Retail technology: The view from Wall Street 

By Deborah Weinswig

Retail technology first came to the attention of investors just as the technology bubble was bursting on Wall Street. As a retail analyst, I remember that my first exposure to retail technology came during a conversation I had in 2002 with a pioneer in revenue optimization solutions for retailers. I learned how analyzing patterns of customer demand could yield valuable insights that would help retailers drive sales, increase margins and improve profitability.

These early projects changed the way I viewed retail technology and how it fit into the overall investment story. Leapfrog to today, and speaking with the SAS Global Retail Practice executives, I see the depth and breadth of what retailers can gain from retail solutions infused with predictive analytics are even greater. 

I am amazed at the impact that retail technology has had across retailers’ income statements and balance sheets. It has driven profitability to a new level that many investors did not think was possible.  However, as retailers have matured, it may appear that there remains little upside for growth and profitability. I believe that the continued expansion of retail technology will allow retailers to be increasingly innovative with site selection, increase operating margins and drive profitability.  Based on my more than 10 years of experience following retailers on Wall Street, I believe that technology has had the greatest impact on five key measures:

1. Comparable store sales
2. Operating margin
3. Square footage growth
4. Inventory turns
5. Return on invested capital (ROIC)

1. Comparable store sales
Comparable store sales growth is a good barometer of demand for a retailer’s product because it measures sales at stores that have been open for at least a year. Retailers with the ability to maintain comparable store sales growth will be able to better leverage fixed costs and improve operating margin. Several technologies can assist retailers in growing comparable store sales by maximizing revenue based on the demand:

• Markdown optimization maximizes sales by taking markdowns at the appropriate times and levels.
• Size optimization increases product availability and sales by ensuring that products are in stock in the right sizes at the right time.
• Price optimization (revenue optimization) optimizes sales dollars by finding the highest price point for a predicted level of demand.
• Advertising optimization (market mix analysis) increases sales by helping retailers analyze and understand the comp lift from a specific marketing campaign.
• Regional pricing (revenue optimization at zone level) optimizes price points based on regional characteristics.
• Cycle-time reduction improves sales and product success by providing relevant and on-trend merchandise more frequently.
• Point-of-sales and clienteling solutions provide enhanced customer service through the use of collected customer profile data and task management tools, faster checkout and linkage between retail channels (Internet, catalog, and brick and mortar stores).
• Planning and allocation software (merchandise planning) boosts top-line growth through increased availability of product by region and store.

2. Operating margin
Operating margin shows how well a retailer can improve profitability by increasing gross margin and leveraging expenses. Improving operating margins can greatly enhance earnings per share growth, which is a primary focus on Wall Street. Technology can help retailers improve margins by increasing the probability that their products are sold at full price and by achieving better sell-through.

• Markdown optimization maximizes operating margins by helping retailers avoid taking higher markdowns than necessary so that they can sell products as close to full price as possible.
• Size optimization increases operating margins via better sell-through of product in the right sizes.
• Cycle-time reduction enhances operating margins by allowing retailers to have more control and the flexibility to adjust orders based on customer response, which lowers their markdown risks.

3.  Square footage growth
Square footage growth drives total sales and is useful in judging the overall growth prospects of a business. Technology can aid retailers in designing a growth plan and finding the optimal location for a store given the demographics of a particular area.

• Location optimization optimizes a retailer’s potential to expand in a market by identifying the best locations for store openings.
  

4.  Inventory turns
Inventory turns measure how effectively a retailer can move product through the supply chain and into the customer’s basket. High turnover of inventory will not only drive sales but will also lower the total cost of carrying inventory. Exceptional inventory management can be a significant driver of profitability.

• Radio frequency identification (RFID) reduces inventory-carry costs, out-of-stocks and shrink.
• Planning and allocation software reduces inventory levels and out-of-stocks by using accurate demand forecasts.
• Markdown optimization uses optimal markdowns to improve sales and lower inventory levels.
• Size optimization decreases out-of-stocks by having an optimal mix of sizes.
• Cycle-time reduction increases inventory turns and lowers carrying costs.
  

5.  Return on invested capital (ROIC)
ROIC represents the profit that a company can generate for each dollar invested and is calculated by dividing a company’s net operating profit after tax by its invested capital. Technology can help in two ways. First, technology that improves operating income will increase the numerator of the equation. Second, technology that manages invested capital will help the denominator of the equation.

• Technologies that drive the top line and operating margin enhance a company’s net operating profit after tax (the numerator of the ROIC equation).
• Inventory management technologies reduce a company’s capital investments (the denominator of the ROIC equation).

The successful implementation of retail technology by leading retailers has raised the standard for retail operating performance, but it does not appear that the end is yet in sight. Retailers that effectively utilize the technologies available to them will grow sales, increase margins and improve profitability. The effective use of technology comes down to getting the right product to the right store at the right time so that the customer buys the product and is satisfied in doing so – and that’s what will catch the attention of Wall Street.

BIO 
Deborah Weinswig leads the Retailing/Broadlines team at Citi Investment Research. She also covers home improvement retailers, supermarkets and drugstores. In 2007, Weinswig received the First Place ranking for Retailing/Department Stores and Broadlines in the 2007 Institutional Investor survey. This marked the fourth consecutive year that she received the First Place ranking in this sector. She also received First Place in the Greenwich Associates Poll in 2006 and 2007, and most recently, she was recognized for her excellence in forecasting earnings by StarMine, with a third-place ranking in the Multiline Retail sector. Before joining Citi, Weinswig covered supermarkets, drugstores, discounters, clubs and food distributors at Bear Stearns. Prior to her tenure at Bear Stearns, she was a member of the global strategy team at Morgan Stanley, where she had primary responsibility for the Competitive Edge fund. Weinswig received an MBA in finance from the University of Chicago and a BS in accounting from Indiana University.