Retail rebound accelerates after two years of pent-up demand

By Craig Johnson, johnson@customergrowthpartners.com

After the steepest sales slump in decades, the once-sputtering retail economy is coming back to life. And it may be coming back most strongly closest to home: the home-furnishings and home-improvement sectors.

Based on its weekly store checks across the country, and results recently reported by home-related retailers, Customer Growth Partners (CPG) analysis shows that the retail sector in general, and the home-focused retailers in particular, may be at the outset of an exceptionally strong rebound.

After a four-year slump, home furnishings and home-improvement retailers -- now that housing turnover is picking up -- are beginning what may be quite a solid recovery. As we saw with major appliances on Black Friday, and as we’re seeing now in furniture, all it takes to ignite years of pent-up demand is sunny skies and a percent-off coupon.

In fact, after a 2009 retail economy that declined by 5.7%, and 2.3% excluding gasoline, the worst year since at least the 1970s, the only reason we aren’t seeing even stronger home-related retail growth is the near 10% unemployment, and still stagnant housing markets in Arizona, California and Nevada. But across sectors -- including apparel, consumer electronics, sporting goods, toys and other general merchandise -- and at both the discount and luxury ends of the price spectrum, retail is emerging after a long hibernation.

Based on its historical database, CGP analysis shows that the home-furnishings and home-improvement sectors last year suffered the greatest declines, of 20% and 18% respectively, from their sales peaks last decade, over four years ago.

Home-furnishings retailers reporting this week, including Ethan Allen and Haverty, each reported rising sales year-to-date after many years of decline, and Williams-Sonoma -- which doesn’t report until later this month -- sharply raised guidance at the end of January. CGP store checks have indicated stronger traffic and conversion levels at other home-furnishings players this winter, including at Bed Bath Beyond, Crate & Barrel, TJX’s HomeGoods division, and the home departments of broadline retailers such as Costco, Macy’s and Target.

Other retail sectors are seeing a continued rebound from smaller and shorter duration declines than experienced by the home-related merchants, accelerating from the 2.4% year-on-year growth seen over the holiday period.

The office-supply sector, down in 2009 some 15% from its 2006 peak, is up over 5% year-to-date versus last year, according to CGP’s retail growth vectors (RGV) analysis

The clothing sector, down last year almost 7% from its 2005 peak, is up 7% year-to-date, according to CGP’s RGV data.

Luxury retailers, ranging from Nordstrom to Tiffany, down last year some 11% from their peak two years ago, are up over 9% year-to-date from 2009.

Value retailers, ranging from BJ’s to TJX and Walmart -- which never as a sector declined over the recession -- are up 10% year-to-date, according to the RGV data.

CGP recently issued its 2010 retail sales forecast, calling for year-on-year growth of 4.6% in total sales -- well above consensus estimates -- and just under the 10 year 4.7% average. For 2010, we see a “scimitar recovery,” as shallow growth accelerates each quarter -- with 6%+ retail growth by next fall -- unless we get an oil price or tax hike. But it is becoming increasingly evident to even the naysayers that the American consumer is beginning to spend again -- at least the 83% of Americans with full-time jobs.

We predict that 2010 will show retail earnings growth even more robust than the rebounding sales growth. Paradoxically, 2009’s record slump -- the worst many retailers have seen in their corporate lives -- provided a harsh but necessary discipline that forced many merchants to make the tough decisions that are put off in good times.

But these difficult cost-cutting decisions will make 2010, and the out-years, among the most profitable retailers have ever experienced -- especially if the job market recovers.

Craig Johnson is president of Customer Growth Partners, New Canaan, Conn., a consulting and research firm serving the retail and other consumer industries. Founded in 2001, CGP conducts both proprietary and public forecasts of holiday and back-to-school retail sales, and is the only retail analyst firm that correctly predicted what turned out to be above consensus overall holiday season results. He can be reached at johnson@customergrowthpartners.com.

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