Planalytics Spring Retail Update 2017

SPRING RETAIL UPDATE
1Q 2017
Shoshana Pollack
Senior Research Associate
FUNG GLOBAL RETAIL & TECHNOLOGY
May 11, 2017

© 2017 Planalytics, Inc. All Rights Reserved. Proprietary and Confidential.
Agenda
• Spring Retail Update
• Top Five Insights from Recent Conferences
• Macro Backdrop Update; The Consumer Still in
Good Shape
2

Spring Retail Update
• Recent sales and earnings results indicate a
continuing struggle in retail.
• Store closures, bankruptcies and management
changes are shaking up the industry.
• The media barrage of the retail industry doesn’t
help perception.
• Uncertainty exists in terms of the forward picture;
things probably get worse before they get better.
3

Spring Retail Update
1. 4Q16 Earnings Results: Positive Results Lead by E-Commerce
Retailers and Off-Price
2. Late Easter Hurt March Sales, But Benefitted April Sales
3. Monthly Comps Less Bad in March/April
4. Number of Store Closures Continues to Exceed Number of Store
Openings
5. US Major Store Openings Favor Dollar Stores and Off-Price
Retailers
6. Retail Bankruptcies Are at Post-recession Peak
7. Management Changes Shake Up Retail
8. Media Headlines Reveal Looming Prospects
9. Management Teams Expect Continued Uncertainty
4

1. 4Q16 Earnings Results: Positive Results Lead by
E-Commerce Retailers and Off-Price
5

2. Late Easter Hurt March Sales, But Benefitted April
Sales
• The shift of the Easter holiday from March last year to April this year negatively
impacted March sales at most retailers.
• Retailers saw a bump in sales in April. L Brands’ April comps benefited from the
late Easter holiday by 3%.
• Fred’s benefited from double-digit growth in Easter categories in April.
• Costco enjoyed a 1%–1.5% sales lift in March and was negatively impacted by
1.5%-2% in April due to the Easter calendar shift.
6

3. Monthly Comps Less Bad in March/April
Company February March April
Costco 4.0 6.0 3.0
Buckle (23.2) (10.1) (3.5)
Cato (25.0) (21.0) (2.0)
Fred’s (4.0) (0.5) 1.2
L Brands (13.0) (10.0) (5.0)
Zumiez (3.1) 1.1 7.8
US Same-Store Sales: YoY % Change
Source: Company reports
• Monthly comps generally declined
in February and improved
somewhat in March and April.
• L Brands continues to face
challenges in its Victoria’s Secret
business, which posted 1Q comps of
(14)%, versus total company comps
of (9)%.
• Comps at Cato and Fred’s were
affected by delayed tax refunds.
7

4. Number of Store Closures Continues to Exceed
Number of Store Openings
23
32
44
48
50
60
68
68
70
70
101
110
120
138
160
160
170
171
187
190
220
250
400
400
0 50 100 150 200 250 300 350 400 450 500
Ralph Lauren
Gander Mountain
Lucy Activewear
Eastern Outfitters
Chico's
Guess
MC Sports
Macy's**
CVS
Staples
Gordmans Stores
American Apparel
BCBG
JC Penney
Sears and Kmart
Crocs Inc.
Bebe Stores*
Wet Seal
RadioShack
GameStop
hhgregg
The Limited
Payless Inc.
Rue 21
Total: 3,310 announced
store closings
Up 98% year over year
Major US Store Closing Announcements
Year to Date 2017
*Reported by Bloomberg
**Part of the 100-store closure announcement made in 2016
Source: Bloomberg/company reports/Fung Global Retail & Technology
8

5. US Major Store Openings Favor Dollar Stores and
Off-Price Retailers
17
24
30
52
59
60
90
100
100
111
130
650
1,000
0 200 400 600 800 1,000 1,200
Nordstrom
Costco
Target
Dick's Sporting Goods
Walmart***
H&M
Ross Stores
Lidl
Ulta
TJX**
Aldi*
Dollar Tree
Dollar General
Total: 2,483 announced
store openings
Up 16% year over year
Major US Store Opening Announcements
Year to Date 2017
*Fung Global Retail & Technology estimates
**Net store openings
***Includes new, expanded and relocated stores
Source: Company reports/Fung Global Retail & Technology
9

6. Retail Bankruptcies Are at Postrecession Peak
Month
Announced
Company
Jan Wet Seal
Jan American Apparel
Jan The Limited
Feb Eastern Outfitters
Feb MC Sports
Mar BCBG
Mar RadioShack
Mar Gordmans Stores
Apr Gymboree*
Apr Rue21*
Apr Payless ShoeSource
*Reportedly preparing for bankruptcy
Source: Company reports
Retail Bankruptcy Announcements
Year to Date 2017
• Nine retailers have filed for
bankruptcy year to date.
• That is equal to the number of
filings over the entire year in
2016.
• Retail bankruptcies are on track
to reach their highest level since
2009, when 18 retailers filed for
bankruptcy.
• And there are likely more to
come…
10

7. Management Changes Shake Up Retail
• There have been more than 30 major
management change announcements
year to date
• Abercrombie & Fitch, Ralph Lauren,
Givenchy, Tiffany & Co, J.Crew, and
Hudson’s Bay
• Management changes have been
concentrated among luxury and
specialty retailers.
• The rationale behind the changes
includes disappointing financial
performance, conflicting views and
planned succession.
11

8. Media Headlines Reveal Looming Prospects
–Business Insider
–Bloomberg
–New York Times
–CNBC
Wall Street is expecting the worst of the retail apocalypse
this week
Why the Retail Crisis Could Be
Coming to American Groceries
These five forces are going to shake up the American supermarket.
Is American Retail at a Historic Tipping Point?
Retail Wreckage: Here are the numbers moving retail stocks Thursday
12

9. Management Teams Expect Continued
Uncertainty
“Our guidance reflects a prudent view based on current trends....”
– Cathy Smith, CFO of Target, 4Q16 earnings call
“We do feel that the uncertainty in our sector will continue. We want to maintain a
strong balance sheet that would allow us to execute quickly as opportunities arise to
garner share.”
– Kevin Mansell, CEO and President of Kohl’s, 4Q16 earnings call
“We are assuming that there will be little to no improvement in our sales trend in 2017
relative to 2016. As we head into 2017, we assume that many of the industry challenges
that we face in 2016 will continue.”
– Karen M. Hoguet, CFO of Macy’s, 4Q16 earnings call
“Business was very challenging during the first half of February, where there was no
catalyst and comp sales were down double digits. … Moving forward, we are
maintaining a conservative outlook as we plan inventory commitments until we get
more conviction on overall customer demand.”
– Robb Giammatteo, CFO of Ascena Retail Group, FY2Q17 earnings call
13

Top Five Insights from Recent Conferences
Conferences we have attended recently include:
• Magic (Las Vegas, NV)
• AAFA Executive Summit (Washington, DC)
• SXSW (Austin, TX)
• Shoptalk (Las Vegas, NV)
• Israel Dealmakers Summit (San Francisco, CA)
• World Retail Congress (Dubai, UAE)
• Global Retailing Conference (Tucson, AZ)
• NACDS Annual Meeting (Scottsdale, AZ)
We also recently went on an Israel Innovation Tour, where we met with companies in a
number of cities.
14

1. Stores Are Not Dead, But They Need A Dramatic
Transformation
2. Understanding Customers Is Critical To Creating A
Compelling Customer Experience
3. “Back To Festival” Is The Back To School Of Spring
4. Wellness Is The New Luxury
5. Retailers And Brands Are Increasingly Seeking Partnerships
With Startups
Top Five Insights from Recent Conferences
15

1. Stores Are Not Dead, but They Need a Dramatic
Transformation
• Stores are not dead, although the store experience needs to be upgraded
dramatically.
• Stores need to create a sense of community rather than just be a place to
transact.
• Consumers still prefer to touch and feel products that are not commodity
items before buying them.
The new Apple Store in San
Francisco created a gathering
place for customers.
Target is experimenting with
new urban store formats.
West Elm created a new hotel
experience.
16

2. Understanding Customers Is Critical to Creating a
Compelling Customer Experience
• Retailers need to better understand where their customers are shifting
their discretionary dollars (think travel and dining out) in order to
understand their habits and how to reach them.
• Soliciting feedback from customers and listening to them are helpful in
understanding how to better meet their needs and expectations.
• Chief marketing officers and marketing departments have increasingly
complex roles in terms of communicating with customers.
• Many retailers are not investing enough in people and the human
experience. It is important for retailers to build their brand through a high
level of service and experience, so that customers will defend the brand.
17

3. “Back to Festival” Is the Back to School
of Spring
• Spring festivals are becoming a driver for spring category shopping.
• Searches for “festival outfits” accelerate in January and peak from May to
August, according to Trendalytics.
• Retailers are launching festival-specific products and marketing campaigns in
spring.
Source: Trendalytics.co Source: Trendalytics.co
18

4. Wellness Is the New Luxury
• Consumers are placing more value on health and wellness than on “things.”
• Consumers are increasingly spending on products and services related to healthy
living, including exercise, sleeping, devices and apparel.
• Healthy living and self-improvement are becoming status symbols.
Rebecca Minkoff’s smart
bracelet
HelloFresh’s healthy food
delivery service
Under Armour’s Athlete Recovery
Sleepwear
19

• Global retailers are launching dedicated athleisure and wellness spaces.
• A number of brands and luxury department stores are turning parts of their
stores into gyms.
Cycle Pop-Up Studio at
Selfridges, London
Yoga class at Lane Crawford,
Hong Kong
Nike’s 45 Grand Workout Space,
NYC
4. Wellness Is the New Luxury
20

Startups breathe life into retail companies that have not innovated
• Coca-Cola created a six-month program called The Bridge to help
close the gap between the Israeli entrepreneurial community and
major global markets.
• In February 2017, Adidas launched its LeAD Sports Tech Accelerator
in Israel in partnership with OurCrowd. The program is designed to
discover high-potential innovation in sports-related products and
services on a worldwide scale.
• Executives from multinational corporations such as Honda, HSBC,
Merck, Porsche, Shell and Tyco have spoken recently at conferences
about partnering with startups to find solutions.
5. Retailers Are Increasingly Seeking Partnerships
with Startups
21

Favorable Macro Backdrop
Source: US Energy Information Administration/International Monetary Fund/Rhodium Group
A solid job market, relatively low gas prices and improving wages suggest that the
economy sustained its strong momentum in the first quarter.
The US unemployment
rate was 4.4% in April,
hitting its lowest level
since May 2007.
Home prices continued
to rise in February,
supported by low
mortgage rates and a
shortage of supply.
Private sector wages
rose by 2.5% year
over year in April.
Consumer confidence
hit 97 in April, up
9.0% year over year.
22

Indicator Period 2017 2016
YoY %
Change
Impact on
Consumption
GDP Growth 1Q 0.7% 0.8% (10)bps –
Savings Rate Mar 5.9% 6.2% (30)bps +
Gas Price (USD per Gallon) Apr $2.34 $2.03 15.2% –
University of Michigan Index of
Consumer Sentiment
Apr 97.0 89.0 9.0% +
Unemployment Rate Apr 4.4% 5.0% 0.6% +
Average Hourly Wages Apr $26.19 $25.54 2.5% +
S&P CoreLogic Case-Shiller 20-
City Composite Home Price
NSA Index
Feb 185.6 175.5 5.7% +
US Housing Starts (Mil.) Mar 1.215 1.130 9.1% +
Source: US Energy Information Administration/University of Michigan/US Bureau of Labor Statistics/S&P Dow Jones/US Bureau of Economic Analysis
The Consumer Remains in Good Shape
23

US Retail Sales Momentum Slowed in March But Still
Favorable Year Over Year
Total US retail sales in March decreased by 0.2% month over month and amounted to $470.8
billion. However, on a year-over-year basis, retail sales rose by a solid 5%.
Delayed tax refunds might have resulted in shoppers temporarily holding back from making
purchases in March.
Six of 13 major store categories posted negative sales results compared with February but few
core retail categories were affected: sales at gas stations, building materials stores and auto
dealers, among others, fell in March.
Sales at nonstore retailers (such as Amazon, Google and eBay) rose by 11.9% year over year in
March.
0
2
4
6
(10)
(5)
0
5
10
15
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Monthly Retail Sales ex Autos
Jan 2003–Mar 2017 (YoY % Change)
Monthly Retail Sales ex Autos
Apr 2016–Mar 2017 (YoY % Change)
5.0%
5.0%
Source: US Census Bureau
24

The US unemployment rate was 4.4% in
April, down from 4.5% in March and
hitting its lowest level in 10 years:
• The decline in unemployment was
partly driven by growth in new jobs.
The US economy added 211,000 jobs
in April, beating the 190,000
consensus estimate.
Sector growth:
• In April, leisure and hospitality added
55,000 jobs. Employment in food
services and drinking places
continued to trend upward.
• Retail sector jobs showed little
change month over month.
Source: US Bureau of Labor Statistics
US Unemployment Rate
4.4%
3%
4%
5%
6%
7%
8%
9%
10%
11%
Apr 10 Apr 11 Apr 12 Apr 13 Apr 14 Apr 15 Apr 16 Apr 17
Labor Market Near Full Employment, Jobless Rate
at 10-Year Low and Payrolls Rising
25

April average hourly earnings were up
2.5% year over year:
• Wages increased by 2.7% year over year
in March and 2.8% in February.
Through April 2017
Source: US Bureau of Labor Statistics
Average Hourly Earnings (YoY % Change)
2.5%
1.5%
2.0%
2.5%
3.0%
10 11 12 13 14 15 16 17
Wages Continue to Advance Following Large Gains
26

• Gasoline prices averaged $2.34 per
gallon in April, up 31 cents per gallon
from $2.03 in the year-ago period.
• The US Energy Information
Administration expects retail gas prices
to average $2.46 per gallon during the
summer of 2017, up from $2.23 last
summer.
• US annual transportation-related
household spending is expected to be
$200 higher in 2017 than in 2016, but
still $300 lower than the five-year
average.
Source: US Energy Information Administration
US Retail Gasoline Prices (USD per Gal.)
Gasoline Prices Rising, but Still Low
$2.34
$0.0
$1.0
$2.0
$3.0
$4.0
Apr 14 Apr 15 Apr 16 Apr 17
27

The University of Michigan Index of
Consumer Sentiment hit 97 in April, up
0.1% month over month and up 9.0% year
over year:
• The reading was below the market’s
expectation of 98
Confidence edged up due to attitudes
about:
1.Personal finances
2.Inflation
3.Unemployment
4.Government policies
5.Interest rates
Through April 2017
Source: University of Michigan
University of Michigan Index of
Consumer Sentiment
Consumer Confidence Remains at a Postelection High
96.9
50
70
90
110
06 07 08 09 10 11 12 13 14 15 16 17
28

Home Sales Appear Solid, Hit Recent High
• Home sales appear solid, but are constrained by supply and affordability.
• Existing home sales increased by 4.4% year over year in March, the fastest pace in
more than 10 years, driven by significant supply shortages in recent months.
• New home sales jumped for the third month in a row in March, increasing by 15.6%
year over year, the fastest pace since July 2016.
US: Existing Home Sales and New Home Sales
(Seasonally Adjusted Annual Rate, Thous.)
Through March 2017
Source: US Census Bureau/National Association of Realtors
5,710
4,000
4,500
5,000
5,500
6,000
13 14 15 16 17
Existing Home Sales
621
0
200
400
600
800
13 14 15 16 17
New Home Sales
29

US Housing Starts Fell in March
US housing starts in March fell to 1.22 million (annualized), down 6.8% from the month
prior, missing the consensus estimate of 1.25 million.
The decline was primarily due to cold weather in the Northeast and Midwest and a
sharp, 35% decline in single-family starts in the Midwest.
Through March 2017
Source: US Census Bureau/National Association of Realtors
US: Housing Starts and Building Permits
(Seasonally Adjusted Annual Rate, Thous.)
1,215
600
800
1,000
1,200
1,400
2013 2014 2015 2016 2017
30

Savings Rate Ticks Up
5.9%
4.5%
5.5%
6.5%
US Annual Personal Saving Rate %
Source: Bureau of Economic Analysis
US personal savings rate ticked up to 5.9% in March, from 5.7% in May and the ten-
year average of 5.5%.
Consumers are becoming more cautious and save more to finance other necessary
spending like education and health care.
31

GDP Disappoints in 1Q17
US GDP grew at a rate of 0.7%, the slowest rate for 1Q in three years, missing expectations
of 1.2%.
Consumer spending rose modestly at 0.3% due to slowed spending on consumer
electronics, home appliances, automobiles, clothing and gasoline.
-0.9%
4.6%
4.3%
2.1%
0.6%
3.9%
2.0%
1.4%
1.1% 1.2%
3.5%
2.1%
0.7%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
US GDP Annualized Growth Rate
Source: Bureau of Economic Analysis
32

Thank you!
33
Shoshana Pollack
Senior Research Associate
FUNG GLOBAL RETAIL & TECHNOLOGY

Planalytics Spring Retail Update 2017

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