call stores, of which they have 29 (compared to 42 of their traditionally-branded stores).  Nordstrom has seen comparable store increases in the 3.0% range from their Rack concept, and Neiman Marcus may be well-advised to build out Last Call to help salvage consistent losses from their other channels.

#4: Restoration Hardware

The year started out poorly for RH, with analysts noting massive supply chain issues in the company’s online platform.  In some circumstances, it was said, customers might face a wait time of six months for certain products.  As one might imagine, this is bad news in a retail sector where timeliness is everything.

Despite assurances that the problem was being worked through, the results never showed in the earnings calls.  During the latest earnings release, RH noted a comparable brand revenue decline of 6% and drastically reduced adjusted net income ($8.0 million for Q3 2016 versus $27.7 million in the same quarter one year prior).  Additionally, they lowered expectations for 2016’s Q4, stating that their holiday sales were slower than expected.  Supply chain issues also dogged their “Source Books” they traditionally send out in the fall—because their Source Books were late in mailing to consumers, RH CEO Gary Friedman said that sales typically stemming from the catalogs would be pushed to Q1 2017.  If Q1 2017 fails to see this predicted bump in revenue, the company may have more severe issues on their hands in the next calendar year.

As though all of this weren’t enough, the company rolled out their RH Grey Card membership program in 2016.  The program charges consumers $100 up front for a 25% discount on purchases.  Early indications are that the program may be costing RH some on the operating margin front—this is borne out in Q3 2016 numbers, where top line revenues increased by 3% to $549 million, yet earnings for the company took a significant hit, as noted above.  Potential optimism for RH sits with their RH Modern, whose launch was blamed for “temporarily depressing financial results” for the company as a whole.

#3: Staples/Office Depot

Although we are cheating somewhat here by combining two companies in one spot on the list of most-struggling retailers in 2016, these two companies are inexorably tied together due to their attempted merger that fell through.  After the merger was shot down in May, both companies were sent scrambling to identify future plans.

The FTC ruling seemed to hit Staples a bit harder than Office Depot, as the latter was already in the process of closing down stores deemed redundant by their merger with OfficeMax just a few years prior.  In August, Office Depot reiterated plans to close another 300 locations, in addition to the 400 already closed by the Q2 2016.  Some optimism lies in Office Depot’s “store of the future,” with a smaller square footage and increased omnichannel execution capabilities.

Staples, meanwhile, saw same store sales plummet in their Q1 and Q2 by nearly 5%.  Additionally, they had to pay Office Depot a “break-up” fee of around $250 million.  Much like Office Depot, Staples initiated store closures in 2016 (50 in the U.S.), which built on their total store closure count of 242 over the two years prior.  Stock prices for both companies was extremely volatile over the course of the year.

#2: h.h. gregg

h.h. gregg, with a footprint mostly based in the eastern half of the U.S., hemorrhaged away top line sales over the past four quarters.  In all likelihood, 2017 will prove absolutely crucial for the retailer who exists in the same sector as Best Buy.

Unlike Best Buy, which saw a surprising surge in 2016, h.h. gregg struggled outside of their appliance segment during the calendar year.  Comparable store sales decreased 6.4% in 2Q 2017 alone, and their cash supplies dwindled down by another two million.  Increases of 35.5% in online sales and appliance comps by 5.7% weren’t enough to offset slackening same store marks, with net sales down 6.6% for the quarter, the most recent for which financial information is available.  Their major losses seem to be spurred by decreased sales in consumer electronics, which saw a 25% decrease over 2Q 2016, owing likely to increased competition from e-commerce retailers and Best Buy’s increase in brick-and-mortar market share.

The poor sales figures come amidst pressure on CEO Robert Riesbeck, who some investors blame for the lack of expansion in e-commerce and in their super-premium Fine Lines chain.  As with the previous retailers on this list, there is some reason for optimism for h.h. gregg in 2017—if they can build out and capitalize on Fine Lines, they may yet find a way to turn around poor top line numbers.  However, they will almost certainly need to do so on credit—while they’ve reported no interest-bearing debt over the last year, their cash reserves have been reduced to a dangerously low level over the last two years.

#1: Sears Holdings

It is no surprise to anyone that Sears Holdings as had a very rough 2016.  Two waves of closings (and another just revealed for 2017) and consistently slipping same store sales make for a toxic combination, one that is likely to come to a head during 2017.

Although Kmart has seen lower same store sales declines than their Sears counterpart, the long-time retailer has been ticketed for more store closures over the past two years.  The store closures have understandably played a role in decreased top line figures for SHLD—for the quarter ending October 29, revenues decreased approximately $721 million to $5.0 billion.  However, despite the closing of what the company deems “under-performing stores,” same store sales continue to take upper-single-digit hits, declining by 7.4% overall in the most recent fiscal quarter.

So poor is the retailer’s performance of late that it has almost become trite in retail circles to criticize CEO Eddie Lampert—who loaned $125 million to Sears Holdings in April and another $300 million in August.  The company has indicated the possibility of exploring alternatives for Kenmore, Craftsman, and DieHard brands, as well as the Sears Home Services portion of their business.

The lone positive news for Sears Holdings is their REIT (Seritage Growth Properties), which saw it’s market cap rise to $1.42 billion in 2016.  For reference, Sears Holdings’ market cap hit an all-time low of just under $830 million during December.  SHLD shares are down to around $8.50 at year’s end, from around $20.00 per share in January 2016.  Most retail analysts (ourselves included) don’t see a way out for the highly debt-leveraged company, and so unlike the other retailers on this list, it’s possible that Sears Holdings will not exist—at least as it is currently constructed—by the conclusion of 2017.

In a few days, we’ll release our list of the five most successful retailers in 2016.  Until then, we discuss the same topic in the latest Retail Focus Podcast, available on iTunes, PodBean, or any other podcast delivery service.

Walmart Re-Thinks Express Concept

Walmart Friday announced plans to close 154 stores in the United States and 269 stores total.  The majority (119) of the domestic closures surround the retailer's Express store concept, which features smaller store footprints--often in rural areas.  Twenty-three of the closures are Neighborhood Market stores, with 12 Supercenters, four Sam's Clubs and six traditional Walmart stores also on the list.

The majority of the stores tabbed for closure have been built in the last five years, as the company attempted a pilot of their Express brand and attempted expansion of the Neighborhood Market brand.

The closures of the Supercenters, Neighborhood Markets and traditional Walmarts may possibly be offset by scheduled store openings in 2016.  A Walmart store was opened in Fort Lauderdale last week, with Neighborhood Markets in Gretna, LA and Albuquerque, NM opening this week. Neighborhood Markets in Meraux, LA and Pittsburg, KS will open later this month.

View a Map of Walmart Closures in U.S. at Quartz

Sears Holdings Announces Store Closures

Various media outlets Wednesday began reporting news of Kmart store closures throughout the United States, as Sears Holdings began a review of its store network.  At least 29 closures of Kmart stores were confirmed by multiple media outlets Wednesday afternoon, as a company spokesperson remarked that the decisions regarding store closures were performance-based.  A small number of Sears and Sears Hometown stores are also expected to close their doors in spring of 2016.

Note: Several stores reported as closing by certain media outlets have been closed for some time (Glendale, AZ for example), or, as in the case of the Duluth, MN store, are remaining open.

List of closures, as of 6:30 CST Wednesday:

Kmart Store Closures (source in parenthesis)

Prescott Valley, AZ (Prescott Daily Courier)

Katella Ave, Anaheim, CA (LA Times)

Chula Vista, CA (LA Times)

Citrus Heights, CA (LA Times)

San Mateo, CA (LA Times)

Daytona Beach, FL (WKMG)

Tampa, FL (Tampa Bay Business Journal)

Milledgeville, GA (Newsmax)

Rome, GA (Rome News-Tribune)

Nimitz Hwy, Honolulu, HI (Honolulu Star-Advertiser)

Ottumwa, IA (Ottumwa Courier)

Pocatello, ID (East Idaho News)

Canton, IL (Peoria Journal Star)

Terre Haute, IN (WTHI)

North Topeka, KS (WIBW)

Braintree, MA (Patriot Ledger)

Ironwood, MI (Detroit Free Press)

Virginia, MN (WDIO)

Greenville, MS (Delta Democrat-Times)

Boardman, OH (WKBN)

Steubenville, OH (Herald-Star)

Mitchell, SD (KELO)

Pierre, SD (KELO)

Cleveland, TN (Chattanooga Times Free Press)

North Logan, UT (East Idaho News)

Cedar Bluff, VA (WSLS)

Mall Road, Covington, VA (WSLS)

Virginia Beach, VA (WSLS)

Superior, WI (WDIO)

 

Sears Store Closures (source in parenthesis)

Ft. Gratiot Township, MI (Detroit Free Press)

East Memphis, TN (Local Memphis)

Eatonville, WA (The South Pierce County Dispatch) (Hometown store)