A Blog by Jonathan Low

 

Dec 31, 2018

Retail Reality: Those Chains That Will Survive Have Embraced Ecommerce

Adapt or die. JL

Suzanne Kapner and colleagues report in the Wall Street Journal:

Chains that invested to improve stores and boost their e-commerce businesses were rewarded in 2018 as a surging economy lifted consumer confidence and spending. Walmart and Target  in the second quarter posted their highest sales increases in more than a decade. But time ran out on a few that were unable to adapt to the rapid shifts in retail wrought largely by the move to online shopping. Toys "R" Us closed all its stores after filing for bankruptcy protection last year. The parent company of Sears and Kmart also filed for bankruptcy
Chains that invested to improve stores and boost their e-commerce businesses were rewarded in 2018 as a surging economy lifted consumer confidence and spending. Walmart Inc. and Target Corp. in the second quarter posted their highest sales increases in more than a decade. But time ran out on a few that were unable to adapt to the rapid shifts in retail wrought largely by the move to online shopping. Toys "R" Us closed all its stores after filing for bankruptcy protection last year. The parent company of Sears and Kmart also filed for bankruptcy and is in the process of accepting bids that will decide whether it liquidates or remains a going concern.
Here are retailers that flourished and those that flopped; the fates of some others on the list remain too early to call.
Passing:
Walmart
U.S. sales at the world's largest retailer have risen each quarter for four years and over 3% in the past two quarters. Walmart's biggest profit and revenue engine is still 4,600 cavernous U.S. stores, where the company has spruced up, cut inventory and raised wages. Walmart has been plowing store profits into e-commerce investments, capped by this spring's $16 billion acquisition of Indian firm Flipkart. Investors are watching how investments eat into profits and the pace of online sales growth, which Walmart says will hit 40% in the U.S. for the current year.
Target
Two years ago, Target was struggling to keep up with competitors such as Amazon.com Inc. and Walmart, which had remodeled stores and lowered prices. In early 2017, the company began investing billions of dollars in its stores and digital capabilities, including lowering prices and adding exclusive brands and new pickup and delivery options. The moves helped win back shoppers and improve sales, but they also squeezed margins. Still, Target CEO Brian Cornell recently said he is optimistic about its ability to boost profits in 2019.
Best Buy
Best Buy Co. has been defying the retail slump for years by matching prices and using its huge physical footprint to its advantage. Stores have become hubs to ship online orders and showrooms for popular vendors, which have dedicated spaces and trained employees. The company also teamed up with Amazon to sell smart TVs. Best Buy's strategy has become a model for several other chains now trying to adjust to the rise of Amazon and other online sellers. In November, the company reported its sixth straight quarter of comparable sales growth above 4% and raised its full-year guidance.
Kohl's
Kohl's Corp. moved quickly to ramp up its athletic offerings as the athleisure trend took off. Active apparel now accounts for one-fifth of the retailer's sales, and the category grew 10% in the most recent quarter. Meanwhile, Kohl's, too, has been taking risks by partnering with Amazon. Shoppers can return items purchased on Amazon at roughly 100 Kohl's stores, and 30 stores have dedicated Amazon shops selling the Echo and other home gadgets. Kohl's has one advantage over other department stores: Most of its stores aren't in malls, which have suffered from declining foot traffic, so it hasn't had the mass store closings of many rivals.
Failing:
Sears Holdings Corp.
The parent of Sears and Kmart filed for bankruptcy protection in October, 13 years after hedge-fund manager Edward Lampert created the company by merging the two chains. Mr. Lampert has said he did everything he could to save the ailing retailer, but his innovations weren't enough to offset the precipitous sales declines. He may get a second chance. His hedge fund submitted a $4.4 billion bid to keep 425 stores open. But he must compete with other bidders who want to liquidate the company. Bids were due Friday, but the bankruptcy court has until Jan. 4 to determine which have enough value to qualify them for an auction later that month.
J.C. Penney
Already reeling from repeated strategy shifts under previous leaders, J.C. Penney Co. suffered another blow this year when CEO Marvin Ellison left after less than three years on the job to run Lowe's Cos. New CEO Jill Soltau, who joined in October from fabric retailer Jo-Ann Stores Inc., has yet to lay out her strategy. Penney reported a big drop in sales in the most recent quarter, even as rivals increased sales amid an uptick in consumer spending. The chain's $4 billion in debt has weighed on the stock, which has lost about two-thirds this year.
L Brands
L Brands Inc., the parent company of Victoria's Secret, has struggled to revive its lingerie business. The brand long thrived with images of busty supermodels and padded bras retailing at prices topping $50, but competitors have moved in with cheaper options and more-natural styles. The company also continues to operate a fleet of largely mall-based stores at a time when fewer people are going to malls. To address the slump, it brought in a new leader for the lingerie division, moved to shed smaller brands including Henri Bendel, and announced plans to cut its dividend.
J.Crew
With no CEO and about $1.7 billion of debt, J.Crew Group Inc. faces an uncertain future. The company last year hired retail veteran James Brett as CEO amid a yearslong sales slump. He sought to reach a more-diverse group of shoppers by selling products at other retailers and adding more entry-level prices. The moves helped the brand snap a four-year sales slump, but Mr. Brett suddenly departed in November after disagreements with the board about strategy and spending plans. He has been replaced by an office of the CEO, which has already moved to undo some of his decisions.
Work in progress:
Macy's
CEO Jeff Gennette has been trying a host of initiatives to pull the department store chain out of its slump. Macy's Inc. is striking back at off-price chains like T.J. Maxx by rolling out its own off-price concept called Macy's Backstage inside stores. It is spending millions of dollars to upgrade the most promising stores and plans to shrink others. And it bought STORY, a New York City boutique that changes its merchandise and layout every few weeks. While some moves have helped reverse years of sales declines, it is unclear how many of them will play out.
Michael Kors Holdings
Michael Kors Holdings Ltd. is transforming itself into a holding company for luxury brands, following last year's purchase of shoe maker Jimmy Choo and this year's agreement to buy Italian fashion house Versace. But it is still struggling to turn around its namesake brand. The latest stumble occurred in the most recent quarter, when sales took a hit after the company wasn't able to meet renewed demand for logo-covered handbags. Michael Kors's strategy of cutting back on inventory with the goal of selling more items at full price backfired when it didn't have enough goods.
Tiffany
Tiffany & Co. CEO Alessandro Bogliolo has been shaking up the staid jeweler with edgier marketing that features more minority and same-sex couples. Recent commercials have featured Zoe Kravitz and the rapper A$AP Ferg. New product lines such as Paper Flowers have a youthful flair. The company is embarking on a $250 million overhaul of its Fifth Avenue flagship to make it less formal and more fun to shop at. At a time when marriage rates are stuck at historic lows, sales of Tiffany engagement rings have been soaring. But sales growth stalled in the recent quarter, hurt by a slowdown in spending by Chinese consumers traveling abroad.
Dick's Sporting Goods
Dick's Sporting Goods Inc. paid a price for its February decision to lift its buying age to 21 for guns and ammunition and end sales of assault-style weapons. In the most recent quarter, sales fell 3.9% -- after the change angered some gun enthusiasts -- the fifth consecutive quarter of declines. CEO Ed Stack has said Dick's made the choice for moral reasons, and the company is making moves to reverse declines. That includes filling space previously occupied by guns with higher-margin, faster-growing categories like golf and kayaks. Dick's also said it is making investments to improve its website and order-delivery speed.

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