Retail: The Current Lost Generation
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
To play with Tolstoy’s famous observation about families, I am convinced that all failing retailers are essentially alike: Two Guys From Harrison is not much different from Circuit City. They were ham-handed with change. That could have been within their own business, such as through over-expansion or lack of expense control. Or it could have been in the marketplace, as with new customer preferences and pricing expectations. On the other hand, all successful retailers are unique in how they manage shifts, internal and external. In this era of austerity, Kohl's, for example, seems to be making a lot of the right moves internally and discounts at the level just beneath Macy's yet higher than the big boxes and dollar stores. Let's look at some stores that could become this decade's lost generation.
Talbots (NYSE: TLB) is a classic case of brand extension gone awry. It had differentiated itself as the clothes store where baby boomer professional women, just getting to positions of leadership, could feel safe. They knew that whatever attire they selected would be exactly right for the office, the company retreat, and gala charity events. There was an added advantage at the time in that wearing Talbots signaled that the women knew the rules of the game at the mid-level and were players in good standing. It was analogous to what a tailored suit accomplished for men.
Then Talbots added cool clothes for younger women. The merchandise was no longer bullet-proof from mistakes professional women could make in what to wear. That core customer drifted away. The purpose of brands is to provide a sense of security, of not having to think too much. For that, customers pony up the premium price. The stock is at $2.51, with the 52 week range of $1.28 to $10.40.
Jim Cramer declares that J.C. Penney (NYSE: JCP) “seems to have totally lost its way.” Actually, it looks more like a banana republic. Change piled on change. President Michael Francis got the boot. Chief executive officer Ron Johnson admitted that his initiative of “month long value” was "confusing." No surprise recent sales plummeted 18%. Johnson agreed to bring back the concept and the term “sale.” But will that makeover be configured and executed in ways that provide incentive for customers to return? The stock hit a new low of $22.25. The enigma here is that Johnson comes from Apple retail. Those stores create a cocoon of security in a world of disruptive technology. The products are geared for the user experience and knowledgeable clerks are available to provide all the answers. In a sense, Apple retail empowers customers to navigate change.
Staples, Inc. (NASDAQ: SPLS) is in the midst of a branding identity crisis. It’s no longer that safe haven for small business. At one time, like Talbots, Staples was the go-to place in a category it essentially created. Under one roof was all the right merchandise, ranging from shredders to commercial stationery, that a small business could need and at a price it could absorb. Now, much of the floor space is filled with consumer electronics and sales associates eager to help in that one niche.
Analysts have noted lackluster growth in net income, subpar profit margins, and a weakness in operating cash flow. Is the solution for Staples to better balance the two lines of business? Or, as Best Buy weakens, should it dominate that consumer electronics space? The stock, at $12.99, is near the 52 week low of $11.94 and far from the high of $16.93.
Not long ago, Wal-Mart (NYSE: WMT) toyed with its identity as the best overall discount game in town. Sure, competitors might have this or that item at a lower price, but the overall total of what was in that shopping cart would be lower. For this, shoppers traded off ambiance. Then Wal-Mart experimented with going upscale. Just in time, it returned to its core competency as the no-frills big box trusted to have everyday low prices. Its stock at $67.81 is near its 52 week high of $68.48.
Wal-Mart was not lucky. It has a track record for rapid course correction when it or the marketplace is in flux. Those initiatives have ranged from locating stores in urban areas to reducing the square footage of new stores. Talbots, J.C. Penney, and Staples could get the hang of becoming just as smart, fast, and resilient. That's up to the leadership.
I do not own stock in any of the companies mentioned or discussed.