Fourth quarter results spur faster change
INSIGHT ARTICLE |
What were the takeaways from the major retailers’ fourth quarter releases and management conference call discussions? Jeffrey Edelman, director in RSM’s retail and consumer products industry practice, provides his observations and insights.
From the fourth quarter discussions, there were no major surprises as retailers and apparel suppliers provided additional insight into their holiday season and outlook. Many companies, however, underestimated the impact from changes in consumer preferences and shopping patterns. The decline in store traffic and increased online purchasing had significantly more pressure on profitability than previously estimated. Many noted progress in making both adjustments to align to current business trends and longer-term changes to their business model, but there was a sense of urgency in implementing their strategies. This is likely to have a ripple effect from landlords to suppliers.
No discussion about quarterly sales would be complete without mentioning weather. The warm weather in October and November, combined with consumers’ “buy now, wear now” attitude, delayed fall and winter selling. Despite lean inventory positions entering the holiday season, promotional activity intensified. Some stores did report better merchandise margins due to merchandise mix, easier comparisons and higher markdown allowances.
Some took a victory lap
Those that produced better than the industry, and expected results, tended to be sellers of home and do-it-yourself categories. These areas have been and continue to be strong. Wal-Mart Stores, Inc. enjoyed a reversal in its dismal sales trends largely because of its concentration on consumable items and relatively lessor dependence on apparel. The off-price sector was also a standout, benefiting from consumers’ ongoing search for value rather than higher-priced brands.
Fewer and smaller stores
Store closings have been a common theme over the past year with more retailers recently making additional announcements. The trade-off in volume from store to online has continued to pressure overall profitability. It has become difficult, if not impossible, to reduce store level expenses commensurately. Thus, there will likely be more closings this year, many of which could be downsized or replaced with a smaller format. There is a fine-tuning process as many retailers want to maintain a market presence and offer its consumers the ability to pick up, return and exchange, often resulting in incremental sales. Additionally, a number of retailers noted there is generally some loss of online sales if there is not a physical store within a close proximity to the marketing area. The choice between market share and profitability remains the internal dilemma.
Better edited product assortment
Consistent with focus on a smaller store, there is an ongoing analysis of sales by department and merchandise in an effort to fine tune to a more profitable mix. Kohl’s, in particular, was vocal about weeding out its slow sellers that should make its new, smaller formats more productive. Many retailers, in their rapid expansion phase, opted for larger stores in its effort to generate higher volume. The trade-off was generally lower sales per square foot and profitability. Now, the buzz is smaller is better, but this will likely result in more vacant store fronts and reduced volume for marginal suppliers further squeezing margins further.
Mall-based retailers most in need of rapid change
Mall-based retail managements were most vocal about the need to implement and enhance strategies to maintain and increase market share profitability. It will not be business as usual. It would appear as if most expense-reduction initiatives have already been set in motion. It is easy to say the priority is to work closer to consumer demand, shorten the production cycle and flow new merchandise more frequently. Retailers and brands need to be focused on creating excitement and create the want to purchase. There are too many venues that cater to the need-to-purchase consumer; they are generally headed down the slippery slope of discounting and less likely to have the ability to control their destiny. Winners are those with an ongoing strategy of rejuvenating online and in-store traffic, and maintaining relevance for their existence.
Two challenges: Sharper pricing and shorter production cycle
For too long, production efficiencies were based on volume requirements that generally required long lead time. Fast fashion retailers, such as Zara and H&M, proved this wrong, leaving many traditional retailer and apparel brand strategies obsolete and less competitive. Attitudes have changed markedly over the past 12 months. As an example, J.C. Penney noted it reduced its cycle time 40 percent. Ralph Lauren and others have made these initiatives a priority; however, many will have to endure the trials of implementation.
Both Macy’s and Kohl’s lamented about the competitive pricing environment, over and above promotional activity, and are exploring new pricing strategies. Will this be at the expense of margins with hopes of an offset by higher volume? Are they trying to close the pricing gap with the off-price sector? In addition, another consideration affecting pricing, there are still unanswered questions about the pending border-tax proposals. Bottom line, profitability is at further risk.