The traditional September back-to-work event for investors, marking the end of the summer lull (after a hectic wrap up to Q2 earnings in August and prognosticating about the back-to-school selling season) is the Goldman Sachs annual conference. This two-day affair is chock full of investor presentations and Q&As with 50+ public companies, private equity investors and the GS team. There was no real breakthrough news at the event, and our stalwart retail leaders seem to be soldiering on working hard to create compelling customer experiences as a point of differentiation. But it’s tough out there on the retail battleground front, and omnichannel is settling in as the strategy of choice for survival.
I believe the overriding takeaway of the conference was put forth in Robin Lewis’s recent blog, The Forecast: Share Wars For Rest of 2014, that ran a week ago, which quoted Macy’s CEO, Terry Lundgren, who kicked off the conference on the first day. The blog forecasted zero growth based on Mr. Lundgren’s quote: \”The rebound that we were all expecting in this year hasn\’t happened. The consumer has not bounced back with the confidence that we were all looking for. And so the performance I think we had in the second quarter, and we expect to have in the second half, is going to be a continuation of what we\’ve been able to do over the last several years — and that is to capture market share and get the most out of the consumers that are in our stores.\”
No surprise that e-commerce and its disruptive impact on retail were among the first words out of Hardlines analyst Matt Fassler’s introductory comments. Price transparency provided by the Internet, as well as multiple shopping apps, transcend traditional retail channels. This pressures margins across retail and brand enterprises and, in sum, across the industry in all but a few categories (notably lumber). A steady flow of startups are creating deflationary pricing pressure. Concurrently, to maintain market share, retailers are spending hundreds of millions in the aggregate on omnichannel investments. Weak store traffic exacerbates the situation.
Brick-and-Mortar Has Competitive Advantages Too!
True enough, but attending the sessions on September 3 and 4 reminded me that good retailers know their customers; adapt their offerings to changing tastes as well as shopping habits; and have a prestigious heritage — sometimes as long as 177 years in the case of Tiffany. Despite the focus on social media, mobile, and “personalized” offerings, nothing comes close to real relationships with real people with real smiles (not emoticons), and brands that provide value and meaning. As Rick Caruso opined at the NRF conference in January, people want experiences; provide them with a good experience and fabulous eye-candy (merchandise) and they will anchor the memory with a purchase or two. Put another way, shopping is social, buying is survival.
A week later I attended the Luxury Retail Summit Holiday Focus 2014 and was amazed at the consistent remarks among brand managers, marketers, researchers and consultants that luxury shoppers are seeking “meaning” in their purchases. I would argue they should be seeking meaning in their lives, their work and in their relationships. Nonetheless, providing meaning is truly a marketer’s dream and the epitome of lifestyle branding. One way to provide meaning is through fantasy. Ralph Lauren has created a Disneyland for adults. I can’t daydream a better life. If sipping artisanal coffee in a Fair Isle wool vest purchased at the new Polo 5th Avenue store will provide an afternoon of meaning, I’m all for it.
Back to Goldman Sachs, it was reported pervasively that the Internet and e-commerce have created omnivores; compulsive consumers with insatiable appetites. This desire for immediacy is both gratifying and annoying at the same time for the retailers who have to provide it. The shopper’s mantra is, “give me what I want, when I want it, where I want it — NOW, please.” At Nordstrom, they are delivering instant gratification. Whether it’s at the full-price flagship, Nordstrom Rack’s, Hautelook or online, I can have it all. Macy’s is leading retailers with its strategic omnichannel vision which includes Buy-Online, Pick-Up-in-Store program available at all Macy’s stores. It meets the immediate gratification needs of customers and with a drive to their local Macy’s that day, it saves Macy’s the delivery cost. And even more importantly, it drives store traffic, which, on average, results in another purchase for a total spend of 125% of the original online transaction.
Other key takeaways from the conference were:
- Retailers’ growth focus on international expansion, with China cited frequently
- Holiday expectations, which were generally an extrapolation of the prevailing trend of modest top line growth and the likelihood of a highly promotional holiday selling season.
- Most retailers have managed inventories well heading into the second half, which could mitigate gross margin erosion. JC Penney and teen retailers have reduced year-over-year inventory levels.
Kors in the Crosshairs
At the other end of the spectrum, Michael Kors entered the current quarter with a 65% inventory increase. During the Michael Kors’ August 4 earnings call, CEO John Idol spoke about the company’s high inventory commitment (in light of their guidance of a high-teen comp for its FQ ending September), explaining the transition to in-house fulfilment from a third-party for NA e-commerce and in-transit inventory drove the buildup. Still that’s a lot of inventory in an increasingly competitive category with weakening margins and guidance for modest margin contraction this FY. I’m worried.
In fact, on September 4, Michael Kors (the company) announced a secondary of 11.6 million shares on behalf of Sportswear Holdings Limited, which eliminates founders Silas Chou’s and Lawrence Stroll’s investment in KORS shares and they’ve stepped down from the board. While the brand continues to enjoy vibrant demand, these investors are on to greener pastures. It’s probably time to sell KORS shares! This could be a replay of the Tommy Hilfiger collapse in 2000-2002, a likelihood we predicted in The Robin Report in February 2014.