As reports came in of record Cyber Monday sales this week, it was a sharp reminder that for traditional, bricks and mortar department stores these are tough times. The oft heralded “retail revolution” is, after several false starts since the turn of the century, gaining pace. Consumers, it seems, are finally embracing online shopping; not just in principle, but in terms of dollars spent.
For large retailers, and department stores in particular, the fact that reports of their demise have been repeatedly exaggerated and early over the last 15 years or so has created a problem in itself. There is a natural tendency, when everybody tells you that something is coming but it takes its time, to view the predictions as the boy crying wolf. When the wolf finally does come to the door it comes as a surprise despite the frequent warnings.
This chart illustrates the problem. At first glance, it seems to clearly sound a death knoll for traditional retail, but look more closely at the vertical axis and you can see why, despite the evidence, it has been easy for companies to be a little complacent. From the beginning of 2007 to the end of 2012, the percentage of total retail sales conducted online has roughly doubled, but is still under 6%. The trend is worrying, for sure, but until recently the actual impact has not been major.
There has been much written about this and the potential impact on retail businesses going forward, but it is how the companies most effected have responded that interests me. Macy’s (M), JC Penney (JCP) and Sears Holdings (SHLD) have all reacted differently to the challenge.
Macy’s (M) did nothing drastic. They have their own online store and continued to pursue a strategy of discounts and sales events to lure customers to their physical stores. They accepted that revenues would be squeezed, but, apart from the dark days of 2009 have generally continued to be profitable.
The stock has reflected that, being up around 33% Year to Date (YTD). Even if Macy’s does no more than continue in the same vein, there is a decent chance that they will repeat last Quarter’s results of beating lowered expectations and, at a forward P/E of around 13.45, M looks like a decent buy to me.
Sears Holdings (SHLD) is another story altogether. They have reacted in a style that, if you think about it, is no surprise given current ownership. They attempted to build an online empire of their own, primarily through acquisition, but when that didn’t work out too well, majority owner and hedge fund manager Eddie Lampert did what comes naturally to a hedgie… he started to cut his losses.
In this case, that meant selling or offering for sale profitable parts of the company. The market wasn’t too impressed, and as news came out that Lampert was, for whatever reason, beginning to sell his stake, the excuse for a rout was served up.
The interesting thing to me is that, as pointed out by this piece by Laura Heller on Forbes.com, Sears Holdings was no longer a retail company, it was a holding company. The clue, I believe is in the name. In many ways, shedding underperforming parts and returning to the core business makes perfect sense, and if the market was unhappy with what Lampert was doing (the stock has never really recovered from its drop from 2007 highs close to $200) then his relinquishing control should be good news.
The problem is that, while this may be true, traders are in the mood to punish SHLD. This move down will, at some point probably be overdone, but attempting to catch a falling knife is dangerous, so I’ll wait for evidence of a turnaround in the stock’s fortunes before doing anything.
JC Penney (JCP) , on the other hand decided a few years ago to do something about the challenge from online retail. They brought in Ron Johnson and set about a crusade to change the way department stores operate. We would all love to think that doing away with the phony sales and just operating with straightforward pricing would be a success. After all, isn’t the old way somewhat insulting to our intelligence? Apparently not; the experiment was a disaster from which JCP may never recover.
I recently wrote here about what I believed to be a short squeeze in JCP and a possible opportunity for short term gains. I still believe that to be the case, but I would reiterate that trading that possible squeeze was basically recommended as a way of getting short at a decent level. The Ron Johnson era is likely to have a long tail, and the debt laden JCP is far from out of the woods.
So, we have three different household name department stores, three different responses to the challenge of online retailing, and three different outcomes. Macy’s has continued as a profitable company with reduced margins, Sears is still trying to decide what it wants to be and JC Penney is trying to recover from a disaster that still threatens the very existence of the company; truly, the good, the bad and the ugly.