Specialty Retail Industry

Industry Overview

Some 400,000 specialty retail stores operate in the US with combined annual sales of $350 billion

CAGR 2002-06: 5%

Market is dominated by large players like Best Buy, Toys “R” Us, Gap, Sports Authority, etc

The market size of some major product categories:

o Shoes and clothing - $125 billion

o Electronics and appliances - $85 billion

o Jewelry - $25 billion

o Sporting goods - $25 billion

o Books - $25 billion

Other categories include Toys, Music, Luggage, Pet supplies, etc

Specialty retailers cater to a narrow or niche audience вЂ" either by location, type of customer or product mix. On a national level, specialty retailing is dominated by national chains, such as office supply store Staples or electronics outlet Best Buy.

However, on the local level, specialty retailing is defined by independently owned, unique shops that express the personalities of their owners. These small retail outlets -- shoe stores, food stores or book stores -- have become the bedrock of downtown and urban redevelopment across the country.

Industry Statistics Dec 2007

Valuation Ratios

P/E(ttm) 22.80

P/Sales(ttm) 1.34

P/Book(mrq) 13.07

P/Cash Flow(mrq) 11.17

Profitability(ttm)

Gross Margin % 34.59%

Operating Margin % 9.54%

Net Profit Margin % 9.19%

Financial Strength (mrq)

Quick Ratio 0.49

Current Ratio 1.46

LT Debt/Equity 110.07

Total Debt/Equity 118.25

Mgt. Effectiveness (ttm)

Return on Invstmt % 13.23%

Return on Assets % 9.09%

Return on Equity % 25.77%

Key Issues

The growing popularity of online retailing is attracting competition from traditional and online multi-retailers such as Wal-Mart and Amazon which are gaining considerable market shares in many of the product segments included in the specialty retail sector.

Currently majority revenue is generated by store sales but online sales from the stores’ websites are increasing. With US dollar getting weaker, international sales from these US based websites are increasing too. This creates significant positive outlook for the large incumbent players but also acts as a significant barrier of entry for new players.

Moreover, despite the presence of some large chains, specialty retail markets are highly fragmented. Barnes & Noble, for example, with over 900 stores, is the largest US bookseller but has a market share of only 15 percent.

With increasing transportation costs and tighter margins there is a possibility that some large specialty retail players will consolidate assets, knowledge and outsourcing capabilities in order to generate economies of scale and scope.

Key Opportunities

High-end and niche merchandise: With rising disposable incomes the demand for high-end goods in increasing, which can best be catered by specialty retail stores. Large players can offer competitive prices as they buy in bulk. Smaller players can differentiate themselves by offering niche products and superior customer delight at a premium price.

Store environment: Specialty retailers can focus on shopping experiences by providing more comfortable, ergonomic store environments. This way they will differentiate themselves within the marketplace, especially against large discount retailers, within which such qualities are generally lacking.

Emerging Landscape

пЃ¶ Small and marginal players: Growing popularity of online retail has motivated people with novel product concepts to start selling through standalone websites. Often these web-based stores are owned by people who are passionate about the product they sell, which is either linked to a hobby or to a field of expertise. Most of these businesses have small garage sized manufacturing. They sell products like gelatin based colorful I-pod covers, remote-controlled toys, handicrafts, customized digital displays, extra powerful blenders, etc. Many of these products are a hit and there is possibility that some of these players will consolidate with other larger players to generate economies of scale. The following website lists more than 250 such specialty retailers:

http://www.specialtyretail.com/advertise/linkdirectory.html

Some of these pioneering entrepreneurs have figured out how to boost their businesses by online video ads. They have attracted millions of viewers on You Tube by making funny, outrageous and remarkable videos. They are termed as “viral videos” as they are spread by friends, family and relatives who want others to check those videos out. One such video can be seen at http://www.youtube.com/profile_videos?user=Blendtec

пЃ¶ Kiosk based franchise business: Many successful specialty retailers are dreaming of expanding their businesses through franchising. Cart and kiosk based franchises are gaining popularity because of less set-up and overhead costs.

Franchising contributes more than $1.5 trillion to the US economy and is also the source of jobs for more than 18 million Americans, according to the International Franchise Association (IFA) a Washington based organization that offers resources to the franchise community. There are more than 2500 franchise concepts in the US with 900 new concepts introduced since 2003. The fastest growing category is specialty fast food and ethnic food.

There are already a number of cart and kiosk based franchises out there for specialty retailers who not only want to be in business for themselves but also want the support of a franchisor who knows its product inside-out and understands the most effective way to sell the product for maximum profitability.

Some