December's Echo

More shakeout from December retail business (click headline to read story):

Saks To Cut 9% of Workforce

Saks, as previously noted, is one of the company's in BIG trouble. Along with cutting 1100 jobs (most of which I cannot imagine coming from New York, where the company is strongest), the company plans to reduce inventory by 20%, has decided to close it's Club Libby Lu chain entirely and suspended a number of benefits to employees.

Let me be the first to say, it won't be enough. Print it.

Macy's Looking to Make Further Cuts

Macy's is planning to cut their four regional offices down to two, eliminating Miami and Atlanta, with New York and San Francisco remaining.

As I stated last month after their announcement of 11 store closings, this is still the tip of the iceberg. I foresee lots more trimming in the near future, as the longer they wait, the more severe the measures needed to right the ship.

Not all my prognostications for the Retail Sector were negative for the Holiday Season.

Video Game Industry Roars in December

A 9% increase for December year-over-year, and 19% increase YTD 2008! 

That is a "roar", if ever I heard one.

The revenue for the industry also was over $5 BILLION for the month for the 1st time in history.

As stated in November, the value to cost ratio for gaming has no rival, with $30-$60 games providing, literally, weeks of entertainment.

Look for this win streak to continue.

Lastly, while most retailers are still refusing to fully face the realities of the new economy, one (the same as always) retailer stands above all the rest in how they are dealing with the downturn, Walmart.

Walmart Sees New Realities for Retailers

Love 'em or hate 'em, Walmart may not be the prettiest girl in the class, but there can be no doubt they are valedictorian. 

Lee Scott was on Charlie Rose yesterday, in what I think is a must see interview. He discussed the impact the economy is having on Small Businesses and suppliers, which has not been discussed with the degree of specificity Mr. Scott shared. 

As they move forward, the focus at their stores will be continued improvement in customer service (he said this is not a slogan, but a actual goal), a better edited buying selection (less is more in his eyes, which is sooooo smart) and better presentation standards (thus making the store easier to shop for the consumer).

Three simple goals, which will translate into a big win for the world's biggest retailer. 

Not sexy, just smart. A formula to emulate if ever there was one.

Slipping Into Darkness

I promised  today, Thursday, would be a hot day for the press, as retailers reported December figures.

Here are a few stories to illustrate the point (Click Headline to read entire story):

Deep  Discounts Fail to Help Retail Sales

Family Dollar Sees Boost This Year from Use of Food Stamps

The Grinch Stole Christmas: Retail Sales Plunged 4% in December

Macy's to Close 11 Stores Nationwide

Retailers Confirm, 2008 Holiday Season Worst in Decades

Saks December Same-Store Sales Plunge 19.8%

Neiman's Has a Lousy Christmas

This may seem like a lot to read, so I will ask that you only read this one in it's entirety:

A Brutal December for Retailers

Now that we have looked back, barring something spectacular being revealed, I only plan to look forward.

If one is a regular reader of the Oasis, these headlines are not surprising. There seemed to be no question this past holiday season would be horrible, the only question was how bad. 

By Thanksgiving the picture, literally (CLICK HERE), crystalized.

Our new goal, moving forward, is to discuss how to get through the coming downturn, both for retailers and consumers. Additionally, I will spot trends, spotlight innovative practices and continue to provide a lens to the retail marketplace for you, the reader.

Let's Get It Started!

Many Happy Returns

I was reading Ray A. Smith's article (U.S. Retailers to Report Grim Results)  on the Wall Street Journal website regarding the much anticipated December retail numbers due out Thursday and something sparked a memory of an unusual experience I had yesterday. 

Allow me to share and expand.

I went to my neighborhood Costco (a retailer who's praises I have sung on numerous occasions) yesterday and, as I approached the doors, saw something I have never witnessed before, a line to get in.

Mind you, yesterday's weather in Chicago was in the upper 20's, maybe 30, maybe.

Yet and still there were about 8-12 people standing in an orderly line outside the store. As I moved closer and closer I noticed the line extended some ways inside the store as well.  While walking and searching my wallet for the always misplaced membership card required to enter, I started wondering if the few items I needed was really worth standing in freezing weather.

Just as I resigned myself to the idea, I noticed the line was not to get inside the store, but an extension of the "Returns" line that was now, literally, winding outside the store.

The sight of that line and the thought, sparked by Mr. Smith's article, drove home a point I had not considered, how tough January business is in the retailing business.

This January, much like this December, is sure to be perhaps the worst month for retailing in, excusing the hyperbole, modern history.

Three things are needed to make a Perfect Storm in retailing:

• First, an uncertain economy. A bad economy is one thing, but "better the devil you know", they say. In bad economy, people have already made adjustments and pared down their spending habits. In uncertain economy, which is really a bad economy where people refuse to accept that reality, people attempt to maintain their lifestyles regardless of how difficult the reality of doing so is. This leads to large spending expenditures, followed by mass returns, pawning and borrowing. Sound familiar?

• Secondly, you need swollen inventories. Swollen inventories take up room needed to show new goods, inhibit buying teams from investing in newer, more relevant merchandise and forestall payments to vendors, banks and other creditors. If you consider we just came through the worst holiday season on record, and 4th quarter is when retail inventories swell to their highest levels, inventories are now HUGE, everywhere. This is why you are seeing, "Buy 1 Get 2 Free" signs in place of, "66% Off" signs popping up in stores. They seem to be the same thing,and while the latter gives customers merchandise for 1/3 the price, the former gives customers merchandise at 1/3 the price, but additionally removes two more items from the store's inventory. Inventory is a major problem at virtually every retailer right now.

• Lastly, you need reduced consumer foot-traffic. This point is not as obvious as it seems. Of course January is going to be infinitely slower than pre-Holiday business. However this January is sure to be slower than most because of something I wrote about in November, the greatly reduced number of gift cards sold this past Holiday Season. Gift cards ensure future business, period. When customers decided to steer clear from purchasing gift cards over the holidays, the message was clear, "We are not sure if we will be back, or if you we will be here when we do." The combination of loaded gift cards and huge discounts would have made for a festive January in retailing, instead we have the opposite effect.
  

Coupling these three factors with record rates of merchandise returns brings the problems many retailers face more clearly into focus.

A Perfect Storm has descended on the entire retail landscape and will have a disastrous impact on this, the last fiscal month of the calendar year. Look for Thursday's numbers to be bad, and this month's numbers to only accelerate the inevitable thinning of the retail herd.

Best of Inbox 01.02.09

Here's the best nugget I found in my box today:

I can't believe I am saying this, but NOW is the time to make your move. 

95% off is less than free. Here is the math on my theory.

If item a is $100 and tax is 10%, then your cost to take it out the door is $110.

If that item is 95% off, the math is as follows:

$100 - 95% = $5 and 10% tax of $0.50, so you are paying $5.50.

That is 45% less than the tax you would have paid on the item at the original price.

So as Jean Luc Picard said best: "ENGAGE!"

Another Reason To Run...

From retail stocks.

The natural squabbles that arise in crisis are starting to play themselves out. However, this one is huge. Primarily because it deals with what has already happened, as well as the future.

A little known side of retail are the guarantees that vendors make with large stores for their profit margins. Retailers are more likely to buy more merchandise if they know vendors will cover the difference for the items that are sold under the agreed level of profitability, usually in the neighborhood of 40%.

This article (HERE) spells out the "war" playing itself out now between vendors and retailers, due to the tremendous, and early, markdowns taken this holiday season. The thing that makes this so critical is, this is the time of year retailers usually await checks making up the difference in the margins from vendors. This year the opposite is happening, with vendors negotiating to receive re-payment for the unprecedented discounting of their goods by several major retailers.

As Cotten Timberlake at Bloomberg reports:

If vendors succeed, they could recoup $1.2 billion from Macy’s, Penney, Kohl’s, Nordstrom, Dillard’s and Saks Inc. alone, based on analysts’ average estimated fourth-quarter sales of $24.2 billion for those six chains.   (emphasis is mine)

Which means, not only will retailers be hit by much smaller profit margins than anytime in the last 40-50 years, not only will there be no gross margin dollars flowing to them from vendors that usually guarantee those profit margins, but the retailers, after all this bad news is sorted out, will be making payments to these vendors, further reducing profits.

That may be the biggest story in retail so far to emerge from a season of big stories.

Keep an eye out.

It Begins!!!

From my 12/28/09 inbox:

There is no reason to panic, this is all expected...if you have been following the blog, that is.

Thinning Profits (and the Herd!)

The following are photos from my monthly walk along Michigan Avenue, Rush and Oak Streets. This two mile stretch has every store, covering every niche, in the entirety of the retail marketplace. What I decided to do is document what I saw, where I saw it and, just to get 2009 on everyone's mind, share what I think the fate of the particular retailer holds in the near future.

Before we start, please understand this very important fact:

With VERY few exceptions, when a store sells something for 50% off, they are losing money on the item. Yes, I know all about margin builders and the like, but those are a very rare exception in the overall assortment.

The reason for the loss is simple, here is an example:

Store A buys a dress for $40
Store A decides to sell the dress for $100 (a 55-60 mark being about industry norm).
If they sell the $100 dress for 50% off at $50 it would seem they made $10 profit, right?

Wrong!

Store a had to pay for the trip to New York for it's buying teams.
Pay for the paper to write the order on.
Pay the salary of the buyer that makes such decisions.
Pay for advertising, in-store signing and and the like.
Pay for medical, dental, 401k and other retirement benefits for their employees.
Pay for the real estate costs, insurance, design and fixture costs for their stores.

There is more: loan repayments, legal fees and market research, but you get the idea.

Such costs cannot be covered from that $10 profit, unless you sell hundreds of millions of those dresses (which is what Walmart is so good at).

That being said, the signs you see below should read as something out of SAW IV, not Happyland.

While this will bode very well for the consumer, it, quite literally, means the end for more than a few of these stores.

As always, all images can be clicked to get a larger, more detailed view.

Let's get it started:

This is Aldo, the shoe store that competes against 9 West when their goods are full price and Payless once they put their goods on sale. They are over saturated and overly dependent on mall traffic to drive sales. When was the last time you heard a friend say, "Hey, let's go to Aldo." I thought not. I see this chain closing 50% of it's locations, and/or seeking bankruptcy protection by May 2009.


Brooks Brothers will be fine. When the economy goes sour, people dress better. Even during the Great Depression this was the case. People without jobs wore suit and tie, just to feel a part of society. Brooks Brothers is an iconic brand that more than a few people will discover a other options from overseas start to disappear. Don't look for expansion, just look for them to make it through the economic downturn in one piece, which is sort of an A- or B+.


Walt Disney stores. During the Great Depression this company was hit so hard it had to do something radical just to remain relevant. What they did was start doing live action films, s Snow White and the like were not really meaningful after the war. This time, Disney is better suited for the though economic climate ahead. The acquisition of Pixar Studios two years ago gives Disney a foothold on smart, cutting edge filmmaking that not only deals with tough issues and ideas, but seeks them out. That being said, they SHOULD close their stores, but won't. Tourism to the Disney family of theme parks will plummet, so giving your child a little piece of Disney, if even in the form of a Happy Meal, may become all the more important. We'll see, but Toys, as a category, took a bath this holiday.



Sak's Fifth Avenue is going away. If not altogether, much like the sign below, 75% of it will. Someone has to convince me why not. See, you can't, can you? Saks has long thought itself Neiman's and run itself like Enron. If someone peeped behind the curtain, OOPS! you got us. This holiday season should pretty much end what has been a 6-7 year flirtation with a $5 stock price. Credit is tightening, so look for investors to pull of their roots and  go elsewhere. Sak's is nice, but not necessary. This will be one of the biggest, in name, casualties of this economic downturn. Obama Stimulus, or not.


Neiman Marcus is really in a class by itself. The brand represents the pinnacle of the American retail marketplace. They will benefit more from Saks' demise than anyone beside, perhaps, Nordstrom. Without the presence of Sak's, Neimans should see better gross margins due to not having to price match/ compete in many of their markets, which will lead to more profitability. Neiman's would be one of my real winners for 2009, save for one mistake...and it ain't small.

Why they decided to open up so many of these CUSP boutiques is beyond me. They are aimed at just the market niche that is most impacted by, first the housing collapse and now, the Great Recession. The combination of $600 blue jeans, $1800 driving jackets and long-term mall leases does not make for a good recipe for the future we face. This ultimately will be a VERY costly drag on the company and expect them to exit the idea entirely by the beginning of 2010.

BCBG, the retailer that never really was, will go back to selling it's goods in stores exclusively. For the life of me I cannot think of a more gracious thing to say, other than the sooner the better. 50% reduction by the beginning of 2010, perhaps entirely. They still have a strong, desirable brand for young adults, though.


Juicy Couture, in short will be in big trouble. Rapid expansion, usually means rapid reduction. Juicy has a great brand, but they are waaaaay overextended as far as different balls in the air. Look for them to rapidly shift to licensing, if that is an available option. Store closings and a return to being a vendor, not a retailer.



Yves Saint Laurent will be fine. I just wanted to illustrate the point that EVERYONE is on sale.



Children's clothing boutiques will be one of the first to get wiped out. Over the last decade no category has had faster growth and prices within this category have not been tied to anything sane. $100 shirts, $125 jeans and $70 t-shirts have become the norm from NEW DESIGNERS, not even luxury brands.

All things related to children will see growth, as people will think of their kids before themselves, but most Childrens boutiques will take a back seat to the Target's and Kohls's of the world. This has actually already started, evidence being the bath toy's took this December.



Home related stores are already in deep trouble (see Home Depot), though few really know by how much. To get a grasp of the outlook for this segment of retailing you need only one fact: January is the second most important month of the year for furniture-makers. So many home stores will go under within the first half of this year, survival will come down to how long you can hold on? If you can make it to July, and less than 50% will, you may have a chance at getting through the year flat. Habit will drive people to stores in the first quarter of the year, but I cannot think of a segment of retail so heavily dependent on credit, save automobiles. This obviously is a recipe for disaster.



Bye-Bye...



Those in the know understand why I included this photo, as a "sale" sign at this company is virtually unheard of. The early part of this economic downturn will benefit "stay-at-home" stores which related to: cooking at home instead of going out, watching dvd's at home as opposed to going to movies and buying liquor for home gathering as opposed to going out to bars and clubs.

What happens after the summer within these categories is anyones guess at the moment. If things start to rebound (which I don't see) they will maintain their balance. Though should there be no clear vision of an end to the downturn, look for them to be hit hard by September, complete with lots of closings and bankruptcies.



Not enough stores at MaxMara to have mass closings, but they will feel the realities of the economy, hardcore. Light inventory and staff cuts are in their very near future.



When you sell everything in your store for $20, as H&M does, you cannot survive by selling everything for $10. Margins are too thin at this company to help pay for what has been a very rapid expansion. Look for LOTS of store closings for this European company, same goes for Forever 21 and Charlotte Russe. Bankruptcy is not out of the question for any of them.



Let's be real. Borders is in big trouble. Not liquidation trouble, but trouble nonetheless. Immediate store closings after the new year, staff reductions at other locations and possibly bankruptcy protection for reorganization purposes. The good news for them is they have been putting out fires for 6-8 months at the company, so they are a bit further along in their planning than other retailers.



Ralph Lauren is on SALE!!!!! Run, don't walk!!! Their strong department store business will carry them for the next few years, one of the few companies with such a luxury.



Banana Republic (Gap and Old Navy) are in some very big trouble. Over-saturation in every market, irrelevant fashion assortments and long-range turnaround plans aimed at fashion, not efficiency mean bad news. Look for lots of closings, lots and lots of corporate lay-offs and a possible split of the company, which might be best. Banana, however, will be hit the hardest. It participates in the niche with the most competition, 20-40 year-old new professionals. Zara is going to dominate this market once it gets set with it's expansion, Express has more money and focus (though they are already suffering) and their clientele is already starting to dip into the XXI's and Junior departments at larger retailers in search of discounted merchandise.



Bye-Bye Talbot's! I don't see how they will emerge from this in one piece. Immediate store closings, immediate mass lay-offs and perhaps even liquidation.



As I stated earlier, Limited Brands (Express, Limited, Express Men) is going to take a significant hit. They have too many stores to begin with, but the fact they control the entire process (from design, textiles, maufacture and shipping) of everything in their stores may save them in the long run. Wexler is smart and visionary, so we will see if he was able to make the necessary adjustments to his machine before September, if not....ouch!



Very hard to write these words, but Crate & Barrel may not make it. I am a Chicagoan, so I grew up alongside this company. Going to the first store with my mother when I was small boy. That aside, the company has become less relevant with each passing year due to more copycats, with lower prices. In the movie It's A Wonderful Life, Clarence the angel tells George Bailey, "every time a bell rings, an angel gets its' wings." Well in the non-celluliod world, every time an Ikea opens a Crate & Barrel loses it's wings, or appeal.

I am pulling for you C&B, I just don't see how you emerge from this unscathed.



Ann Taylor closing are a given. Too many stores, reduction in clientele (less job holders means less clothes needed), loads of competition at every conceivable price-point and bloated inventory levels all point to bad times ahead. Look for quick moves to bankruptcy protection and, ultimately, a BIG downsizing by the middle of next year.



These types of stores (H20 and Bath and Body) are basically gone. They can only operate profitably when selling goods at full price, which is no longer an option. So take this test, will you spend the $15 you have on a new shirt, sweater, groceries or six ounces of green-apple bubble bath. Thought so!



The question for retailers like Levi's becomes, will their customer base continue to buy jeans from their boutiques at $90-$145, or start buying the lesser-weight versions from Kohls for $19.99-$40.00? I think the latter is more probable, so that is not good news for the store side of Levi's.



Ditto for Kenneth Cole. This is value-brand that has never been priced at value. So as a retailer, good-bye! As a vendor, you have a bright future.



Ditto Emporio Armani. The good thing for this company is there are not many of their stores to close, but close they will.

Stores that are not on Michigan Ave. that face major problems:

Sears - Kohls is kicking their butt and will continue to do so. Tightening credit means far less major appliance sales, less home-building means fewer tool sales. How can they withstand a double-hit like that in their two main areas of strength?

Macy's - Contraction is inevitable. Look for closings of 75-200 stores rather quickly. Bankruptcy is not out of the question, as they have massive debt payments due in the first half of 2009. Swollen inventories and lease obligations spell bad news.

All Jewelers - Contraction in this market will be unrelenting. A bad 4th quarter (-35%) will only make the thinning less merciful. Look for the elimination of 25-50% of all mall-based jewelers by June.

Mail Dominance

I thought I might share a few images from my inbox this morning. I expect this to be the norm going forward, not the exception.

I think everyone should sign up for e-mail alerts from their favorite retailers. Reason being, many of my favorites do not advertise in traditional (newspapers, magazines, televisions) manners to keep their costs down. Also, they are able to react quickly to market conditions. For example, Saks Off 5th regularly sent out alerts on deals that lasted for only a few hours throughout the entire Holiday Season. I took several people to the store and watched their jaws fall through the floor at the prices on everything from Prada to Zegna to Gucci.

If you are going to be a shopper, be an informed shopper.

Numbers Start To Trickle...

Retailers will not be forced to share Holiday numbers until the 7th of January, or so. However, the analyst's numbers have already started breaking, and all I can say is WOW!!!!!!!!

Must read article from the Wall Street Journal HERE.

This came in very late last night on Christmas Day, so I knew the news would be bad. The numbers actually play out in line with what I have been telling you for the last 7 weeks, retail got mugged this season.

The strange thing to come out of this report is how far off the actuals are from everyone's estimates. After Black Friday we were told, in spite of the photojournalistic evidence provided by yours truly, that "sales were up", and "things might not be as bad as expected."

Now that we are dealing with the staticity of facts, everyone is stating the obvious, this was one of the worst shopping seasons since the compilation of retail figures began.

The only thing scarier than these numbers is what lies ahead.

A Millie Here, A Millie There

"Final" October retail sales figures are out. There are lots of reasons it takes a few weeks to sift through the chaff to produce what really happened.

The good folks at Seeking Alpha (you should visit daily) crunched all the numbers for you and had this to say:

"Department stores are struggling the most, with specialty stores not far behind. Both are at their lowest levels in the history of the Bloomberg indices."

They are using the Bloomberg metric, so when they say "worst", they mean since 1992, which is still amazing because nobody compiled these figures as comprehensively before that time.

You can view the entire report HERE.

3 MUST READ Stories

I talked about the problem with current market pricing of Retail stock, here are a few more numbers to paint an even clearer picture of what I said two weeks ago:

Macy's valuation a topsy-turvy world.

We have also discussed the bleak fate of malls, due to rising bankruptcies and liquidations of small chain stores. This article is spot on in discussing retail vacancy rates.

Retail Vacancies Hit 10.3%

If you care to read about the incentives malls are using to keep tenants, go HERE.

The final article is the BIG indicator. Thrift stores are thriving right now. Far and away this is the most telling factor of what is ahead. I have been looking for data on this for months, as the managers at my Goodwill have been sharing info with me since July.

Not only has the Goodwill near me (West Loop, Chicago) seen a dramatic increase in shoppers, both the management and myself have noticed a demographic shift in the customer base. 

Shoppers at the store are much younger (now early 20's on up, from previous late 30's and up) and much more fashion driven. One manager related a story of how new to the thrift model some of this new clientele are. She told me of a young lady, who upon seeing another shopper with a nice black dress in her hand, asked to be called when another one came in.

Anyway, here is the read.

Secondhand stores busier than ever, bucking retail trend.

Confronting My Pessimism

To get a gauge of this "Black Friday" business, I took a stroll around my neighborhood shops to get an idea of consumer enthusiasm. I live in downtown Chicago, so my "neighborhood" shops, along Michigan Avenue, Oak Street and State Street, may differ from yours, but I tried to be as comprehensive as possible.

Please note, Michigan Avenue is universally considered on of the world's top ten shopping addresses, so expectations were higher than normal.

I captured the afternoon on film to share with you and all pictures were taken between 1pm - 230pm, usually the busiest time of day.

Click on pictures to enlarge for better detail:

Pessimism be damned! UGG Australia has a rope line to get in. Average wait: 15 minutes

Optimism squashed, I notice there is not one person in the check out line at Urban Outfitters:

Kate Spade was trumpeting their $50 price point ON OAK STREET!

The undeniable elegance of Trabert & Hoeffer:

Even Luxury houses such as Chanel and St. John were pushing Sale, it's not even December for goodness sake:

Louis Vuitton is always bubbling with enthusiasm:

A While the 6o-foot Christmas tree at the 900 North Mall is always breathtaking,

The Lack of foot traffic to get in the mall left much to be desired, 

For even Santa was feeling a bit forgotten today (notice there is no line at the bottom right of the photo:

People were not fighting to get in Neiman Marcus:

Or Saks Fifth Avenue

But crowds at Apple let me know iPods, iPhones and Macs are still on everyones wish list: 

The overflow crowd at Garmin let me know there are still lots of people trying to find their way in the world:

There were two separate massive protests. One for Chicago Public School Funding picketing in front of Water Tower Place:

Another against wearers of fur marched, about 500 strong, up and down the Avenue:

They had a few escorts too:

But DJ in the window at Nike Town was there to remind everyone, the Holidays are about peace:

There were a few very serious shoppers out:

But the overwhelming majority of people, as evidenced by these crowd shots, were walking around empty-handed. And that's after the stores had been open for well over 5 hours:

So with such photo evidence, I need not wait until Monday's reporting period to say this weekend is hinting at Waterloo. I will post Saturday on "What's Next", so look for that.

Since it is the Holiday Season and I want to end on a high note. Treat yourself to one of life's great treats.

If you are in the vicinity of the Peninsula Hotel, just a block west of Michigan Ave. at Superior, there is no way you should pass up Pierrot Gourmet's, WORLDS BEST HOT CIDER!

They regulate the temperature of the cider to the outdoor temp. So if it is very cold, the cider is made very hot. However, if the temp is more mild like today's lows 40's, the cider is served hot, but at a drinkable temperature.

The crew knows a bit about the temperature because the drink stand is OUTSIDE the restaurant. Warm friendly faces and attitudes to match make this a stop every Chicagoan and tourist should put on your schedule.

The Hot Cocoa, served with a semi-sweet chocolate plastic stirring spoon, also cannot be beat.

Notice also, they maintain their 5-Star standards (hello authentic sterling silver carafes), even outdoors.

So even if you cannot afford the splurges of holiday's past, you can always afford to treat yourself to 10 minutes of civilization, if only in the form of a warm drink in your belly.