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John Kinsellagh
John Kinsellagh
Articles (168) 

2-Tier Retail Sector Continues to Evolve

Survival of the fittest retail environment provides stark contrast among department store chains

August 22, 2019 | About:

The transformation of the cutthroat competitive retail sector continues apace. The changes have starkly revealed an ever-widening gulf between those traditional department stores that have successfully revamped their business models to mesh with consumers' changing shopping habits and those stores that have not.

Three companies that have revamped their business strategies, Walmart (NYSE:WMT), Target (NYSE:TGT) and TJX (NYSE:TJX), each posted strong sales and an increase in foot traffic to their stores in their latest quarterly results. By comparison, old-line, middle-market chains continue to post disappointing and inconsistent results.

One of the factors separating the two tiers is the top-level stores find new ways to offer value for its customers. This can take the form of merchandise discounts, but also convenience features to make shopping as hassle-free as possible. Walmart and Target have aggressively added in-store pick up for online orders as well as holiday season, two-day free shipping with no minimum purchase required.

Last Wednesday, Target announced sales at its stores rose 3.4% for the quarter ending Aug. 3; the company raised its guidance for full-year earnings as well. The company's total revenue for its most recent quarter climbed 3.6% to $18.4 billion. Profit shot up to $938 million from $799 million for the same period last year. Investors seem willing to reward brick-and-mortar stores that have revised their business operations to adopt to the 21st century retail landscape. Target’s shares climbed 20% to $103 on the good news, the largest one-day gain for its shares on record.

One of TJX’s strengths is that it has rapid turnover in its stores; it rarely has a glut in its back room. The lean apparel stocks in its stores means it doesn’t carry inventory for nearly as long as middle-market retailers such as Macy’s (NYSE:M) and Nordstrom (NYSE:JWN).

TJX stores rapidly turn over limited quantities of goods at bargain prices. The result is a steady trove of repeat customers who return to its stores to look for new deals. Customers keep coming back because the marked-down sales items may disappear from the store. The result of this discount pricing and rapid inventory turnover is increased foot traffic at its stores.

Macy’s presents a different picture: for its latest quarter, the company said its inventories of unsold items swelled during the summer. Carrying large inventories throughout the year, in a sector that has small margins, is not a recipe for success. Macy’s reported a sales increase of just 0.2% for the three months ending Aug. 3. However, net income dropped nearly 50% to $86 million from $166 million the prior year.

Many stores, such as Macy’s and Nordstrom, rely heavily on the holiday season for a substantial portion of their sales. But it’s the remainder of the year that has investors spooked. As many analysts have noted, all retailers have operated with strong tailwinds at their backs for the past several years as consumer spending and sentiment have remained high. How middle-market retailers perform off-season is one measure of whether they are going to be successful in the new retail environment.

TJX is an example of a deep discounter that has demonstrated consistent foot traffic over the past several years. For its most recent quarter, the company noted customer visits grew for 20 consecutive quarters — a number few middle-market retailers can come close to matching. The consistent store visits helped drive the company’s 2% sales increase for its latest quarter on top of the prior year’s 6% increase.

Another structural disadvantage for middle-market retailers such as Nordstrom, J.C. Penney (JCP) and Macy’s are that none of their stores have large grocery selections at favorable prices that helps to ensure consistent site visits.

The widening retail gulf is starkly reflected in the respective stock price of tier-one and tier-two retailers: illustrating the retail divide, Kohl’s (NYSE:KSS) shares have fallen 41% over the past 12 months, while Walmart’s stock is up 17%. Although Macy’s has not been standing still in terms of changing its operations to add more online ordering as well as store makeovers, it is moving much too slowly. J.C. Penney seems to be rudderless, sailing with no clear strategic plan for moving into the evolving shopping landscape.

The strategy of some retailers that are struggling seem to be reactive, instead of proactive. If stores such as Macy’s and J.C. Penney want to stay in the retail game, they are going to have to implement more novel retail strategies, with alacrity, that acknowledge the brick-and-mortar terrain is changing as consumer habits shift more to online shopping.

Disclosure: I have no position in any of the securities referenced in this article.

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About the author:

John Kinsellagh
John Kinsellagh is a freelance writer, former financial adviser and attorney specializing in civil litigation and securities law. He completed the Boston Security Analysts Society course on investment analysis and portfolio management.

He has served as an arbitrator for FINRA for over 25 years resolving disputes within the financial services industry. He writes primarily on financial markets, legal and regulatory issues that impact the investment community, and personal finance.

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