Valuation of the Retail Trade Industry

Valuation of the Retail Trade Industry

Dolbeck, Andrew

The retail trade industry sells merchandise to the general public for personal or household consumption. The industry is characterized by the purchase of goods for resale to consumers. Manufacturers that sell their own products directly to the public are generally classified as manufacturers rather than sellers. Retail trade also includes stores that sell to both individual consumers and businesses, such as office supply stores and gasoline service stations.

Low consumer confidence and a decline in holiday spending left the industry in a difficult position at the end of 2002. Retailers fought back with discounts and special deals made possible as manufacturers, also feeling the economic pinch, offered goods to retailers at reduced prices. High-ticket items such as furniture and designer-brand apparel were especially hard hit by the economic downturn.

While many analysts predicted a stronger holiday shopping season for 2003, retail profits for November were less satisfying than predicted. Sales for stores open at least one year, for the four week period ending November 29, were below expectations for 52 percent of the retail businesses tracked by Thomson First Call, according to research analyst Ken Perkins.

Famous name department and discount stores generally did well. Wal-Mart Stores Inc., the nation’s largest retailer, was on track with expectations with a 3.9 percent gain. Target also saw an increase in sales, gaining 6.2 percent. Saks Inc. reported one of the best months among department stores with an increase of 6.7 percent, significantly higher than Thomson First Call’s 2.8 percent forecast. Kmart, recently emerged from Chapter 11 bankruptcy, reported a net loss of $23 million for the third quarter of 2003, representing a decrease in the company’s losses. As the company reduces its expenses, it predicts that profits will begin to increase, even though sales figures will continue to be low.

Mergers & Acquisitions

Merger and acquisition activity shows a steady decline from 1999 in the mid cap market, with the most significant drop in 2000. In the large cap market, activity actually increased in 2000, but then fell to roughly the same levels as the mid cap market in 2001. Purchase price to revenue ratios have been remarkably consistent in the mid cap market, rising slightly in the first half of 2003. Price to revenue ratios show a continuing decline in the large cap market.

The Return of the Luxury Market

Sales of luxuries and upscale consumer goods, a segment hard hit by the economic downturn, may be seeing a resurgence. Profits at Neiman Marcus, a big name in upscale retail, increased in the company’s first quarter, which ended November 1. Revenues generated by Neiman Marcus stores are up 8.2 percent. Bergdorf Goodman, which sells furs, jewelry, and fashionable clothing, increased its revenues by 18.2 percent.

The sector is seeing increased spending from both long-term customers and new shoppers as consumers feel more comfortable paying extra for quality and design. “Fashion is exciting for the first time in two years and the high-end customer is back,” says Eric Beder, a retailing analyst with Northeast Securities. Key merchandising categories in the luxury sector include contemporary sportswear, women’s handbags and shoes, skin care products, jewelry, and fine apparel.

Competing for the Teen Market

Teenaged consumers generally have a large portion of disposable income, making them valued as customers for the fashion and entertainment markets. The beauty and fashion sectors, traditionally popular with young girls, are seeing competition for teen dollars from the technology industry. According to a market research study conducted by NPD Group, teens and tweens are spending less on apparel and more on technology items such as cell phones, Internet service, MP3 players and portable DVD players.

According to Jane Rinsler Buckingham, president of marketing consulting firm Youth Intelligence, “Technology is the new jewelry right now. It’s the coolest new accessory and when a teen has the newest piece of technology it says they are smart and on top of things.” Buckingham believes that teens are interested in innovation in all product categories and technology is where the innovation is happening.

Competition from Online Shopping

Traditional brick and mortar shopping establishments are seeing competition from the e-commerce industry sector. Retail e-commerce volume in the third quarter of 2003 was 27 percent higher than the same quarter last year, according to a report from the Commerce Department’s Census Bureau. According to the most recent American Express Retail Index survey, 31 percent of consumers plan to make a holiday purchase online this year, an increase from 18 percent in 2002. In addition, 54 percent of American consumers plan to at least surf the Web for gift ideas, even if they don’t commit to making an actual purchase.

e-Commerce remains only a small portion of the total retail market, despite its growth. Online shopping accounted for only about 1.5 percent of the estimated $872.5 billion in total third-quarter retail sales, according to the Census Bureau.


The economy is not out of the woods yet and consumer spending is difficult to predict. The return of spending on high-ticket luxury items is a good sign, but general sales figures don’t indicate a promising holiday spending season. In the long run, retailers must hope that an improving economy will increase consumer confidence and improve demand for retail goods.

Sources: Cardline, Knight-Ridder Tribune Business News, New York Times, Women’s Wear Daily

By Andrew Dolbeck


Copyright NVST, Inc. Dec 15, 2003

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