This dispatch is all about the Grinch lurking in what is predicted to be your best holiday sales performance in years. The Grinch would be Wall Street and the homage you pay to those \”short-termer\” investment spoilers at this merry time of year. But wake up! Don\’t pay homage, Get tough. Stick to your long-term strategic direction. And begin to educate them about a more intelligent strategy of replacing their myopic view of the quarterly \”by the numbers only\” as the primary performance measure.
How is it that Black Friday (now the entire Thanksgiving weekend) and Cyber Monday, plus the frenzied couple of weeks leading up to Christmas, will serve up record-breaking sales numbers for literally all of the major retailers, on and offline — and yet, their margins are in decline? The NRF expects on and offline sales for November and December to increase by 4.8 percent, well ahead of the 3.9 percent average over the past five years.
The simple answer is retailers and brands have (and still must) invest billions of dollars in technology and scaling their e-commerce businesses. They have also had higher online operating costs, including distribution, delivery and labor. They are investing in refurbishing, modernizing and infusing technology into their physical stores. And let\’s not forget the ongoing price promoting pressures, which in our still overstuffed/stored industry will never go away. Who are \”they?\” They would be virtually all of the major legacy retailers, including iconic brands: Nordstrom, Macy\’s, Target, Kohl\’s, TJX Companies, JC Penney, HBC, among others.
One of the CEOs of these majors recently said to me, \”We make these huge billion-dollar investments because there\’s no option — we must. And when you mix higher costs of doing business in this new, more complex integrated model along with the perpetual pressure on prices, margins are under siege.\”
Another leading CEO when addressing an analyst meeting, speaking of their investment plans for the next few years said, \”Regarding our CapEx over the next few years, we are projecting X-billions of dollars, because we must continue building out our e-commerce business, modernizing and building technology and consumer experience in our stores. So, we will take a hit on our margin. Accordingly, we believe our performance should be measured by ROIC (return on invested capital).\” At the time, I was sitting next to an analyst from one of the big five who had his screen open to Yahoo tracking the stock price in real time. As the CEO was making that statement, I watched the retailer\’s stock price drop about 25 percent in those few short minutes.
Citi analyst Paul Lejuez was recently quoted: \”We are in a decade of profitless sales.\” Duh!!!! Paul, although I don\’t know you, your statement is spot on. The reason I\’m flippant in response to your statement is that if this is true (which it is) then why can\’t you and your Wall Street legions of the best and brightest figure out why this is happening? Why should it be the sole measure of importance? We need to pin performance on STRATEGY and ROIC.
Amazon has always been given a pass on profitless sales. Recently, following a slowdown in sales, its stock did take a hit. It will be interesting to see if Amazon continues to slip on the top line and how Wall Street will respond.
Turn Wall Street on its Head
Before They Drive Your Business into the Ground
Since virtually every consumer-facing business is in the midst of fundamentally transforming their business models to compete in this Technology Revolution, driven by the new young consumer culture armed with technology, shouldn\’t the financial industry, which determines the value of these companies also transform their models?
It has been speculated that the reason the Nordstrom brothers sought to take the company private was to escape the short-term performance scrutiny of Wall Street and the company\’s never-ending quarterly pressure to increase Wall Street-defined profitable sales.
While it is unlikely that the long-established reporting, analysis and performance ranking process will change anytime soon, individual companies and their leaders can resist those pressures and adopt a longer-term vision and growth philosophy. For those that have the willpower (and it will take lots!) to do so, they will avoid potential \”failure by the numbers\” and will stand a better chance of achieving competitive superiority.
I believe the current CEOs and their teams among the major players have evolved and are willing to take short-term hits to their stock, knowing such pain is necessary to achieve long-term, profitable and sustainable growth.
Always ahead of his time. Les Wexner, CEO of L Brands, was quoted in 2003 describing a company\’s financial track record like baseball. He said, \”The business community would be better served if it reported both short- and long-term results. What is winning? Is it an inning, a game, a series, a season or a record over time?\” I hope he\’s taking his message to heart and operating under his own advice, given the financial and brand dilemma he has with Victoria\’s Secret.
Speaking of Baseball
Regardless of which inning the state of our economy is in, how it is measured and when and where the Technology Revolution will level out, industry sectors will continue to be overly competitive and growth challenged for well into this century — and perhaps forever. This is certainly the case for the retail sector, which fits that description well before the boom of the late 90s and even during those earlier \”bubbly\” years. The reasons have been repeated ad nauseam.
So, don\’t fool yourself into thinking that there is some shining star just out of reach where growth will automatically switch back into overdrive. Yes, the squeeze you feel now may ease somewhat, but get used to your business world being defined in three buckets: tough, tougher and toughest.
Therefore, on that happy note, you must start, or continue to think outside of your box right now, and never stop. If you don\’t, you will still be trapped in that box when they lower it into its final resting place.
In the short term, do not let the profit Grinch get to you. Ignore Wall Street and keep on keeping on, investing in your long-term, winnable strategies.
If you have that mindset and the courage to keep it, you\’ll beat the Grinch and the upcoming Holidays will, indeed, be ringing happy bells and cash registers.
Merry Christmas and Happy Holidays to all.