What's Really Wrong with Moderate-Price Retailers
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Thursday was a busy one for a handful of retailers, as three of the biggest names in the industry posted last quarter's results. Anything to glean from the aggregate numbers and accompanying comments? Sure, but first things first.
The good news is, Target (NYSE: TGT) topped expectations last quarter. The bad news is, Target's income fell on a year-over-year basis. By bringing home $1.45 per share, the retailer beat estimates of $1.40, though the total net income of $981 million was 5.2% shy of last year's total.
Those are the secondary numbers, however. The numbers that matter -- the ones that got investors pumped -- are 15 to 20. That's the number of new stores the company plans on opening in 2012, with a decisive focus on the Canadian market and new urban stores called CityTargets. Traders loved the news, of course, bidding shares up to a close of 2% higher for the day. After all, growth is good, right?
Ehhhh... maybe.
Adding stores would normally be a great move, but Target's got bigger fish to fry right now, and building out may end up being another step in the wrong direction.
Specifically, gross margins fell from 28.7% to 28.4%. The difference seems negligible on the surface, but when net margins are already a thin 4.3% for Target (as they generally are for most retailers), every penny really does count. The culprit? Deep discounting to stay competitive on the price front.
Kohl's Corp. (NYSE: KSS) apparently fared better, posting a bottom line of $1.81 per share versus $1.66 for the same quarter a year ago. Solid, encouraging results? Not so fast. There are actually a lot less shares in the float now than there were then. Net income in dollars actually fell from $494 million in Q4 of 2010 to only $455 million for last quarter, and analysts were looking for an adjusted $1.91 per share.
Even that shortfall isn't a cardinal sin though. The alarming part here is that Kohl's revenue was actually flat on a year-over-year basis.
In other words, though the moderate-price retailer didn't exactly "do less with more," it still managed to do "less with the same." Wait, it gets worse. Kohl's guided toward the lower end of the range of prior 2012 outlooks. The retailer is now looking for something closer to a profit of $4.75 per share this year, rather than earlier guesses of $4.93.
What about Sears Holdings Corp. (NASDAQ: SHLD)? This one may be the most discouraging -- yet somehow most encouraging -- retail report from Thursday.
Sears' revenue decreased by 4.0% on a year-over-year basis, leaving practically no chance at all for earnings improvement. And sure enough, earnings didn't improve. Per-share profits fell from $3.67 in the fourth quarter of 2010 to (and no, this isn't a typo) $0.54 in the last quarter of last year. Even a rise in same store sales could have acted as a reprieve, but Sears Holdings couldn't even muster that. And yes, gross as well as net margins, and GAAP and well as non-GAAP margins, paid the price. Last year's total net income of $382 million turned into a $2.44 billion loss.
So how does the market punish the disastrous (relatively) quarter? With an 18% rally. Figures.
Actually, the big buy-in wasn't a reward for weak numbers, but rather, news of a spinoff/sale. The company said it expects to raise $670-$800 million by selling off some of its stores - namely, 11 Sears units - and spinning off its Sears Hometown, Outlet, and hardware stores. The move has been cheered by some, and jeered by others. The pro-sale faction loves the idea of garnering some much needed liquidity; the company's got $747 million in cash in the coffers as of the end of last year, versus $1.36 billion in the bank for the same quarter a year earlier. That's not much for a $6.6 billion company that spends a little more than it probably should on marketing, and still hasn't actually solved the problem of shrinking its way to death.
So, moderate retailers are 0 for 3, at least on Thursday. Is there a bigger theme here that (1) is apt to affect other retailers, and (2) may linger for these three? In a word, yeah.
Were it just one, or even two, of these names struggling with margins or tepid sales, it might be something we could overlook. When it's all three though, that's an epidemic... and epidemics are tough to lick no matter how optimistic the company's figureheads are.
The core of the problem isn't just mismanagement though. It's part of the problem, but not all of it. No, what investors really need to chew on is the new mindset of consumers, and how these three retailers are positioned in consumers' minds.
To give credit where it's due, Andria Cheng over at MarketWatch said it eloquently: "...shopping patterns continue to show a bifurcation, where retailers in the middle are being squeezed... On one end, consumers seek bargains and discounts at retailers from Wal-Mart Stores Inc. to T.J. Maxx, while on the high end, luxury shoppers are spending without price being the key influencer in the purchase decision.... So the big issue for retailers during the [fourth] quarter was whether to lower prices at the expense of earnings to increase sales and shopper traffic."
Well, we know they did indeed lower prices, not because they wanted to, but because they had to. And, though all three retailers painted a pretty rosy picture about the future, the fact is, the middle ground Cheng discussed in her article is the very heart of the problem -- no amount of inventory improvement, marketing, fat-cutting, and re-pricing is going to change the fact that the middle-ground market is dead as long as consumers are thinking in "have/have-not" terms, and acting accordingly.
Yes, that moderate-price ploy worked great when consumers felt like they could afford Target's 'cheap chic' and Kohl's mix of reasonably-priced name brands. Now though, the perception for most consumers is that those kinds of purchases aren't the wisest use of money. Yeah, it may only be a perception issue, but if we're now allegedly three years into an economic recovery and the problems for these companies are getting worse instead of better, it's pretty clear that mental re-positioning needs to be the next step for moderate-price retailers.
It stinks too, because they had just gotten good at the "you can afford to live a little" message.
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