Despite defying the ‘retail apocalypse,’ At Home reportedly puts itself up for sale

Amid all the doom and gloom about physical retail, there are quite a few unsung stories of robust growth and solid profitability. At Home Group, the Plano, Texas-based chain of home decor superstores, is one of them. Despite the brand’s relative success, reports emerged late last week that because of poor stock performance the company was exploring sale options. Once again, it seems no good deed goes unpunished.

While the company has started to experience some headwinds, it is hard to understate what has been accomplished . Under the leadership of CEO Lee Bird, At Home has carved out a well-differentiated and remarkable position in the massive, highly fragmented home furnishings business. In just over five years, the company re-branded from Garden Ridge, did a complete merchandising and store format overall and grew from 68 stores to 180—with another dozen or so to open by year’s end. At Home’s operating margins are higher than industry averages, and it is among a handful of retailers to deliver positive comparable store growth every quarter for the past five years. Apparently it did not get the retail apocalypse memo.

Like many leaders in the value-oriented end of the market—think TJ Maxx, Ross, Five Below—At Home differentiates itself through low prices, broad and deep assortments, a “treasure hunt” shopping experience and a low-cost operating model. By playing in a category that is still largely driven by physical stores while having a very high penetration of private-label goods (~70%), it is somewhat insulated from the “Amazon effect.” With comparatively low brand awareness, under-developed digital capabilities and many untapped markets for new stores, there are ample reasons to believe At Home can deliver solid growth for years to come.

Yet Wall Street is clearly worried. After hitting a post-IPO high of nearly $41 last July, the stock has been bouncing around the low 20s for nearly four months. To be sure, the company has seen a deceleration in growth and greater margin pressure and gave lower guidance in its most recent earnings release. The prospects of growing competition and a more significant economic turndown give rise to growing concerns.

It remains an open question whether moderating performance suggests that the At Home model is starting to run out of gas, is the canary in the coal mine for macro-economic jitters or is caught up in the Street’s lack of appreciation for brands that are more physical-store-centric. Regardless, from where I sit, the brand has delivered strong results for several years running, seems to have carved out a compelling value proposition and has plenty of runway left in both its store expansion plans and the opportunity to better digitally enable its business.

At a market capitalization of under $1.5 billion, At Home could be an enticing acquisition target for a number of players. Amazon, Wayfair and TJX all to come to mind, but it could conceivably be of interest to Home Depot, Lowes or Target. A deal to take the company private could also make sense, where it could grow aggressively without having to endure the quarterly earnings pressures of the public market.

Either way, it may take a transaction to put At Home more favorably on investors’ radar screens. But it’s clear from the company’s results that it has won the hearts and wallets of plenty of customers.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

Sears tries small stores again and again. Here’s why they’ll fail once again.

Sears, aka “The World’s Slowest Liquidation Sale,” garnered a fair amount of attention recently with the announcement that they would open small stores featuring appliances and other home products called Home & Life. Perhaps having closed hundreds of stores over the past few years, the idea that Sears would “get off the mall” with new, more focused stores is interesting news and perhaps an early sign of resurrection? It’s neither.

Some of us may be old enough to remember that back in the ’90s and early 2000s Sears tried many iterations of exporting its signature home businesses into new formats that held the promise of being more competitive, convenient, customer relevant and sustainable. I’m one of those people. I was directly involved in many of them.

During my tenure—as well as before and after—we opened dozens of Sears Hardware Stores and acquired Orchard Supply Hardware. There were hundreds of so-called Dealer Stores that grew out of the original catalog business. At one point we operated more than 100 outlet stores. We tried various combinations of small-format tools, appliances and mattress stores. My team helped create and launch Sears Grand and The Great Indoors as large format off-the-mall stores where, among other things, Sears home brands were showcased in a more updated and convenient location. We also had the second-largest furniture business in the United States, which we tried to aggressively grow off mall. And, in a juicy bit of irony, those stores were called Homelife.

To varying degrees, and for various and sometimes complicated reasons, all of these efforts failed. While it may be interesting to debate what could have been done to assure better outcomes (spoiler alert: a lot), there are three powerful reasons a reboot of what is by now a very old strategy will almost certainly amount to zilch–plus or minus bupkis.

First, with the benefit of first-hand experience and a heaping spoonful of hindsight, I firmly believe that the one thing that could have saved Sears was to have created our own version of a home improvement warehouse or, even better, to have acquired Home Depot or Lowes at a time when Sears’ valuation would have made that realistic. Based on work we did during my tenure, it became increasingly obvious that the value in two businesses that drove most of Sears’ valuation (home appliances and tools) was migrating to these disruptive formats, and there was little we could do to stop it either with our mall-based format or through our powerful small stores. Without compelling participation in what is now by far the preferred way consumers buy these categories, Sears’ continued share loss—and long march to irrelevancy—was inevitable.

Second, what Sears is trying today is what I often refer to as attempting to be a slightly better version of mediocre.. Sure, some customers might find these more focused and better located stores a step up from the current Sears on-the-mall or online offering, but is that really delivering something truly relevant and remarkable? Of course not.

Third, even if these formats were able to gain some meaningful traction, Sears has little capacity to scale and has fallen so far below critical mass in many aspects of what is key to winning in today’s environment (marketing, sourcing and supply chain, most notably) that any positive momentum will be immaterial to any hoped for turnaround.

I, like so many other people, truly wish there were a better outcome for Sears. But as time goes on it seems increasingly obvious that the train left the station on those possibilities many, many years ago.

Today, sadly, all this thrashing is just lipstick on the pig. Dead brand walking.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  


Here’s who Amazon could buy next, and why it probably won’t be Nordstrom

Since the Whole Foods deal, more than a few industry analysts and pundits have weighed in on which retailers might be on Amazon’s shopping list.

Various theories underpin the speculation. Some say Jeff Bezos wants to go deeper in certain categories, so Lululemon or Warby Parker get mentioned. Foursquare (is that still a thing?) crafted its own list from analyzing location data. The Forbes Tech Council came up with 15 possibilities. The always provocative, and generally spot-on, Scott Galloway of L2 and NYU’s Stern School of Business believes Nordstrom is the most logical choice.

Obviously no one has a crystal ball, and Amazon’s immediate next move could be more opportunistic than strategic. Given Amazon’s varied interests, there are several directions in which they could go. And clearly they have the resources to do multiple transactions, be they technology enabling, building their supply-chain capabilities out further, entering new product or service categories, or something else entirely. For my purposes, however, I’d like to focus on what makes the most sense to expand and strengthen the core of their retail operations.

Before sorting through who’s likely to be right and who’s got it wrong (spoiler alert: Scott), let’s briefly think about the motivating factors for such an acquisition. From where I sit, several things are critical:

  • Materiality. Amazon is a huge, rapidly growing company. To make a difference, they have to buy a company that either is already substantial or greatly accelerates their ability to penetrate large categories. This is precisely where Whole Foods fit in.
  • Fundamentally Experiential. There is an important distinction between buying and shopping. As my friend Seth reminds us, shopping is an experience, distinct from buying, which is task-oriented and largely centered on price, speed and convenience. Amazon already dominates buying. Shopping? Not so much.
  • Bricks And Clicks. It’s hard to imagine Amazon not ultimately dominating any category where a large percentage of actual purchasing occurs online. Where they need help is when the physical experience is essential to share of wallet among the most valuable customer segments. They’ve already made their bet in one such category (groceries). Fashion, home furnishings and home improvement are three obvious major segments where they are under-developed and where a major stake in physical locations would be enormously beneficial to gaining significant market share.
  • Strong Marginal Economics. We know that Amazon barely makes money in retail. What’s not as well appreciated is the inconvenient truth that much of the rest of e-commerce is unprofitable. Some of this has to do with venture-capital-funded pure-plays that have demonstrated a great ability to set cash on fire. But unsustainable customer acquisition costs and high rates of product returns make many aspects of online selling profit-proof. An acquisition that allows Amazon access to high-value customers it would otherwise be challenged to steal away from the competition and one that would mitigate what is rumored to be an already vexing issue with product returns could be powerfully accretive to earnings over the long term. Most notably this points to apparel, but home furnishings also scores well here.

So pulling this all together, here’s my list of probable 2018 acquisition targets, the basic rationale and a brief word on why some seemingly logical candidates probably won’t happen.

Not Nordstrom, Saks or Neiman Marcus

Scott Galloway is right that Nordstrom (and to a lesser degree Saks and Neiman Marcus) has precisely the characteristics that fit with Amazon’s aspirations and in many ways mirror the rationale behind the Whole Foods acquisition. Yet unlike Whole Foods, a huge barrier to overcome is vendor support. Having been an executive at Neiman Marcus, I understand the critical contribution to a luxury retailer’s enterprise value derived from the distribution of iconic fashion brands, as well as the obsessive (but entirely logical) control these same brands exert over distribution. Many of the brands that are key differentiators for luxury department stores have been laggards in digital presence, as well as actually selling online. Most tightly manage their distribution among specific Nordstrom, Saks and Neiman Marcus locations. If Nordstrom or the others were to be acquired by Amazon, I firmly believe many top vendors would bolt, choosing to further leverage their own expanding direct-to-consumer capabilities and doubling down with a competing retail partner, fundamentally sinking the value of the acquisition. While Amazon might try to assure these brands that they would not be distributed on Amazon, I think the fear, rational or otherwise, would be too great.

Macy’s, Kohl’s or J.C. Penney 

Amazon has its sights set on expanding apparel, accessories and home but is facing some headwinds owing to a relative paucity of national fashion brands, likely lower-than-average profitability (mostly due to high returns) and a lack of a physical store presence. Acquiring one of these chains would bring billions of dollars in immediate incremental revenues, improved marginal economics and a national footprint of physical stores to leverage for all sorts of purposes. All are (arguably) available at fire-sale prices. Strategically, Macy’s makes the most sense to me, both because of their more upscale and fashion-forward product assortment (which includes Bloomingdale’s) and because of their comparatively strong home business. But J.C. Penney would be a steal given their market cap of just over $1 billion, compared with Macy’s and Kohl’s, which are both north of $8 billion at present.

Lowe’s

The vast majority of the home improvement category is impossible to penetrate from a pure online presence. Lowe’s offers a strong value proposition, dramatic incremental revenues, already strong omni-channel capabilities, and a vast national network of stores. The only potential issue is its valuation, which at some $70 billion is hardly cheap, but is dramatically less than Home Depot’s.

A Furniture Play

Home furnishings is a huge category where physical store presence is essential to gaining market share and mitigating the high cost of returns. But it is also highly fragmented, so the play here is less clear as no existing player provides a broad growth platform. Wayfair, the online leader, brings solid incremental revenue and would likely benefit from Amazon’s supply chain strengths. But without a strong physical presence their growth is limited. Crate & Barrel, Ethan & Allen, Restoration Hardware, Williams-Sonoma and a host of others are all sizable businesses, but each has a relatively narrow point of view. My guess is Amazon will do something here — potentially even multiple deals — but a big move in furniture will likely not be their first priority in 2018.

As I reflect on this list (as well as a host of other possibilities), I am struck by three things.

First, despite all the hype about e-commerce eating the world, the fact remains that some 90% of all retail is done in physical stores, and that is because of the intrinsic value of certain aspects of the shopping experience. For Amazon to sustain its high rate of growth, a far greater physical presence is not a nice “to do” but a “have to do.”

Second, the battle between Amazon and Walmart is heating up. While they approach the blurring of the lines between physical and digital from different places, some of their needs are similar, which could well lead to some overlapping acquisition targets. That should prove interesting.

Lastly, the business of making predictions is inherently risky, particularly in such a public forum. So at the risk of stating the obvious, I might well be wrong. It wouldn’t be the first time, and it surely won’t be the last.

But why not go out on a limb? I hear that’s where the fruit is.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here

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With Kenmore Deal Amazon Is A Winner. For Sears, Not So Much.

Investors reacted quite favorably to the news that Kenmore appliances will soon be sold through Amazon. For Amazon, it’s clearly an interesting opportunity. While online sales of major appliances are currently comparatively small, being able to offer a leading brand on a semi-exclusive basis gives Amazon a jump start in a large category where they have virtually no presence. On the other hand, for Sears, it smacks of desperation.

First, some context. Way back in 2003 I was Sears’ VP of Strategy and my team was exploring options for our major private brands. Despite years of dominance in appliances and tools, our position was eroding. Our analysis clearly showed that not only would we continue to lose share (and profitability) to Home Depot, Lowe’s and Best Buy, but those declines would accelerate without dramatic action. Unfortunately, it was also clear that very little could be done within our mostly mall-based stores to respond to shifting consumer preferences and the growing store footprints of our competitors. Kenmore, Craftsman and Diehard’s deteriorating positions were fundamentally distribution problems.  And to make a long story a bit shorter, a number of recommendations were made, none of which were implemented in any significant way.

Flash forward to today, and Sears leadership in appliances and tools is gone. While in the interim some minor distribution expansion occurred, it was not material enough to offset traffic declines in Sears stores and the shuttering of hundreds of locations. More important is the fact that Kenmore and Craftsman still aren’t sold in the channels where consumers prefer to shop–and that train has left the station.

So last week’s announcement does expand distribution, but it does little, if anything, to fundamentally alter the course that Sears is on. Simply stated, making Kenmore available on Amazon will not generate enough volume to offset continuing sales declines in core Sears outlets, particularly as more store closings are surely on the horizon. Selling Kenmore on Amazon does not in any way make Sears a more relevant brand for US consumers. In fact, it will give many folks one more reason not to traffic a Sears store or sears.com.

Since 2013 I have referred to Sears as “the world’s slowest liquidation sale”, owing to Eddie Lampert’s failure to execute anything that looks remotely like a going-concern turnaround strategy, while he does yeoman’s work jettisoning valuable assets to offset massive operating losses. Earlier this year, Sears fetched $900 million by selling the Craftsman brand to Stanley Black & Decker, one of the leading manufacturers and marketers of hand and power tools. So it’s hard to imagine that Sears did not try to do a similar deal with either a manufacturer of appliances (e.g. Whirlpool or GE) or one of the now leading appliance retailers. The Kenmore partnership with Amazon appears to have far less value than the Craftsman deal, despite being done just six months later–which speaks volumes to how far Sears has fallen and for how weak Sears’ bargaining position has become.

The cash flow from the Amazon transaction will do little to mitigate Sears operating losses and downward trajectory. In fact, it seems to be mostly the best way, under desperate circumstances, to extract the remaining value of the Kenmore brand given that no high dollar suitors emerged and Sears continues its march toward oblivion. Amazon, however, is able to take advantage of fire-sale pricing and create the valuable option to have Kenmore as a potentially powerful future private brand to build its presence in the home category.

Advantage Bezos.

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A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.

The two sides of ‘good enough’

It can be quite dangerous to believe that you are better than the competition when the customer evaluates your product offering in isolation and out of context. When I was at Sears our research regularly told us that our target consumers viewed us as the best provider of appliances and tools. Yet we continued to leak market share.

As it turns out, once customers checked out the appliance or tool offering at Home Depot and Lowes they learned that, while the product assortment wasn’t quite as good as ours, the prices were often better. And if they were doing a DIY home improvement project they could get everything they needed in one trip. Plus, having to jump back in the car and deal with the hassle of shopping in the mall added to the “cost” of buying from us. For many customers, at the moment of truth, Home Depot and Lowes were good enough.

The opposite side of good enough involves brands that managed to thrive for many years despite their mediocrity, despite their peddling rather average products for average people.

When consumers had few alternatives, little access to information about their options and weren’t all that demanding, they had little choice but to settle. Those days are rapidly disappearing. Today, in most instances, folks are faced with a virtually infinite amount of choice, information and access. This reality lays bear the deficiencies of any brand for all to see.

Good enough no longer is.