Specialty Retail & Dept Stores | March 12, 2015
March 12, 2015
Specialty Retail & Dept Stores
MORGAN STANLEY & CO. LLC
Kimberly C Greenberger
Kimberly.Greenberger@morganstanley.com
+1 212 761-6284
Katy L. Huberty, CFA
N.A. Insight: The Changing Path to
Purchase: Who Is Best Positioned?
Kathryn.Huberty@morganstanley.com
+1 212 761-6249
Benjamin Swinburne, CFA
Benjamin.Swinburne@morganstanley.com
+1 212 761-7527
Simeon Gutman, CFA
Changing consumer behavior and technology have led to a rapid
evolution of shoppers' purchase paths. In this report we discuss the
core competencies necessary to properly service evolving consumer
demands in this new age of retailing, regardless of channel choice.
We see three steps in the path to purchase: We view the shopping process
as a funnel: 1) “Catch”: consumers review current offerings and build a
consideration set; 2) “Connect”: the process of filtering merchandise for style,
price, quality, size, and fit; and 3) “Close”: the purchase. We expect consumers'
shopping behavior to continue to evolve, requiring both brick & mortar and
pure-play e-retailers to continually invest in technology and update strategies.
Simeon.Gutman@morganstanley.com
+1 212 761-3920
Brian Nowak
Brian.Nowak@morganstanley.com
+1 212 761-3365
Lauren Cassel
Lauren.Cassel@morganstanley.com
+1 212 761-4143
Retail, Department Stores
North America
IndustryView
In-Line
How can traditional Brick & Mortar retailers evolve to succeed?: Our
survey work suggests certain categories lend themselves more to a multichannel business model (apparel, intimate apparel, fine jewelry, accessories,
footwear, home improvement, home furnishings). However, simply because
consumers choose to shop for certain categories in a store at least part of the
time does not suggest retailers aren't required to be omni-channel savvy. We
believe B&M retailers who have 1) omni-channel inventory capabilities, 2) a
single CRM system across channels, and 3) employee incentives aligned to
encourage cross-channel conversion are best positioned. We view GPS, JWN,
M, & URBN as best positioned Softline retailers and WSM, HD, & LOW
among the most omni-channel savvy within Hardlines.
How can pure-play eCommerce retailers evolve in order to succeed?:
We see two categories of eCommerce retailers: general merchandise retailers
(AMZN) and niche-category retailers (zulily, Wayfair). For general merchandise
eComm retailers, growth depends on category expansion. AMZN is a leader in
fulfillment and has leveraged this model to expand into a large assortment of
categories with ease. However, the next largest category opportunity for AMZN
is grocery which requires an evolution of their business and fulfillment model.
For niche players, the key to future success requires managing the migration
of digital traffic from desktop to mobile. The cost to “catch” (ad spend) is the
same regardless of channel, but mobile conversion is much lower, which could
lead to a lower revenue stream on the same cost base. Within eCommerce
pure-plays, we believe AMZN is best positioned.
We thank retail consulting firm, The Agility Project, with whom we
discussed the path to purchase framework: Founders Jonathan Metrick
and Andrew Wong leverage quantitative and qualitative data to improve
marketing effectiveness. The team has extensive experience working with
retailers to optimize omni-channel strategies.
Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As a result,
investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of Morgan
Stanley Research. Investors should consider Morgan
Stanley Research as only a single factor in making their
investment decision.
For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of this
report.
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Specialty Retail & Dept Stores | March 12, 2015
How Has Consumer Behavior Changed?
Report Roadmap
We first discuss how changing consumer behavior and technology has led the retail industry to
where it is today (How Has Consumer Behavior Changed?).
Next, we define our “path to purchase” framework (Catch, Connect, Close) and how it is evolving
in an omni-channel world.
More importantly, we discuss changing consumer expectations and what retailers need to
implement to thrive and stay competitive over the next 5-10 years (Implications for Retailers).
Most of these capabilities cannot be switched on overnight (unlike free shipping/free returns)
and take over a year to fine tune.
We also explore how Google can help retailers connect to consumers (What Do Consumers
Expect in an Omni-Channel World?).
Finally, we conclude with examples of omni-channel leaders in both the Softlines and Hardlines
space (Examples of Softline Omni-Channel Leaders, Hardlines: We See WSM and Home
Improvement as Best-Positioned). We believe omni-channel capabilities are likely to
differentiate retail performance over the next 5-10 years.
The last great Retail disruption was the “mall-ification” of America. This was not driven by incredibly innovative
retailers, it was driven by consumers. Enabled by the G.I. Bill and a network of interstate highways built in the
1950's, the consumer pivoted from Main Street variety store shopping to big-box stores. Retail moved to the
suburbs along with the Baby Boomers, which in hand led to the major expansion of three retail concepts: Target,
Kmart, and Walmart. Malls opened rapidly between 1950-2000 (Exhibit 1). Since 1995 alone, the number of
shopping centers in the US has grown by more than 23% and total gross leasable area grew ~30%, while the
population grew less than 14%. However, since 2006, no new enclosed malls have been built in the United
States. Today, we are at just the beginning of Retail's next great disruption, once again driven by the consumer.
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Exhibit 1: Between 1950 and 2000, REITs Developed Nearly 900M Square Feet of Regional Mall Space
So u rce: Co mp an y data, Mo rgan
Stan ley Research
Up until the early-to-mid-2000's, at the beginning of the season, shoppers would walk in circles, scraping the
mall for the newest trends. After a few laps with friends, consumers would decide on the five or so stores they
thought had the best fashion and/or selection and continue the research process inside the store. The entire
path to purchase (Catch, Connect, Close) occurred within the mall or off-mall/big-box stores.
With the rapid rise of the internet, this “research” is no longer occurring at the mall. Today, nearly 75% of all
consumers conduct some form of online research prior to making in-store purchases, whether it be on their
personal computer, tablet, or mobile phone. ShopperTrak reports shopper visits have declined by 5% or more
every month for the last two years. The number of paths to purchase has grown from just one to over 64
(Exhibit 4) and consumers have become the new POS. Note in the exhibit that stores still remain critical to the
trial portion of the “connect” phase.
According to Morgan Stanley's AlphaWise Global eCommerce survey (see "Global eCommerce: eCommerce
Hits Stride "), despite apparel being the most frequently cited online purchase category over the last 12 months,
70% of US consumers say they still prefer to shop in-store vs. online. The three biggest obstacles cited to buying
more items online were: 1) Shipping costs are too high (36%); 2) I want to try items on before I buy/see how
they fit (31%); and 3) I need to see and touch products before I buy (26%).
While free shipping is likely to become a requirement over time, we believe reasons 2 and 3 are unlikely to
abate, leaving multi-channel retailers in a far stronger competitive position than single channel eCommerce
retailers within the apparel, intimate apparel, fine jewelry, accessories, and footwear categories. Within other
categories such as non-food consumer staples (toilet paper, paper towels, shampoo) or vitamin retail, singlechannel business models could prove more successful over the next 5-10 years given the lower SKU intensity,
high reorder rate, and commodity nature of the products.
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Exhibit 2: Top reasons why consumers prefer to shop for clothing, handbags and accessories in-store vs.
online
So u rce: Alp h aW ise, Mo rgan Stan ley Research
Q : W h at are th e to p th ree reaso n s w h y yo u p refer to sh o p in -sto re fo r clo th in g, h an db ags, an d accesso ries?
While Amazon has a competitive advantage from a delivery and fulfillment perspective, its pure play
eCommerce approach in lieu of omni-channel strategy may impact its ability to continue to take share in
categories like high-end apparel. According to Forrester, online share of apparel and accessories is expected to
be 15% in 2015, and while Amazon is a category leader, our AlphaWise survey suggests Amazon’s lead is
smaller in Clothing and Shoes in the U.S. than in other categories, with department stores showing particular
strength.
In our view, Amazon’s pure play eCommerce approach may hold it back from “connecting” in the
path to purchase, as our survey indicates that trying items on (56%) and touching and feeling products prior
to purchase (55%) are the top reasons why consumers prefer to shop in-store rather than online for clothing,
handbags, and accessories (Exhibit 2). While Amazon may have strength in apparel in lower-priced goods such
as socks and basic t-shirts, they are arguably in a weaker position to become a category leader in more
expensive items that require sizing and more “touch and feel.” In this case, department stores’ omni-channel
presence is an advantage. Amazon owns niche sites like Shopbop and Zappos, which offer free shipping and
videos/size guides to make up for their lack of brick and mortar stores, but scaling these efforts is unproven.
In our view, growth depends on category expansion for general merchandise eComm retailers. Our survey
highlights both clothing and grocery as the next categories most likely to transition online (Exhibit 3, also please
see our report “Global eCommerce: eCommerce Hits Stride ”), although both categories would require an
evolution of current fulfillment methods given food is perishable and online shoppers return clothing so
frequently (Zalando’s return rate in 2013 was 50%). While Amazon is a leader in fulfillment and has leveraged
this model to expand into a large assortment of categories with ease, we believe clothing and grocery will
require an evolution of current fulfillment model.
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Exhibit 3: AlphaWise Survey Highlights Both Clothing and Grocery as Most Likely to Accelerate
So u rce: Alp h aW ise, Mo rgan Stan ley Research
Q : Please select th e typ es o f p ro du cts yo u h ave b o u gh t in a sto re du rin g th e p ast 12 mo n th s, th at yo u n o w an ticip ate b u yin g o n lin e in th e n ext 12
mo n th s?
Exhibit 4: Today There Are over 64 Different Paths to Purchase vs. One ~10 years ago
So u rce: Th e Agility Pro ject
How Has Technology Changed?
Two critical factors have enabled consumers to shop whenever and wherever: 1) More sophisticated network
technology and 2) the adoption of smartphones. Just five years ago, only 9% of online time was spent on mobile
phones. Today that number is 61% (Exhibit 5). The relatively small portion of overall retail transactions that
occur via mobile devices masks mobile's true impact.
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3G internet (third generation network) was the status quo during the early to mid-2000's. The 3G network was
the first technology with sufficient speed to provide a decent user experience on a smartphone. At this speed,
consumers could use their smartphones for basic Google searches and emails, but anything requiring image or
video downloads was slow and only accessible in strong service areas. Approximately eight years after the
launch of 3G in 2002, Verizon launched LTE (Long Term Evolution), in December 2010. AT&T launched LTE in
September 2011, followed by Sprint (July 2012) and T-Mobile (March 2013). LTE is ~5x faster than 3G, enabling
smartphone users to download vastly greater amounts of image, video, and music content. LTE is expected to
continue to improve from ~10 Mbps today to ~14 Mbps by 2019 (vs. 3Q ~2 Mbps) (Exhibit 6).
The second important part of the equation is smartphone adoption. Global smartphone penetration is expected
by the IDC to increase to 64% by 2018 vs. just 7% in 2010. In North America specifically, mobile devices are
expected to grow at a 9% 5-year CAGR (Exhibit 7). Interestingly, personal computers are forecasted to decline 3% on average, over the next four years. This emphasizes the importance of Retailer's mobile presence,
strategies, and capabilities.
Exhibit 5: 61% of Online Time Is Spent on Mobile Devices vs. Just 9% 5 Years Ago
So u rce: IDC, Mo rgan Stan ley Research
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Exhibit 6: Cisco expects LTE speed to improve
from ~10 Mbps today to ~14 Mbps by 2019,
which compares to ~2 Mbps for 3G today
Exhibit 7: IDC predicts North America mobile
devices to grow at a 9% 5-year CAGR, while PC's
are expected to decline -3%
Source: IDC, Morgan Stanley Research
Source: Cisco VNI Mobile, Morgan Stanley Research
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Catch, Connect, Close: Traditional vs. Omni-Channel Path to Purchase
Catch
Traditional Path to Purchase: Consumers traipse the mall/stores with friends, trying to understand and
identify the latest fashion trends and build a consideration set. Shoppers must then visit each store to review
selections and compare prices and quality. The entire process takes place within the mall or in off-mall stores.
Omni-Channel Path to Purchase: Consumers are inundated with email marketing sent directly to their
computer, smartphone, or tablet when new merchandise arrives, often with targeted promotions. Shoppers can
compare price points across a multitude of different items in minutes and read other customers' reviews of
products, all without leaving the comfort of their own home. The “catch” process occurs in-store, on a personal
computer, smartphone, or tablet or a combination of any of the above. The key change is consumers are now
able to browse where they want and when they want. This diminished emphasis on physical location breaks
down barriers to entry, thus increasing competition from local, regional, global and online pure-play retailers.
Retailers must consider/implement: 1) A seamless, consistent cross-channel brand experience; 2) Shoppable
mobile app and responsive website designs; and 3) Integration of offline/online messaging.
Connect
Traditional Path to Purchase: This stage consists of “filter” and “trial.” Consumers try on items, test fit and
quality, and feel fabrics. Once again, this historically occurred entirely in-store. Store associates are critical to the
process as they must educate consumers about products and other merchandise the retailer might carry. Price
comparison is much more difficult to conduct as customers have to write down or commit to memory prices
from store to store.
Omni-Channel Path to Purchase: Consumers can “filter” and compare prices across similar or identical items
within seconds either prior to visiting a store or while in-store using a mobile device. However, brick & mortar
stores remain critical to “trial” and is one of the reasons why we believe multi-channel apparel retailers will
outperform single channel apparel retailers overtime. Repeat purchases, commodity items (toothpaste, paper
towels), and merchandise without sizing (handbags, jewelry, makeup) are easier to sell online and less
dependent on stores, but apparel is, and we believe will continue to be, heavily dependent on brick & mortar.
Retailers must consider/implement: 1) Price consistency across channels; 2) A way to track customer
transitions from web to in-store (omni-channel CRM); 3) Omni-channel inventory management; and 4) A well
informed in-store sales force. Notably, consumers are beginning to trust their devices more than they do sales
associates. In a November 2013 Deloitte survey, 50% of US internet users said they preferred to rely on their
own device for price and product information, compared with only 20% who preferred a sales associate.
Close
Traditional Path to Purchase: With the exception of catalog retail, all purchases from apparel to toilet paper
were once conducted in-store. There was no thought to shipping or return costs. The only “basket” was one you
might carry around a store. If consumers wanted to return an item, they would have to bring it back to a store.
Once again, the entire purchase experience occurred in-store.
Omni-Channel Path to Purchase: Today, you can add an item to your virtual basket on your mobile phone,
log-in later to your tablet to add a few more items, complete the transaction on your desktop, and then pick
everything up in store. There are a multitude of different paths to buying, receiving, and returning items..
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Specialty Retail & Dept Stores | March 12, 2015
Retailers must consider: 1) Free shipping/returns; 2) Return policies/accepted return locations (by mail only
or in store as well); 3) Delivery speed (same day, 2-day, 5-7 days); 4) Ease of checkout (number of steps); 5)
Consistent checkout processes across channels; and 6) Cross-channel incentive alignment. Please find more
detail in Implications for Retailers
Exhibit 8: Omni-Channel Expectations and Implications
So u rce: Th e Agility Pro ject
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What Do Consumers Expect in an Omni-Channel World?
1. Fast and Free Shipping and Returns: We call this “The Amazon Effect.” Consumers have come to expect
free shipping in as fast as two days. Overtime, we expect customers to expect a same-day delivery option in
major metropolitan markets, likely for a small fee. For example, Macy's currently offers same-day delivery in
select markets for $5. According to our AlphaWise Global eCommerce Survey, conducted September/October
2014, in North America the three most important criteria cited when making an online purchase are: 1) Free
shipping/delivery (68%), 2) Low cost (57%), and 3) Free Returns (29%). Additional 80% of respondents agreed
they would buy more online if retailers offered free shipping and 71% agreed they would buy more if they
didn't have to pay for shipping for returns or exchanges. Only three retailers in our Softlines coverage universe
(JWN, KORS, LULU) offer unequivocally free shipping on every order, every day, with no minimums.
Surprisingly double that number offer free return shipping on every order (GPS, JCP, JWN, KORS, M, TIF).
2. Convenience and Consistency across Shopping Channels: According to The Agility Project, if retailers do
not offer a consistent brand experience across all channels, consumers will deselect the brand. The ability to
shop wherever, whenever (store, desktop, tablet, mobile) creates an “endless shopping aisle” for consumers.
However, the browsing and checkout processes must be consistent. This includes everything from ensuring
search filters are located similarly regardless if it is a desktop website or mobile app, to having the same number
of checkout steps on each platform. Consumers also want to be able to add items to their shopping carts across
channels and use it as an accessible wish list in-store. A September 2013 MarketLive survey found 75% of US
digital shoppers view perpetual shopping carts as important when shopping online.
3. Value: Since the Great Recession, consumers have shifted from consumption-focused spending (fueled by
home equity lines of credit) to value-driven spending (price + quality = value). Retailers deeply discounted
covetable brands in the 2008-2009 recession, changing consumers’ perception of value. The emergence of the
“Recessionista” made bargain shopping a badge of pride, suggesting a combination of fashionable and savvy
shopper. Recession-driven discounting and the expansion of off-price retailers permanently shifted shopper
expectations that great brands could be found at door-buster prices, in our view. We think shoppers’ fixation on
value is a behavioral and cultural change that could persist even amid healthier consumer spending. Research in
advance of shopping trips and pervasive mobile usage in stores allows for easy price discovery and a more
transparent shopping experience. Younger members of this generation grew up in the heat of the bargain
hunting post-Recession era, and we believe they adopt value-seeking behavior by nature.
4. Price Consistency: Many of the retailers we cover still often offer different promotions online versus in-store
which frustrates consumers. It also encourages an already pervasive trend of show-rooming (browsing in-store,
but buying online often at a lower price), and web-rooming (browsing only, buy in-store). Each time a customer
leaves a channel without completing a purchase diminishes the chances of conversion later on.
5. A single inventory pool: For consumers, it comes down to two fundamental questions: “Do you have this
product?” and “Where can I find it?” Ten to fifteen years ago, if a customer couldn't find the exact item he/she
was looking for in-store, they were forced to drive to another location to see if that store had it in stock, or drive
home and dial into the internet to see if it was available (if the Retailer had a website). Now, customers expect
store associates to pull out iPads and order the item for them right then and there, either shipped to their home
free of charge from another store or from a DC. Along the same lines, customers want to be able check on their
phone if the nearest store has the item they want in stock. Some might even prefer to buy it online and pick up
in store.
A single inventory pool should lead to fewer out-of-stock items, increased inventory turns, reduced markdowns,
and drive the virtuous cycle of better sales, higher margins, healthier inventory, and satisfied customers.
Retailers cannot truly understand the depth of demand for an item if every time they run out of stock, they take
it off their website. Being able to fulfill online orders with in-store, sometimes stranded, inventory gives buyers a
window into the depth of demand. Over time that data can be utilized to buy quantities more precisely. For
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Specialty Retail & Dept Stores | March 12, 2015
example, if certain stores are over-inventoried and consistently fulfilling orders due to weaker inventory turn,
over time inventory allocation to those stores should reduce and become optimized. While cost per unit of
processing is lower in a DC than a store, ship from store capabilities better allow the company to understand
buy quantities on a location specific basis, over time improving in store and online profitability.
What Have Some Retailers Implemented Already?
Digital enhancements:
1) Responsive Design: Responsive design allows images from marketing emails and websites to re-size and
format on any screen size, improving the mobile and tablet browsing experience. This could provide significant
opportunity to drive greater conversion and leverage incremental traffic emerging from tablets and
smartphones. Given the powerful shift consumers are making to mobile, we think enhanced mobile viewing
likely drives incremental sales.
2) Triggered E-mails: Triggered e-mails could include rewards expiration reminders, abandoned cart items,
price reduction alerts, or low inventory reminders for items shoppers have indicated interest for. This
personalizes the shopping experience, subtly informing consumers the retailer is committed to meeting her
needs. We think triggered emails can personalize an experience without feeling intrusive, particularly as
consumers have become accustomed to Amazon-like algorithms.
3) Personalization: Several different email versions of the same campaign are sent to different shoppers
depending on their purchase and browsing history. In addition, website homepages highlight consumers’
preferences and target shoppers’ interests. Gap Inc. (GPS) noted personalized emails have resulted in higher
click through rates, longer time spent on the website, and greater web conversion.
In-store drivers:
On average in-store conversion is 30% but according to Gap Inc. (GPS), 10% of the 70% not converted wanted
to make a purchase but did not find the desired item in the correct size or color. By building out the shopping
experience, a retailer may be able to shrink the probability that a shopper leaves empty-handed.
1) Reserve in-store: This option allows customers to select items from the website to be held in store for them.
This removes doubt of whether or not a product is available when a shopper makes a trip, which is both a traffic
and conversion opportunity. According to Gap Inc., reserve in-store has driven higher transactions, conversion,
and units per transaction. A study by the International Council of Shopping Centers (ICSC) determined that a
siloed eCommerce shopping platform netted roughly 77% of the initial sale price after returns and additional
purchases were factored in. In contrast, online sales for in-store pickup netted 107%.
2) Ship from store: Coupled with a single inventory pool, this feature allows retailers to 1) capture online sales
for SKUs that may be out of stock in the eCommerce DC; 2) improve delivery speeds by fulfilling orders from
nearby stores; and 3) minimize markdowns by selling slower-moving or misallocated inventory to online
shoppers.
3) Order in-store: Order in-store allows customers to purchase items online or from other store inventory
while in-store. Often retailers ship the item to the shopper’s home for free or will offer pick-up in a nearby store.
This presents an opportunity to increase conversion.
4) In-store customer tracking: As consumers have turned mobile into a catalyst for physical shopping,
retailers are turning to beacons and other in-store proximity tools. Beacons can track shopper locations in-store
within 3 feet, allowing a retailer to send targeted offers or coupons to shoppers’ mobile phones. To participate in
the program, customers must have either a branded retailer app or a 3rd party coupon app (Shopkick, for
example) and must opt in to receive notifications. Since the technology is available on limited smartphones, this
initiative remains mostly experimental. However, over time beacons are likely to drive increased shopper
engagement.
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Specialty Retail & Dept Stores | March 12, 2015
How Google Augments Retailers' Online Presence
It goes without saying that retailers’ strategies and use of Google – the starting point for many consumer online
retail searches – will continue to be important to driving online eyeballs and e-commerce market share. And
Google’s retail offerings continue evolving too, as the launch of Google Product Listing Ads and Google Express
speak to Google’s efforts to help retailers improve their abilities to reach online audiences and increase their
paid search advertising return on investment.
Google Product Listing Ads
Google Product Listing Ads (“PLAs”) are retail-specific paid search ad units that launched in 2012. These ad units
contain detailed product information (price, description, features, a picture, etc.) and a direct link to the retailers’
website where the searchers can purchase items ( ). PLAs are shown within Google’s search results when users
search for products and product-related keywords (such as: “fleece jacket,” “men’s shoes,” “new dress”). The PLA
ad units are also more visual (with bright pictures of the items) and sometimes interactive (allowing searchers to
zoom in or spin around the product pictures).
Exhibit 9: Google Search Results Page, Highlighting the Placement of Product Listing Ads (“PLAs”)
So u rce: Co mp an y w eb site, Mo rgan Stan ley Research
Google PLAs are sold through a search keyword reverse auction market, with retailers bidding on a cost per
click (“CPC”) basis. In the above example, we see retailers like H&M and Sports Authority bidding on “fleece
jacket.”
For Google, PLAs are designed to improve the relevancy and performance of retailers’ paid search ad spending.
The more specific the ad units are (shirts filtered by size, for example), the more relevant they will be to
searchers…which should lead to higher click-through rates and conversion. The imagery and interactivity of the
ad units also improve performance, as they allow shoppers to better understand and visualize the items that
they (hopefully) will purchase.
PLAs are also part of Google’s efforts to improve the monetization of its “above the fold” top search results…as
they take up space directly beneath the core search bar and thereby push down retailers’ organic (unpaid)
search results. This makes PLAs even more important for retailers to invest in.
PLAs Are a Way for Retailers to Improve Their Shopper Traffic and Reach vs. Amazon
It is also notable that, for now, Amazon.com is not participating in Google’s PLA auction market. As a result, PLAs
also present traditional retailers an opportunity to improve their traffic reach disadvantage versus Amazon,
which draws anywhere from 2X to 550X (!) more unique visitors than the 29 traditional retailers shown below (
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Specialty Retail & Dept Stores | March 12, 2015
). On average, Amazon’s monthly desktop traffic is 14.9X larger than the traditional retailers and its mobile
traffic is 16.2X larger.
As with any retailer, traffic matters. And because Amazon.com is not participating in PLAs, the ad units (and their
prominent placement) represent an opportunity for traditional retailers to grow their traffic and overall share of
the e-commerce pie.
Exhibit 10: On average, Amazon’s monthly desktop traffic is 14.9X larger than traditional retailers
So u rce: Co msco re data, Mo rgan Stan ley Research ,
Google Express
Google Express (launched in late 2013) is the latest way Google is partnering deeper with traditional retailers to
bring more offline retail dollars online. Google Express is a membership program offering members the ability
to order certain items online from a group of 16 traditional, brick-and-mortar retailers (in New York) and have
the items delivered on a same day basis. Google Express is still being rolled out, now operating in 7 U.S. cities
(San Francisco, San Jose, Los Angeles, Manhattan, Boston, Chicago, and Washington, DC).
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Specialty Retail & Dept Stores | March 12, 2015
Exhibit 11: Some Google Express Partners
So u rce: G o o gle Exp ress, Mo rgan Stan ley Research
Google handles the delivery (through couriers) on behalf of the retailers, and we believe there are some
economics exchanged between Google and the retailers on purchases. Google Express is another online
distribution channel for retailers, offering the opportunity to further leverage Google’s ~235mn monthly U.S.
unique visitors and ~12.5mn monthly U.S. search queries. Here again, because Amazon and eBay do not
participate in Google Express, it is also a further method brick-and-mortar retailers can use to fight for ecommerce market share.
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Exhibit 12: Google Express Search Results Page, Highlighting the Ability to Search by Local Retailer
So u rce: G o o gle Exp ress, Mo rgan Stan ley Research
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Implications for Retailers
Retailers that are likely to move ahead of the pack in 2015 likely will differentiate themselves by capturing
customers at the start of their shopping journeys and have a user-friendly, consistent presence across all digital
platforms, providing a seamless, holistic online and in-store shopping experience, both aesthetically and
emotionally. Customers increasingly expect a personalized experience that merges the richness of stores with
the convenience of online. We believe the five items below are the most critically important factors of an omnichannel world retailers must embrace. Alternatively, we believe the two most critical mistakes a retailer can
make are 1) failing to recognize a changing competitive landscape; and 2) insufficient investment in omnichannel capabilities. As consumers demand more and more each year, this is likely just the start of continuous
invention and evolution.
1) Ongoing investment in IT systems and other technology is required: In order to create an omnichannel experience, retailers need back-end systems to integrate and manage all types of data, including
inventory, customer analytics, and fulfillment. IT and distribution share of specialty retail capital expenditures
has increased 1000 bps since 2011 and likely continues to increase overtime. Omni-channel related CapEx now
accounts for 45% of all industry investment spending after increasing 20% y/y in FY13. Retailers must continue
to select best applications/solutions and estimate their ROI, understanding that next year newer, improved
technology will likely be launched.
GPS is Specialty Retail's largest omni-channel capex spender while ARO has likely underinvested. GPS has spent
$1.3B (24% of its total CapEx) on IT alone over the last ten years, including $360M in FY12/FY13 alone. We
believe these investments have allowed GPS to achieve industry leading “pick, pack and ship” capabilities (which
allows it to fulfill online orders from in-store inventory) across all three of its brands. Conversely, ARO has only
spent $97M on IT in the past 10 years, 77% of that from FY12-FY14e. ARO continues to outsource most of its
online operations to a third party, and in the process has fallen behind peers.
Insufficient investment in omni-channel capabilities is one of the critical mistakes we think Retailers can make.
Crucial capabilities such as omni-channel inventory management and omni-channel CRM cannot be switched
on overnight (unlike free shipping/free returns) and take a year or more to fine tune. Those retailers that have
underinvested thus far are unlikely to catch-up over time given the sheer amounts of capital and expertise
required. We expect IT investments to continue to grow as a percentage of total CapEx overtime.
Exhibit 13: Omni-Channel-related IT and Distribution Center Spending Is Taking Retail Industry CapEx share
So u rce: Co mp an y Data, Mo rgan Stan ley Research
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2) The store is still central in the omni-channel path to purchase: Bears fear increased online adoption will
marginalize stores. However, smartphones aren't replacing stores, they are augmenting them. In fact,
eCommerce enables retailers to better utilize their store bases as customers prefer to shop multiple channels.
According to a survey by JiWire, a mobile advertising and data platform firm, out of 68% of mobile Wi-Fi users
who performed retail shopping research on a smartphone, only 35% went on to make the purchase using that
device and 37% ended up purchasing the item in-store. Therefore, it is important that retailers do not lose focus
of their store footprints. The store still plays a central role in the “connect” phase of the path to purchase and
remains a crucial part of a retailer's brand image. Failing to continue to invest in store remodels and in-store
technology is a critical mistake, in our view.
It is also important to effectively manage customers' omni-channel transition from web to in-store with the
ultimate goal of driving conversion higher. Are the items featured in online marketing easy to find in store? Are
products merchandised similarly online and in-store? Customer service also remains extremely important.
Associates should be knowledgeable about the entire assortment, both in-store items as well as online
exclusives. An American Express survey found 74% of consumers spend more money with brands that have
historically given them good customer service, while 60% abandoned a purchase in 2014 as a result of poor
customer service.
3) Employee and management incentives must be realigned to encourage cross-channel conversion:
Previously, it was an in-store vs. online battle. But now, if someone orders an item online while in-store, which
channel receives credit? Or when an online item is returned to a store, which channel is the sale deducted from?
Realigning incentives to ensure employees try to make a sale regardless of the channel are crucial in an omnichannel world. If an in-store associate places an online order for a customer, the store should receive the sale
credit. Similarly, if an online order is returned in-store, the refund should be credited against the eCommerce
channel. Store associates should not feel resentful about fulfilling an order with eCommerce inventory or
accepting online returns.
4) Organizational structures must be realigned as well: The slowness of data integration is in part a result
of the way eCommerce was originally developed among retailers. When eCommerce came onto the scene, most
retailers built their online initiatives independently from brick-and-mortar stores, setting them up as separate
businesses with separate technology, sales goals, and initiatives. Today, closing the loop on the “silo-effect”
requires merging technologies and figuring out how to effectively execute fulfillment from stores. Many retailers
we cover (ANN, JWN, M, URBN) have reorganized their buying, design, and planning organizations into one
single channel. However, many retailers still have teams and marketing campaigns competing instead of
complementing each other. Eliminating silos can be difficult, especially if C-level management is hesitant to
change, but an omni-channel environment requires continual business model evolution.
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Exhibit 14:
So u rce: Th e Agility Pro ject
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Examples of Softline Omni-Channel Leaders
We surveyed our Specialty Retail and Department Store coverage universe on a multitude of different omnichannel metrics, derived a relative ranking, and assigned each of our companies an “omni-channel intelligence”
score (Exhibit ). We consider those with the highest scores omni-channel leaders. It is important to note we
excluded the off-price retailers (BURL, TJX, ROST) given a combination of low average unit retail prices ($10-15)
and thin product margins (GM generally 29%), which leaves little to no room to run a profitable eCommerce
business. Also, although we include TIF, we recognize high-service, luxury businesses are impacted differently
than traditional retailers. Consumers are unlikely to buy a $10,000 diamond ring online, but a consistent crosschannel brand experience is critically important. We believe TIF executes this aspect exceptionally well.
Exhibit 15: We View M, GPS, URBN, and JWN as Omni-Channel Leaders
So u rce: Co mp an y data, Mo rgan Stan ley Research
Macy's Inc. - Innovation at Its Best
Macy's began investing in omni-channel capabilities nearly a decade ago, and the learning curve still has yet to
flatten out even for them. We think M's omni-channel initiatives will be difficult for competitors to copy given
the financial resources and talent required. Macy's places its investments into three buckets: 1) Merchant
strategy (where to place inventory); 2) Making it easier for customers to shop; and 3) Fulfillment.
During 2014 Macy's tested what they call “a single view of inventory” in five departments. As of this month, M
will roll this initiative throughout the Macy's organization as well as Bloomingdale's. This will allow merchants to
figure out exactly where to place inventory to maximize sales and increase inventory turnover. CFO Karen
Hoguet shared an example of critical mistakes that occur when organizations separate buying and planning
departments by channel. There was one particular special occasion dress that sold out of every single unit online
and every one of those units was then being returned to stores. The dot.com merchants were calling the vendor
and buying more units, while the store merchant was going to the vendor and begging for markdown money.
So in essence, they kept ordering more markdowns. Dresses was the first category in which M rolled out omnichannel inventory, and as a result has noted a significant sales increase.
The second big area of investments Macy's is making relates to various technologies store associates can use to
help consumers shop any channel while in-store. Handheld point-of-sale devices and tablets, designed to
improve in-store shopping experiences by enabling sales associates to assist customers more effectively, offer
merchandise ideas and product information, and speed up transaction times. One example is placing tablets in
furniture areas to make it much easier for a sales associate to help complete a purchase, show consumers what
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Specialty Retail & Dept Stores | March 12, 2015
the furniture will look like in their homes, and schedule delivery all while sitting on a sofa as opposed to
standing at a counter for 20 minutes. From CFO Karen Hoguet's perspective, the way she knows if a new
technology is successful is by how many of the associates use it. In this furniture example, she cited 85% usage,
which tells you it is answering a need that sales associates and customers had. In pilot stores, customers can
also shop Macy’s omni-channel assortment via interactive kiosks and “lookbook” displays, or purchase on
mobile devices if they prefer. The launch of Macy’s Digital Edition, an enhanced catalog with editorial content,
fashion advice and curated product suggestions, also offers shoppers a new way to look at Macy’s merchandise
on their tablet, desktop and mobile.
Building upon its “Buy Online, Pickup in Store” (BOPUS) program, which is now available at all full-line Macy’s
and Bloomingdale’s locations nationwide, Macy's is also testing $5 same-day delivery (a great value in our view)
for merchandise purchased online at Macys.com and Bloomingdales.com, and on both brands’ mobile-enabled
websites. Macy’s is testing the service in Chicago, Houston, Los Angeles, New Jersey, San Francisco, San Jose,
Seattle, and Washington, D.C. Bloomingdale’s will cover Chicago, Los Angeles, San Francisco and San Jose. Deliv,
a crowd-sourced same day delivery provider, will work with major mall owners, including General Growth
Properties, Macerich, Simon and Westfield, to orchestrate the deliveries to consumers. Interestingly, BOPUS is
not being utilized the way management initially thought it would be. They assumed most customers would be in
need of an outfit for an event that night, but it has really been more about convenience than a need. Notably,
most BOPUS orders aren't picked up the same day.
Finally, Macy's stands out to us as the retailer always on the forefront of innovation. Examples include image
search, mobile wallets, and smart fitting rooms.
Macy's has rolled out an image-recognition search app, developed by the Macy’s Idea Labs Team,
which allows mobile users to snap a photo of a garment on their phone and search through thousands
of inventory items to find the exact same or similar product available at Macy's. Macy’s Image Search
app is compatible with iOS phones, or web users can upload photos and search on their desktop.
Macy’s efforts to make any image instantly “shopable” is a reaction to the growing importance mobile
devices play in how consumers search for and purchase apparel. This presents another opportunity to
allow Macy's to curate based upon personal shopper preference and monitor upcoming or of-themoment trends.
Both Macy's and Bloomingdale's have added M's mobile wallet technology to each brands' mobile
apps. Mobile wallets—available for customers enrolled in loyalty programs—are designed to eliminate
physical versions of special discount offers and other shopping incentives by storing them virtually.
Macy's also uses beacon technology in select stores, which sends users personalized deals, discounts,
recommendations and rewards, to their mobile devices.
Last fall, Bloomingdale’s also announced they would be adding “smart fitting rooms” to their Palo Alto,
San Francisco, Century City Los Angeles, Short Hills, New Jersey, and Garden City, New York stores. The
smart dressing rooms will be equipped with touch screens where customers and associates can scan
clothing to instantly request different sizes or colors.
Gap Inc. - Focused on Personalization
GPS’ significant 2012-2014 IT and omni-channel investments position the company at the forefront of bricksand-clicks, generating over $2B in FY13 online sales. Management believes its owned digital platform and
proximity to the best technology talent (GPS' headquarters are located in San Francisco) are competitive assets
differentiating GPS from other retailers. GPS has built an impressive IT team over 10 years with ~150
employees focused on eCommerce alone.
GPS is intently focused on personalization. Art Peck, GPS CEO and former President of Growth, Digital, and
Innovation, believes customer formation is primarily digital today. GPS recognizes 60%+ of website traffic as
unique visitors where they can track consumers browsing history, purchase history, etc. Today, GPS is focused
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Specialty Retail & Dept Stores | March 12, 2015
on personalizing that experience to drive increased conversion, click-through rates, units per transaction, and
time spent on websites. Art Peck has said, “Good things happen for the customer if they are willing to selfidentify and tell us who they are at the beginning of a shopping experience.”
As part of this personalization, GPS has rolled out a multitude of omni-channel initiatives, including, but not
limited to:
1) Triggered E-mails: The company currently sends triggered e-mails including rewards expiration notices but
looks to roll out additional trigger e-mail types including sending e-mails to shoppers in response to price
reductions or low inventory on items of specific interest to the shopper.
2) Personalization: Several e-mail versions of the same campaign exist and are sent to shoppers specific to their
purchase and browse history. In addition, the website opening page has several versions and targets the
shopper's interests. GPS notes these have resulted in higher click thru rates, longer time on the website and
higher web conversion.
3) Reserve in store: Allows shoppers to select items from the website to be held in the store. This removes doubt
of whether or not a product is available in-store when a shopper makes a trip. Management views this as both a
traffic and conversion opportunity. This feature is currently available at Gap and Banana Republic, but shopper
awareness still needs to increase. Reserve in store has driven higher transactions, conversions and units per
order. GPS notes that the service is used differently depending on the customer. Some customers are pleasantly
surprised that they can receive a “in-store styling experience” while others just want the quickest path to pay
and get out the door.
4) Ship from store: This feature allows GPS to virtualize inventory, creating a significant opportunity to arbitrage
the rate from online demand to items that may be over-inventoried in a given store. In addition, GPS has a ship
from store algorithm that helps decide whether or not an item requires a shipping charge based upon the
current price of the goods. For example, an item with a $40 original ticket that's on sale for $24.99 with a profit
of $8 may indicate that the item can ship for $3 but not free. We see merchandise margin opportunity as ship
from store grows and GPS' analytics should help the company make inventory-smart decisions.
Urban Outfitters Inc. - Highest Online Sales Penetration Under our Coverage
URBN management has embraced the emerging internet change opportunity more than many others in our
view. URBN has continuously improved online customer acquisition, customer retention, analytic capabilities,
database management, and granular marketing over the past few years and its online sales penetration is proof
efforts are paying off (Exhibit ). In addition to investing in online operational abilities, URBN is focused on
expanding its web-exclusive product offering, increasing online style breadth, assorting locally and integrating
stores with websites. URBN CEO Dick Hayne believes eCommerce sales can represent 50% of the company’s
total sales, up from ~30% today.
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Exhibit 16: URBN's online sales penetration is a head above the rest of our specialty retail coverage, and still
growing
So u rce: Co mp an y data, Mo rgan Stan ley Research
Free People, an URBN brand, has done a terrific job leveraging its small store base to drive higher online sales
and social engagement. For example, at store checkout counters, Free People added a catalog to tout the brands'
full online assortment. Each product in the book has a barcode, which consumers with the Free People app can
scan to make a purchase, use to access reviews, or upload photos to Instagram. While the catalog lets customers
see the full product assortment from a practical standpoint, it also leads customers to a richer and more social
shopping experience. All URBN brands also have shopping carts and wishlists that are integrated across the
brand's mobile site, app, and desktop website. The mobile app not only facilitates transactions online, but also
works as an engagement tool in-store. Additionally, by linking several identities (store, mobile, desktop) to a
single shopper, retailers can get a far more complete pictures of the individual and their shopping preferences
and can deliver more targeted messages, both online and offline.
Since August 2012, URBN has been able to fulfill demand in any location from inventory in all channels, utilizing
one common SKU. Buying, marketing, and planning departments are also fully integrated across stores and
online. As much progress as URBN has made over the past five years, there are still many exciting, potential
initiatives to come this year as well:
URBN's new distribution center (located in Gap, PA - 30 miles from Philadelphia) opens in June 2015
and will allow rapid order fulfillment for East Coast stores. The DC can handle 200K packages daily and
places Retail distribution adjacent to eCommerce fulfillment allowing labor sharing across facilities.
Combined inbound retail, wholesale and eComm inventory should create supply chain savings and
eliminates retail backstock as eComm inventory can replenish retail stores.
URBN already offers a 2-click checkout option across desktop, mobile, and tablet. This will shorten to 1click sometime this year which should help to increase conversion and lower shopping cart
abandonment rates.
Consumers can already search online to see if inventory is available in store, but URBN is rolling out
“reserve online” capabilities by 3Q15 and testing BOPUS (Terrain is the only brand with this
functionality currently).
URBN is also testing beacons and RFID tags in a handful of stores. Management has tested RFID before,
but it still may be too expensive to roll out fleet wide. Anthropologie removed its security tags a few
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Specialty Retail & Dept Stores | March 12, 2015
years ago because shrink is very low, so adding RFID is likely even more expensive today than it was a
few years ago.
Finally, URBN and M are the only two companies we cover who have fully rolled out Apple Pay instores. Although still in early innings, URBN should have initial reads to share in 2H15.
Nordstrom - Best in Class Customer Experience
Nordstrom has been building its eCommerce business since 2003. The company was an early adopter of multichannel fulfillment, pooling inventory systems beginning in 2005 and implementing cross channel fulfillment in
2009 (Exhibit ). JWN’s ability to keep pace with changing technology has established the company as an online
retail leader, and driven eCommerce penetration to 15% of FY14 sales from 8% in FY10. JWN notes that
customers who shop multiple channels spend more and demonstrate greater loyalty.
JWN, KORS, and the Bloomingdale's division of Macy's (M) are the only two companies in our coverage
universe that offer unequivocally free shipping and free returns every day and without any thresholds. JWN
aims to deliver packages within 3-5 days, but is investing to deliver faster. The new fulfillment center in
Pennsylvania, on track to open this year, is one example. Having fulfillment centers closer to the customer will
enable JWN to offer two-day shipping for free to more customers, a major competitive advantage in our view.
JWN also provides a return shipping label in the original package which is much more convenient for customers
than having to print their own label online.
In 2009, JWN was the first department store to adopt omni-channel fulfillment. The current system which
utilizes one common SKU across channels enables JWN to first look for inventory where a store might be about
to take a markdown. The system can also fulfill from stores where an item is turning slowly. This helps drive
inventory turns, thereby allowing JWN to increase merchandise freshness and lift full price selling. JWN's omnichannel inventory system also allows consumers to search online for a given item's availability in their nearest
store as well as buy online pick-up in-store (BOPUS) across desktop, mobile, and tablet. The corporate buying
and marketing teams are integrated between stores and online as well.
Nordstrom has also aligned its employee incentives to encourage cross-channel transactions. If a customer
purchases an item fulfilled online while in-store, the store would receive the same amount of credit as it would
for an in-store purchase. Additionally, if an online order is returned to a store, the return is credited against
where it was originated/where it was originally given credit. Roughly 60% of online returns are made in-store,
which allows employees an opportunity to help convert the return into a sale.
JWN also recently upgraded their mobile optimized site to provide a seamless and consistent experience with
their desktop website. They continue to make enhancements to the online experience and integrate with the
stores. For example, JWN recently added the feature of allowing customers to shop directly from its Instagram
page. Nordstrom partners with a site called Like2Buy that looks and acts like Instagram, but links photos directly
to product pages on its web store and stores the photos that users “like.” A link in JWN's Instagram profile (in
which 763k people follow) connects shoppers to the site. Like2Buy will help stem the constant “Where can I buy
this? Do you still carry this? How much does this cost?” questions in Nordstrom's Instagram comments.
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Exhibit 17: Nordstrom has been investing in omni-channel for nearly 12 years
So u rce: Co mp an y data, Mo rgan Stan ley Research
Rebecca Minkoff - Stores of the Future
Rebecca Minkoff, an accessible luxury handbag, accessory, footwear, and apparel retailer not covered by Morgan
Stanley, is an excellent example of a retailer taking the in-store shopping experience to an omni-channel level.
Rebecca Minkoff has opened two “connected” stores, one in NYC and one in San Francisco, that are chock-full of
high-tech services developed by eBay Inc.'s retail innovation team and aims to make the shopping experience
easier.
Upon entering the store, customers are greeted with a wall-length touch screen which offers shoppers free
drinks. Guests have the opportunity to order a free water, tea, coffee, or espresso. They are asked for a phone
number where they will receive a text as soon as their drink is ready. The same touch screen also allows
shoppers to browse the brand’s catalog and put together outfits. While shoppers aren't aware, employees are
plugged into mobile apps which keep them appraised of who’s in the store and what data is being inputted.
All clothing and accessories are outfitted with RFID tags and dressing rooms are equipped with RFID shields
which allow the store to identify which items customers bring into each specific dressing room. The dressing
room is also equipped with mirrors that double as large touch screens. Kinect sensors within the mirror record
customers' motions and allow for adjustable lighting. Different sizes and colors of the items a customer brings
in are automatically brought onto the screen. If something does not fit, they can order a different size version to
be added to their online basket for future checkout. Customers do not even have to leave the fitting room to
make a purchase. Employees will handle transactions with iPads, or they can pay through the fitting room with
PayPal or traditional methods of payment. By entering their phone number into the touch screen, shoppers
receive a URL link via text message to connect to their store loyalty account.
More important than what customers do buy, the RFID shields remember which items customers bring into the
dressing room and don't purchase. This allows Rebecca Minkoff to then send follow-up emails to remind
customers what they did not buy and other sizes and colors the merchandise may come in.
While the technology for connected dressing rooms and smart stores is here already, it’s going to be a long rollout before it makes its way to every mall. New brands like Minkoff have a running start; retrofitting inventory
and infrastructure for RFID tags and e-commerce integration is a long and expensive process. In addition, many
customers may rightfully have questions about privacy and anonymity when faced with dressing rooms
containing an array of cameras and Kinect sensors.
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Hardlines: We See WSM and Home Improvement as Best-Positioned
Our overall view is that there will be multiple “brick and mortar” winners within Hardlines. Early movers such as
WSM are well-positioned and will continue to enjoy an advantage, while companies like WMT, HD, and LOW
(which is underappreciated) have come a long way fast. We believe these businesses are omni-channel ready
today and have among the best prospects for future gains. While we believe select retailers can thrive in the
omni-channel world, there are a couple of challenges that cloud the near-term.
Williams-Sonoma - Been Doing It Since 1999
First, other than WSM, there isn't a Hardline retailer that we can point to that has economies of scale in its ecommerce/omni-channel efforts. This lack of scale brings uncertainty to the ultimate profit picture.
WSM's business is anchored by its e-Commerce expertise. After 15+ years of significant investments in its
ecommerce platform, WSM has become the quintessential example of a retailer that can operate and thrive as
an omni-channel business. Its success starts with management's channel-agnostic view of the business and
entails a deep focus on having the best website functionality and shop-ability for customers.
The e-commerce platform first launched in 1999 and has grown to become the leading platform in the industry:
Not only does WSM have the highest level of traffic, it also has the highest conversion rate among its peers.
What makes WSM's platform stand above the rest is the consumer-friendliness of its easy-to-navigate website,
the uniqueness of the products it sells, and web content that complements its in-store layout and strategy. We
think what WSM has built is more sustainable and will require less investment over time, which should provide
consistent EBIT margin expansion.
Home Depot and Lowe's - Well-Protected and On the Offense
We view the Home Improvement segment to be well-protected from online competitive pressure, given the
high level of service and exclusivity, though e-tailers have started to gain traction in the market over the last few
years. We estimate online retailers have grown share from 0.2% to 2.0% since 2005. While not a significant
portion, e-tailers capture more of the Home Improvement market than several nationally recognized brands.
Similar to other hardline retailers with industry-leading infrastructure, the success of an e-commerce platform
ultimately lies within management's attitude. HD's leadership knows physical retail is its backbone but
recognizes it must learn to embrace the omni-channel. Former HD CEO Frank Blake said it best: “The internet
has evolved from being an external threat to being part and parcel of our portfolio strategy.”
We believe HD has done a solid job of walking the walk, investing heavily in “interconnected retail” technology
to improve efficiency and offer a multi-channel experience. The company takes an experimental approach with
its newer technologies like its Skype-like virtual services and appliance kiosks, which better engages the
customer and creates a simpler shopping experience. These technologies have elevated the interconnectedness
between retail and e-Commerce, with 10% of online orders originating in a retail store. For the Buy Online
Pickup In Store customers, HD is allocating space to quickly fulfill customer orders to streamline the fulfillment
process.
One of the largest investments HD has undertaken is the addition of three direct fulfillment centers. The intent
for these DCs is to enable same day shipping with the help of new warehouse management systems and new
material handling systems. The DCs will stock SKUs beyond the current retail assortment and are capable of
holding ~100,000 SKUs versus 30,000 SKUs in store.
We also look favorably on LOW as among the most omni-channel ready businesses in our coverage. This
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Specialty Retail & Dept Stores | March 12, 2015
reflects LOW's leading mylowes.com platform, in store technology, logistics capabilities, mobile payments, and
its ability to digitally interact with customers. LOW is also focused on flexible fulfillment as it unleashes its store
network as a distribution weapon. With the heavy lifting and infrastructure & labor investments largely behind
it, flow-through should start to improve over the next few years.
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Specialty Retail & Dept Stores | March 12, 2015
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STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan
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Global Stock Ratings Distribution
(as of February 28, 2015)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our
ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.
Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see
definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond
Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
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Specialty Retail & Dept Stores | March 12, 2015
COVERAGE UNIVERSE
STOCK RATING CATEGORY
Overweight/Buy
Equal-weight/Hold
Not-Rated/Hold
Underweight/Sell
TOTAL
INVESTMENT BANKING CLIENTS (IBC)
COUNT
% OF TOTAL
COUNT
% OF TOTAL
IBC
% OF RATING
CATEGORY
1161
1459
101
609
35%
44%
3%
18%
321
370
10
88
41%
47%
1%
11%
28%
25%
10%
14%
3,330
789
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received
investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a
risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's
industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on
a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant
broad market benchmark, as indicated below.
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market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad
market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.
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Specialty Retail & Dept Stores | March 12, 2015
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29
Specialty Retail & Dept Stores | March 12, 2015
INDUSTRY COVERAGE: Retail, Department Stores
COMPANY (TICKER)
RATING (AS OF)
PRICE* (03/11/2015)
U (06/19/2012)
U (03/19/2013)
E (02/05/2015)
E (06/19/2012)
$7.31
$73.85
$62.36
$79.27
Greenberger, Kimberly C
J.C. Penney Co. (JCP.N)
Kohl's (KSS.N)
Macy's Inc. (M.N)
Nordstrom (JWN.N)
Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.
INDUSTRY COVERAGE: Retail, Softlines
COMPANY (TICKER)
RATING (AS OF)
PRICE* (03/11/2015)
U (02/26/2015)
U (08/02/2012)
U (03/11/2014)
E (10/09/2012)
O (02/10/2014)
E (05/13/2013)
U (05/01/2014)
E (10/26/2010)
O (10/26/2010)
E (01/20/2010)
O (01/24/2012)
O (08/19/2013)
E (11/04/2011)
E (10/26/2010)
E (10/17/2014)
$21.41
$3.97
$17.18
$37.25
$57.17
$17.76
$40.34
$40.85
$90.00
$62.27
$65.22
$105.05
$84.20
$67.15
$44.33
E (08/24/2012)
E (09/13/2012)
E (08/17/2012)
$15.47
$10.71
$57.88
Greenberger, Kimberly C
Abercrombie & Fitch Co. (ANF.N)
Aeropostale Inc (ARO.N)
American Eagle Outfitters, Inc. (AEO.N)
ANN Inc. (ANN.N)
Burlington Stores Inc (BURL.N)
Chico's FAS Inc. (CHS.N)
Coach Inc (COH.N)
Gap Inc (GPS.N)
L Brands Inc (LB.N)
Lululemon Athletica Inc. (LULU.O)
Michael Kors Holdings Ltd (KORS.N)
Ross Stores Inc. (ROST.O)
Tiffany & Co. (TIF.N)
TJX Companies Inc. (TJX.N)
Urban Outfitters Inc. (URBN.O)
Sole, Jay
Express, Inc. (EXPR.N)
Skullcandy Inc (SKUL.O)
The Children's Place Inc (PLCE.O)
Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.
© 2015 Morgan Stanley
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