Specialty stores were the clear champions in the 2006 battle for sales, clocking an average same-store sales gain of 3.9 percent despite posting extreme fluctuations throughout the year. Mass merchants delivered an average comps gain of 3.5 percent last year, while department stores trailed just behind with a 3.4 percent average increase.
Though it controlled comps for most of the year, specialty wasn’t always the most popular channel among shoppers. Sales gains spiked in January 2006, when markdowns from holiday and new spring merchandise boosted average same-store sales 9.4 percent over the year prior, and again in April, when consumers were buying in-season, trend-right fashions. American Eagle, over the course of the year, was the top seller among the specialty stores.
The tune changed for specialty in September, when back-to-schoolers opted to shop in department stores. Although American Eagle reported a same-store sales increase of 19 percent that month, department stores beat out specialty and mass merchants with an average same-store sales gain of 7.4 percent.
By the time the holiday shopping season rolled around, the specialty retailers had lost some steam. Since posting a 6.5 percent average gain in September, specialty same-store sales trailed off in the following months. Specialty stores came in with a meager 0.5 percent gain in December, while mass merchants reported average sales gains of 3.3 percent, and department stores rose 2.5 percent.
Of course, there were still standouts in the channel during holiday. Gymboree, American Eagle and Zumiez dominated the specialty sector with gains of 15 percent, 13 percent and 11.5 percent, respectively.
American Eagle’s strength year-round in 2006 buoyed the channel. The teen retailer doesn’t show any signs of slowing, either. This year it plans to open 50 new namesake stores and remodel 40 existing stores, in addition to opening 15 aerie stores and 15 Martin + Osa units. American Eagle predicts that Martin + Osa will become a $1 billion business and that aerie, the new lingerie brand, will hit $5 billion in sales as early as 2010.
“Their balance sheet is extremely profitable and they have almost $900 million in cash with no debt. They can expand however they want,” said Eric Beder, vice president of Brean Murray Carret & Co. “The Street expects double-digit top- and bottom-line growth. There is still growth for American Eagle that will start to slow down in a few years.”
“American Eagle remains one of our favorite names in 2007, given the potential to raise store productivity through market share gains in key categories and the ramp-up of aerie as well,” wrote Dorothy Lakner, retail analyst at CIBC World Markets, in a research note.
While American Eagle trounced Abercrombie & Fitch, the comps darling of 2005, analysts said not to dismiss the reigning ruler of teen fashion. Abercrombie actually lost ground in same-store sales for holiday, reporting a loss of 1 percent, but that loss had more to do with impossible comparisons with 2005 than a poor merchandise choice this season. American Eagle also takes fewer risks, which makes them more of a reliable retailer, said Beder. “They’re less likely to experience the ups and downs of fashion,” he added.
“Abercrombie & Fitch was comping at 31 percent in October, 23 percent in November, 29 percent in December [in 2005],” said Kevin Regan, senior managing director at FTI Consulting and a retail specialist. “When you comp against numbers like that, it’s pretty hard to sustain. At American Eagle they’ve shown decent consistency.”
“The problem is Abercrombie is up against such tough comparisons. The numbers will start looking different once they anniversary year-ago comps. Hollister, frankly, was as busy as American Eagle stores at Christmastime,” said Jennifer Black of Jennifer Black Associates. “Both the Abercrombie and American Eagle stores look good. There’s nothing wrong with what Abercrombie has been doing.”
And while mass merchants and department stores also performed well throughout the year, neither touched the specialty channel in securing overall gains.
After department stores hit their stride during back-to-school shopping in September, they maintained a modest lead in comps through much of the remainder of the year, and during December holiday shopping, the channel reported average gains of 2.5 percent.
Nordstrom and Saks Inc. emerged as the leaders in the department store sector, beating out more midpriced department stores like J.C. Penney, Kohl’s and Macy’s during holiday. Nordstrom posted same-store sales gains of 9 percent and Saks reported an 11.1 percent gain, demonstrating that luxury continues to be a strong performer.
“Nordstrom and Saks, these guys were in their sweet spot all season because luxury is doing so well,” said Kevin Regan, senior managing director at FTI Consulting.
In fact, luxury chain stores were the leading sector for sales in December, posting an 8.2 percent increase.
In a channel-by-channel comparison, however, mass merchants pulled ahead for holiday, beating both the department stores and specialty in overall gains. Mass’s star performer, Costco, matched Nordstrom in sales gains in December at 9 percent.
“Costco has done a fantastic job on top-line growth, and the secret is knowing what the customer wants and having those items in the store,” said David Schick, managing director and hardline retail analyst at Stifel Nicolaus.
Costco has seen the most strength in its electronics, such as “wow” items like flat-panel TVs, and pharmacy divisions, Deborah Weinswig, retail analyst at Citigroup, said in a research note. In December, the Washington–based company joined the pharmaceutical competition of aggressive generic drug pricing, launching its own deal on about 200 generic drugs.
“They are not sloppy on price and don’t play games with pricing, and the customer knows this,” Schick said. “They have good merchants and store operators and are able to attract talent, and this shows up in the sales line.” Still, Costco still faces challenges in translating revenue into the bottom line because of the narrow margins in the wholesale business.
TJX Cos. also performed well in the mass channel, thanks to chief executive Ben Cammarate, say analysts. Cammarate has adopted the use of the “sweaty palm theory,” maintaining a liquid open-to-buy position and making purchasing decisions later in the season and thus having the most desirable options in store, wrote Citigroup retail analyst Kimberly Greenberger, in a research note. The company’s December 6 percent comps outshone company guidance of 3 percent to 4 percent and the Street’s expectation of a 3.1 percent gain.
“This was an especially strong comp gain in light of the overall poor results for the industry in December and demonstrates the benefits of TJX’s diversified merchandise offering, which is not singularly dependent on apparel sales,” wrote Mark Montagna, retail analyst at CL King, in a research note.
— With contributions from Liza Casabona, Jeanine Poggi and Vicki M. Young