Reports of the retail sector’s demise have been greatly exaggerated. Long operating in the omnipresent shadow of Amazon, a perusal of the latest quarterly earnings would seem to indicate that, no matter the somber pronouncements of some wirehouse analysts, for the immediate future, brick and mortar stores are here to stay.
Creative thinking and drastic modifications to traditional marketing/sales strategies has led to positive results for those retailers who understand the need to adapt to customers' new shopping habits. At the end of 2017, Macy’s reported increased sales growth for the first time in three years. Although its share price has increased 18% this year, reflecting the improved performance, analysts at Morgan Stanley and Deutsche Bank were skeptical about similar prospects for the first quarter, warning of the stock’s limited upside.
Macy’s reported first quarter earnings far surpassed the Street’s expectations. Profit climbed 78% to $139 million, or 45 cents a share. On an adjusted basis, the company earned 48 cents a share. This compares with a consensus estimate of 37 cents a share, as compiled by FactSet. Revenue also rose 3.6% to $5.5 billion, exceeding estimates of $5.4 billion.
Other companies in the retail sector followed suit. Of the first quarter results reported by retail stores, approximately 73% have exceeded analysts’ expectations. Walmart, the world’s biggest retailer, said Thursday that sales in its latest quarter rose both online and in stores, driven by higher grocery sales and more competitive prices and services online. Walmart announced its plans for a grocery delivery service that it hopes will reach 40% of the U.S. population.
The dramatic change in strategy and the creative thinking employed by some retailers have led to tangible results, and investors are taking notice.
One of the reasons the unanticipated turnaround came as a surprise for some is that the original thinking on Wall Street about prospects for retail stores was viewed as dichotomous: Either consumers will shop online or in brick and mortar stores, and the twain shall never meet.
Why it should come as a surprise to some analysts who suffer from the-internet-is-going-to-change-everything bias that many shoppers actually enjoy both shopping online as well as visiting retail stores for purchases is somewhat mystifying. It is indicative of the occasional misinterpretation concerning prospects for certain industries that can exercise undue influence on Wall Street.
“Certain narratives tend to dominate stock performance longer than they should,” said Kevin McCarthy, a senior research analyst with Neuberger Berman, referring to Amazon’s outsized influence. “People aren’t taking that granular a view of these names and what’s going on.”
Retailers have upended existing in-store layouts to create new revamped stores to present customers a unique and exciting in-store shopping experience. Retailers that are rebounding have all embraced, instead of shunned, e-commerce and have successfully melded customers' online shopping preferences with improved in-store experiences. The strategic marketing goal is to help ensure the same customers who order their products online will be induced to visit the stores to take advantage of unique in-store-only offerings.
Kohl’s recently has adopted a “if you can’t beat em, join em” strategy by embracing Amazon through a partnership that placed Amazon boutiques in 10 of its stores in Chicago and Los Angeles.
By enhancing customers' online shopping experiences, retailers hope to insure customer loyalty. By employing this strategy, Macy’s has achieved double-digit growth in its digital business.
It is interesting to note that Macy’s improved results were broad as they were deep. Increased sales and revenues occurred across all three brands -- Macy's, Bloomingdale's, and Bluemercury -- as well as across all geographic regions and families of business.
CEO Jeff Gennette noted that Macy’s was getting traction in its new loyalty program that offers tiered rewards based on spending. It is also adding new categories to its website through its vendor direct program, such as drones and decorative home goods.
Gennette also said that the company’s discount concept, Macy’s Backstage, is helping to buoy sales.
The retail stores shouldn’t overpromise in terms of earnings growth, as they may risk creating expectations for the immediate future that are not met. But for now, the surprising turnaround shows that prospects for the intermediate term are nowhere near as dire as originally predicted.
Disclosure: I have no positions in any of the securities referenced in this article.
