Retail\’s Q4 Sales Results

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\"\"Do we have amnesia? A mere six months ago at in Los Angeles, I remember sitting amidst heated debates, akin to the Miller Lite “Taste Great, Less Filling” ads from the 1980s. The sticking point was about whether the industry was in the middle of an apocalypse. Today, the state of the industry is Book of Revelation type stuff on one hand, and Matthew Shay’s persistently shiny NRF optimism on the other.

How has everything reversed course so quickly? Why the memory loss? The only refrain I know that changes this fast is Wheels on the Bus, when sung by my 3-year-old son. Legacy brick-and-mortar retailers cannot change their strategies that quickly. Something else must be going on.

Retailers might be rightfully excited to have exceeded their cautiously pessimistic earnings expectations from a few months prior, but let’s not confuse this short-term performance with messianic certification of CEOs leading their people out of the apocalypse or even Martin Luther leading a retail reformation.

Many of the retailers planting the flags of earnings success aren’t even keeping pace with the industry!

What’s even scarier is how quickly people forget that digital acts like a different beast in November and December along with its ancestor, physical retail. Consumer behavior changes almost through inertia during these months. More people gravitate online for ease and convenience during the hectic holidays, forcing legacy players to get more aggressive with pricing and to keep pace with Amazon with ship-from-store and other initiatives simply to save the sale. As a result, it is not out of the ordinary for retailers’ digital sales and online penetration to increase over their pre-holiday, nine-month trends.

By the Numbers: Healthy Skepticism

Cynicism is counterproductive; skepticism keeps us honest. Pollyanna can be a disaster. Unfortunately, the industry talks about short-term performance via orchestrated glass- almost-always-half-full quarterly earnings announcements that often cloud our picture. Vague performance statements and financial jargon make it difficult to see through the glass clearly.

So here is a simple tool, with a few simple data points, that cuts to the chase of an earnings announcement. It also potentially shines a light on whether any Chicken Little pessimism is warranted.


The above chart is simpler than it probably looks at first glance. For example, if a retailer reports a 1.0% quarterly comp, and we also know that said retailer’s online business impacts its total company comp to the tune of 3 percentage points, then the implied physical store comp for that retailer, over that same period, is -2.0%.

The plethora of red in the chart above means that we probably should at least raise an eyebrow to any reported comps in the 0 – 4% range right now, particularly at department stores and specialty apparel shops, where online penetration tends to be higher than at retailers who have a strong presence of grocery and household essentials items (grocery and household items generally depress a company’s online impact to its total comp store sales performance because these categories are e-commerce laggards).

Mass merchandisers should not be immune to our skepticism either. Depending upon how much key seasonal categories, like toys and electronics, move the needle in their online businesses during November and December, mass merchandisers’ top line numbers also could be buoyed by short-term digital performance different from the norm.

A few points of reference from help illustrate the point:

  • Macy’s 2016 total retail sales were $25.7B and their online sales were $4.7B (roughly 18% of Macy’s total 2016 sales).
  • Kohl’s 2016 total retail sales were $18.7B and their online sales were $2.9B (roughly 15% of Kohl’s total 2016 sales).

In the above examples, Macy’s and Kohl’s online businesses are so important that if we assume their store businesses remained flat in 2017 relative to 2016 and that e-commerce sales grew at approximate industry growth rates of just 15% in 2017 over 2016, then the implied impact of digital to Macy’s and Kohl’s total comp sales performance would be roughly 275 bps and 230 bps respectively. Translation: online sales, just on an annual basis, have a sizeable impact on both Macy’s and Kohl’s comps, an impact that is likely even more pronounced during the holidays.



Coincidentally, both Macy’s and Kohl’s excitedly reported November and December 2017 performance early. Macy’s reported comp stores sales of 1.1% and Kohl’s reported comp store sales of 6.9% in early January. The math from the above implies Macy’s store business is still decidedly negative. Kohl’s could be seeing positive signs of light in store, but it is hard to know for sure without more data. On the surface it appears that, back of the envelope, Kohl’s store comps were in the range of 4.0% to 4.5%, but that assumes Kohl’s digital performance for the quarter ran on its annual digital norms (doubtful). And, let’s also not forget Kohl’s ran a negative 2.2% comp in Q4 2016 too, so it is entirely possible Kohl’s store comp numbers were no great shakes either, especially on a two-year basis.

With that said, it is ludicrous to base anything on the above chart, my quick math, and a few highlighted early announcements, but the discussion should at least highlight why we should have some degree of healthy skepticism about retail’s reported November and December sales results.

Real Litmus Tests

The real strategic tells that validate or invalidate our skepticism come from two important litmus tests. One requires our own qualitative assessment, while the other relies upon quantitative data that we will have available quite soon.

Implied physical store comp sales numbers should be alarming if they are not correlated to a company’s reported strategies. Many retailers right now are telling the public they are insanely focused on reinvigorating stores. We have heard all kinds of tactics — leasing space to new partners, remodeling or beautifying stores, new store formats, and even adding elements, like restaurants and beer and wine, into their physical experiences.

But if they are doing these things, we should ask ourselves — how long have these initiatives been in place? Shouldn’t we be seeing payback on these investments by now? Are these efforts moving the needle at all, or is physical store performance getting worse and only being masked by holiday digital sales growth?

Kohl’s has talked about its Amazon shop-in-shops and allowing customers to return Amazon products to Kohl’s stores. If indeed Kohl’s had positive store comps against this strategy and traffic to stores also increased, then perhaps Kohl’s has made some right moves (to say nothing of it potentially staging its house to be acquired by Amazon), but I doubt it. The size and scale of these initiatives are too small to move the needle (10 stores in the former, 82 in the latter). Neither can be more than PR window dressing at this point.

Along these same lines, we should also check reported comp store growth rates against companies’ stated supply chain initiatives. One of the most ballyhooed supply chain strategies right now is ship-from-store, the idea that retailers fulfill customers’ online orders by shipping out inventory already allocated to their stores.

Don’t misunderstand what I am about to say either, ship-from-store initiatives are awesome. They reduce customer delivery lead times, and they compensate for out-of-stocks within digital fulfillment centers. But they should not be confused with strategies that will save legacy retailers from the apocalypse.

Unless retailers can begin to give their customers more compelling reasons in the long-run to shop their stores again, they will not be able to compensate for the margin drain of online fulfillment, unproductive inventory in stores, and ever-increasing store labor rates (which only get worse with a $15/hour minimum wage).

Gloating about shipping large percentages of digital orders through ship-from-store might be well and good in year one, but the next year retailers will need to comp this activity again. If retailers still cannot figure out better ways to answer, “Why come to physical stores to shop?” the 2017 pyrrhic victories of ship-from-store efforts will become evident next year. More frighteningly, increases in ship-from-store orders could also be indicative of many misleading indicators as well – like more people choosing to engage digitally rather than going into a brand’s stores, poor inventory forecasting, and bad inventory management within a company’s fulfillment centers.

Ship-from-store initiatives are basically the retail equivalent of a life raft. You might be “saved” for the time being, but it doesn’t necessarily mean the Coast Guard is coming to rescue you anytime soon.

Q1 2018 Earnings Statements

As excited as I am to dig into retailers’ annual reports in February, I am Stars Wars dressed-up-as-Wookie on opening night excited to see retailers’ Q1 2018 quarterly releases later in May. The retail world will return to stasis in Q1 2018. The hubbub of the holidays will be gone, and the seasonal inertia related to online sales and digital penetration will no longer be obfuscating factors they were only a few months prior.

A Q1 2018 drop in retailers’ overall total comp sales, and especially a drop in their two-year stack total comp sales, relative to the cowbell ringing trends reported during the holidays, should stop any skeptics, and anyone that works at these companies, dead in their tracks.

If physical comp store performance also declines year-over-year, alongside such a total level decline, then the skeptics and employees should not just stop, they should find Sheriff Rick from The Walking Dead and run like hell for the hills as fast possible because the Amazon zombie apocalypse is likely coming for them sooner than they think.

The realization of such results shines a magnifying glass on retail leaders who may be focused on the short-term and maintaining appearances for the good of their personal stock option portfolios rather than taking the long-view. Such whip-saw results are not victories – the top 1% might prosper on the crest of PR manipulation of the stock price in the short-term, but the blue-collar workers who are the backbone of our legacy retailers could end up receiving an early death sentence on the back end.

Calm Before the Storm

Let’s hope none of the above happens. Let’s hope the retailers that reported strong holiday performances continue to carry these performances through the spring and into the summer. Let’s hope they have reversed course in a mere three months on all the concerns so many within the industry have had.

But, if stock prices are supposed to be forward-looking assessments of a retailer’s value, then where has all the newfound value come from? Has the outlook really gotten brighter? Or do the past few months indicate that the lights may be beginning to dim faster on legacy brick-and-mortar retailers than we actually want to believe? Is it the calm before the storm?

Am I crazy? Maybe. But I hold out hope (albeit small) that maybe there are some C-level leaders at retail companies reading this right now and saying to themselves, “Oh crap, what does this mean for us if he’s right?” and that they start to sing a different tune and leave Wheels on the Bus to the kids.

Note: This article should not be construed as investment advice, it is solely the opinion of the author.



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