Retailers are having difficulty moving apparel these days. One analyst attributes the groaning shelves and racks to two successive years of warm weather. So retailers’ worries will soon be over: the world’s leaders are about to assemble in Paris to end the trend to global warming, a bigger threat than terror, says Barack Obama. He has as much chance of being believed in the stricken French capital as do retailers who blame their woes on the weather.
The nervousness in the retail sector began when both Macy’s and Nordstrom’s reported less-than-stellar results. Mighty Macy’s, with about 850 stores including the Bloomingdale brand, and one of the best-regarded CEOs in the business, Terry Lundgren, announced that revenues for the quarter ending in October had fallen by 5.2 percent compared with the same period last year, that net income had been cut nearly in half, and that bloated inventories were prompting price cuts. Shares, which since have recovered a bit, plunged 40 percent. The strong dollar that confronted overseas shoppers in Macy’s famous flagship store on Herald Square in New York didn’t make life any cheerier for Mr. Lundgren. The next day, Nordstrom’s, a high-end department store chain, reported a third-quarter slow-down in sales of all categories of goods, in all regions and on online, in both its swanky and off-price chains, with no improvement in sight. The chain’s executives could offer no explanation except that fewer people were buying clothes. Merchandise has been marked down, as have shares, which dropped more than 20 percent in response to a fall of about 40 percent in profits and a reduction in the company’s forecast for full year growth. Dillard’s 330-store chain (third-quarter profit down 17 percent) fared no better.
Walmart did manage a bit of growth in sales, thanks to its new, small-format stores. But operating income fell by 8.8 percent in the third quarter and the company is warning that profits next year will fall as a result of a perfect storm of price cuts; higher wages and benefit costs; increased investment in store up-grades; the strong dollar, which reduces the value of overseas earnings; and belated investments in its online business so that it can compete more successfully with Amazon.
A clue to what is going on in the retail sector is provided by the reports of two very different retailers. TJX, which operates the off-price retail chain T.J. Maxx, a seller of discounted name-brand clothing and home furnishings, reported third-quarter sales and earnings increases that exceeded analysts’ expectations. The discounter’s annual sales are about the same as Macy’s, but its market cap is almost four times that of the Macy’s. And Home Depot chimed in with a report that sales in stores open more than a year rose a healthy 7.3 percent in the third quarter, and that profit for the year would increase in line with the high-end of its forecasts. Some 20 percent of Home Depot’s sales are now made online.
T.J. Maxx’s performance suggests that consumers are watching their dollars, shopping where prices are most favorable to them, and that it increasingly buys directly from manufacturers rather than wait to pick up department stores’ unsold merchandise. Home Depot’s up-beat results, paralleled by those of rival Lowe’s (third-quarter profits up 26 percent over last year), show that Americans are prepared to unzip wallets and purses to spiff up their homes, buy newer appliances and spend on what Chris Horvers, retail analyst at JPMorgan Chase, calls their “environment.” And the ability of Amazon to turn a profit at long last suggests that the clicks are eroding the bricks at an accelerating rate.
My guess is that we are seeing enduring structural change in the retail sector. For now, people have enough “stuff”, and want “experiences”, which translates into trouble for the apparel sector and good news for restaurants, whether land-bound or on cruise ships in which lavish dining rooms reportedly make it difficult to determine whether one is dining afloat or in a desert resort in Las Vegas. Trendy restaurants featuring local produce (lower carbon footprint), supposedly healthier foods, and what the trade calls fast-casual restaurants beckon, proliferate, as do television channels featuring celebrity chefs providing instruction to viewers who are headed not to their kitchens but to the nearest “hot” restaurant, where the latest frock is no longer de rigueuer. There are gyms to be joined, yoga mats to be bought. With all of these experiences waiting, last year’s sweater will just have to do. Of course, the antipathy to “stuff” does not extend to iPhones and gadgets.
Then there are all those cars with their beefed-up entertainment centers to supplement the driving experience. They are available on the 7-year, no-interest loans that are upsetting bank regulators and which nevertheless require monthly payments that have to come out of relatively static pay checks. And increasing health care costs to be borne, especially rising premiums and deductibles resulting from Obamacare’s restructuring of the health care industry.
The common characteristic of these new consumer must-haves and must do’s is that they are not sold in department stores. Nordstrom’s inability to explain its poor recent results might quite possibly be because it does not care to confront its own obsolescence as a sales outlet. And Macy’s Terry Lundgren had better move quickly to redeem his pledge, “I’m certain we will come up with some creative ideas that will surprise people,” before investors turn sour for good.
One such creative idea is to combine clicks and bricks. After all, Walmart has over 4,000 “bricks” in locations selected because they are convenient for customers, and is starting to compete with Amazon’s “free delivery” by having customers click on the merchandise they want, and drive to one of its stores to pick it up on the same day. Macy’s and Nordstrom’s are already operating cut-price outlets, and just might decide that such merchandising is where their future lies, taking on T.J. Maxx and other discounters more directly and with even lower prices than they now offer. And they might follow the example of London’s fabled department store, Harrods, with its ten eateries, and increase the floor space allocated to restaurants.
We will see a hint of what is to come later this week. Many stores will be opening on Thursday evening, Thanksgiving Day, to offer amazing sales then and on Black Friday and through the weekend. Then comes Cyber Monday, when on-line ordering provides a diversion from work in offices, to the gnashing of employers’ teeth, or resigned sighs, depending on individual psyches. The comparisons between sales in bricks and in response to clicks will should tell us something about the long-term trend in the retail sector.