A really bad time to be boring · Death in the middle · Retail

Sears lives to die another day

Against the odds—and over the objections of most creditors—Eddie Lampert has “saved” Sears, with a federal bankruptcy court judge approving the sale of the once-storied retailer to the billionaire hedge fund king.

At one level, we should admire the resilience of the former Sears CEO (and its principal shareholder, though ESL Holdings). Part Energizer bunny, part Michael Myers from the Halloween movies, part gag birthday cake candles, he just won’t die. At another level, it’s hard to imagine a bigger waste of time. Moreover, the idea that he is motivated to keep the company going to save some 45,000 jobs is laughable and undeniably cruel.

For more than a decade, we have witnessed the brand shrink and shrink. Under Lampert’s leadership, the majority of Sears and Kmart locations have been shuttered. Key brand assets have been sold off to keep the lights on. Comparable store sales have been down virtually every quarter since 2004, and e-commerce sales have consistently lagged the industry. Nothing in the latest Hail Mary move reverses a strong downward trajectory. In fact, the situation keeps going from bad to worse, and the current fragility presents growing challenges, as fellow Forbes.com contributor Warren Shoulberg highlights.

As I have touched on before, Sears has been in trouble for decades, and it’s highly unlikely that anyone could have restored the brand to its former glory, much less maintain it as a meaningfully profitable national retailer. While that may be an interesting thought piece or business school case study, the reality today is that Sears simply has no reason to exist in its current manifestation. Sears no longer offers anything that is remarkable to customers—and no strategic plan has been proffered to alter that. While there may be a few diehard fans (heh, heh) left, absent any nostalgic feelings, as a practical matter, no one will miss Sears when it is gone. There simply are plenty of better options to buy everything that Sears sells.

A Sears store in Hackensack, N.J. (AP Photo/Seth Wenig, File)

Despite being a former Sears executive, I now only wish the insanity would stop. There is no plausible scenario in which Sears does not keep shrinking into oblivion. There are few assets left to fund operating losses. The company will struggle to get creditors to ship it product. Its management team is in tatters. It has no clear target customer groups or compelling value proposition. It has little cash to invest in the areas that desperately need improvement—most notably its remaining stores. And the competition only continues to grow stronger and have greater scale to apply against any resurgence.

So the world’s slowest liquidation sale has entered yet another chapter. I will leave it to others to debate whether this particular move is merely a “scheme to rob Sears and its creditors of assets” or whether it is a good-faith effort to keep Sears as a going concern. Regardless, it is good news for the many thousands of Sears associates who get to keep their jobs for a bit longer. Sadly, though, for most of them, it only delays the inevitable.

As the former Sears CEO (and my former boss) Alan Lacy recently said, “We know how this movie ends; I’m just not sure how many more minutes are left.” 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.  

On February 25th I will be doing the opening keynote at New Retail ’19 in Melbourne, Australia, followed the next week by ShopTalk in Las Vegas where I will be moderating an expert panel and participating in other events.

A really bad time to be boring · Store closings

Dead brand walking: Sears is going out with a bang

In the weird irony that is often part of retail (and life in general), Sears Holdings recently announced its first quarter of comparable sales growth in many years—and I believe only its second or third since I left the retailer in 2003! It turns out that the liquidations sales being held in the many Sears and Kmart locations that were closing during the quarter finally brought out customers in droves. Better late than never, I suppose.

Of course, the world’s slowest liquidation sale is not yet over, but it’s hard to take this dead cat bounce as a positive indication of anything substantive.

Last week also brought two other pieces of Sears news. In a classic “you broke it, maybe you want to own it” moment, the hedge fund led by Sears Chairman Eddie Lampert offered to buy the nearly dead retailer. In a statement that seems certain to guarantee Lampert’s fast track admission to the reality distortion field Hall of Fame was this gem: “Sears is an iconic fixture in American retail and we continue to believe in the company’s immense potential to evolve and operate profitably as a going concern with a new capitalization and organizational structure.” In related news, I set fire to a big pile of cash.

The other big story was that Sears cancelled the auction designed to improve upon Service.com’s $60 million “stalking horse” offer when the effort failed to generate a single additional bid. The lack of interest in this once sizable and profitable unit (which was valued at many hundreds of millions of dollars during my Sears tenure) is yet another sign of how far Sears has fallen during the past decade and how little residual value the market sees in many of its pieces.

It may turn out that Lampert and his investors will do reasonably well when all is said and done in the sad saga of Sears’ demise. I’m not smart enough to figure out exactly how all the financial engineering and picking at Sears carcass will ultimately benefit them. But two things are clear: First, during his nearly 15 years at the helm of the bad marriage that is Sears and Kmart, Lampert has never once articulated a compelling and remarkable strategy to guide the retailer. Instead, we’ve had an endless parade of nonsensical tactics, relentless cost cutting and seemingly self-interested asset stripping. In return the company has sustained well over a decade of precipitous market share declines and massive operating losses. In fact, despite operating in one of the best quarters in recent U.S. history, despite closing hundreds of “bad” locations and despite taking an axe to other operating costs, Sears still managed to lose nearly $1 billion on barely over $2.7 billion in revenue this quarter.

Second, the notion that anything can be done to save Sears in a way that remotely resembles its once iconic status is absurd, particularly as Lampert holds on to the idea that the brand can shrink its way to prosperity. Sears has never fundamentally had a cost problem. It has, for at least 20 years, had a huge customer relevance and remarkability problem. Closing more stores and shrinking and/or leasing out the ones that remain may temper losses, but it will never do anything to address the core issue which, simply stated, is having enough customers that want to buy the stuff they sell.

I am certain that over the coming months there will more stories of asset sales, store closings and largely random new program offerings designed to return Sears to its former glory. It’s all just noise, far more like the like gasps of a dying man than a glimmer of hope for any form of resurrection.

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.  

Retail · The 8 Essentials of Remarkable Retail

Nordstrom: No good deeds go unpunished

Nordstrom–not only one of my favorite places to shop but also a brand I regularly feature in my keynotes on remarkable retail–recently reported strong quarterly operating performance and raised its outlook. So, naturally the stock promptly got whacked–and continues to be caught up in the market downdraft. To be sure, a non-recurring $72MM charge related to credit card billing errors does not inspire confidence. But unless this unexpected earnings hit suggests some underlying management issue it indicates nothing about the go-forward health of the business which, from where I sit, looks rather healthy.

It IS a confusing time for shares of most retailers. I’m not talking about JC Penney, Sears or legions of others hopelessly stuck in the boring middle. I’m referring to companies that are not only competitively well positioned but have also recently reported solid sales and earnings. Despite a strong consumer outlook, everyone from Amazon to Walmart to Macy’s to Home Depot to Target seems to be falling out of favor. Some of this is surely part of the broader market correction and lingering tariff concerns. But much of it is more than a bit mystifying.

In Nordstrom’s case, I remain bullish. The company is showing signs of maturity and is hardly immune from the competitive pressures brought on by industry over-building and digital disruption. Barring a wholly new and unexpected major growth initiative, the accessible luxury retailer has few new locations to open and already has a very well developed e-commerce and off-price business. Yet they seem to be executing well on most of my 8 Essentials of Remarkable Retail and that bodes well for the future. Let’s take a closer look.

  1. Digitally-enabled. For more than a decade Nordstrom has not only been building out best-in-class e-commerce capabilities (online sales now account for 30% of total company revenues!), but architecting its customer experience to reflect that the majority of physical stores sales start in a digital channel. Nordstrom complements its already excellent in-store customer service by arming many sales associated with tablets or other mobile devices.
  2. Human-centered. Being “customer-centric” sounds good, but most efforts fall short largely because brands do not actually incorporate empathetic design-thinking into just about everything they do. Nordstrom, like their neighbors up the street, are much closer to customer-obsessed than virtually all of their competition.
  3. Harmonized. This is my reframe of the over-used term “omni-channel.” But unlike the way many retailers have approached all things omni, it’s not about being everywhere, it’s showing up remarkably where it matters. And it’s realizing that customers don’t care about channels and it’s all just commerce. The key is to execute a one brand, many channels strategy where discordant notes in the customer experience are rooted out and the major areas of experiential delight are amplified. Nordstrom scores well on all key dimensions here–and has for some time. Nordstrom was a first mover in deploying buy online pick-up in store (BOPIS) and continues to elevate its capabilities by dedicating (and expanding) in-store service desks, among other points of seamless integration.
  4. Personal. With a newly improved loyalty program, private label credit card business and high e-commerce penetration, Nordstrom has a massive amount of customer data to make everything it does more intensely customer relevant. Its targeted marketing efforts are good and getting better and it has identified implementing “personalization at scale” as a strategic priority. Fine-tuning its one-to-one marketing efforts, introducing more customized products and experiences and further leveraging its personal shopping program represent additional upside opportunities.
  5. Mobile. Recognizing that a smart device is an increasingly common (and important) companion in most customers’s shopping journeys, Nordstrom has been building out its capabilities, including acquiring two leading edge tech companies earlier this year. Its increasingly sophisticated and useful app has helped earn the brand a top ratingin 2018 Gartner L2’s Digital IQ rankings.
  6. Connected. While there are opportunities to participate more actively in the sharing economy, Nordstrom’s overall social game is strong, earning it the leading US department store rating from BrandWatch.
  7. Memorable. While its department store brethren are swimming in a sea of sameness, Nordstrom excels on delivering unique and relevant customer service and product. It continues to strengthen its merchandise game by offering a well-curated range of price points across multiple formats. This offering is increasingly differentiated–either because the brands are exclusive to Nordstrom or are in limited distribution. Nordstrom’s plan to up the penetration of “preferred”, “emerging” and “owned” brands strengthens the brand’s uniqueness and should provide improved margin opportunities.
  8. Radical. Nordstrom is not quite Amazon-like in its commitment to a culture of experimentation and willingness to fail forward, but they have placed some pretty big equity bets in fast-growing brands like HauteLook, Bonobos and Trunk Club (whoops), in addition to being one of the first traditional retailers to launch an innovation lab (since absorbed back into the company). They are constantly trying new things online and in-store. Most interesting are their new Local concepts  Unlike some competitors who are trying smaller format stores mostly by editing out products and/or whole categories, Local is a completely re-conceptualized format emphasizing services and convenience. These stores have the potential to be materially additive to market share on a trade-area by trade-area basis.

As mentioned at the outset, Nordstrom is a comparatively mature brand with limited major growth pathways. But to view the company from the lens that is weighing on most “traditional” retailers does not appreciate the degree to which the company has outstanding real estate (~95% of full-line stores are in “A” malls), one of the few materially profitable and superbly-integrated digital businesses, strong customer loyalty and important differentiators in customer service and merchandise offerings. Moreover, most of its out-sized capital investments (including expansion into Canada and NYC) will soon be behind it.

Nordstrom will never have the upside that Amazon (or even TJX) has. But it is one of the best positioned, well-executed retailers on the planet. I don’t expect that to change any time soon.

Maybe it’s time for a little bit more respect?

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.  

I’m honored to have been named one of the top 5 retail voices on LinkedIn.  Thanks to all of you that continue to follow and share my work.

Bricks & Clicks · Embrace the blur · Innovation · Retail

Will Amazon 4-Star live up to its reviews?

After learning that Amazon might open up to 3,000 Go stores by 2021, the industry was still catching its collective breath when the retail behemoth opened an entirely new format in Manhattan’s Soho neighborhood last week. Amazon 4-Star is the latest move into physical retail on the part of the once online-only retailer, joining Amazon Books and Whole Foods. If this keeps up, some might start to wonder whether the retail apocalypse narrative may not be entirely accurate (indeed, sarcasm is my superpower).

Just about anything Amazon does tends to be of keen interest and can often send shockwaves throughout the sector. Not only is the company often several steps ahead of the competition, but it possesses the culture and the spending capacity to try a lot of stuff and keep everyone on their toes, desperately trying to figure out what’s next. So at this point it’s anyone’s guess where this particular experiment could lead over time. Yet the idea behind this new concept, along with what I have observed in visiting Amazon’s growing fleet of bookstores, so far leaves me unimpressed.

The organizing principle of 4-Star seems similar to Amazon’s foray into physical book stores: edit down a vastly larger online assortment to a core of mostly “greatest hits” (best sellers, customer favorites and new & trending), add some cool technology, and layer on some of that omni-channel stuff we’ve all heard so much about. At one level, this seems eminently sensible. If we already know what the customer buys online, surely translating that to a physical store is not only the “right” product strategy, but will lead to excellent productivity. Unfortunately this left-brain driven translation from the digital world to brick and mortar can often be underwhelming. There are a few reasons for this.

Shopping online just isn’t the same as shopping in a store.

While e-commerce works well when we are on a mission, it’s not as good when we are engaged in discovery. Most websites are optimized for speed and conversion. Conversely, a really good brick-and-mortar experience can deliver an entirely different customer journey by leveraging displays, product adjacencies, sight lines to neighboring departments, in-person sales assistance, etc. Category management strategies that ultimately determine a brand’s success play out in fundamentally different ways in a physical store. The ability to see, touch and/or try on products requires that assortment strategies be tailored to the unique dynamics of a store shopping experience.

 

Optimizing our way to boring.

Best sellers, by definition, are what some comparatively mass audience has already voted on; the peak of the bell curve, not the extremes. Any student of retail knows what great merchants have done for centuries to create competitive differentiation and maximize long-term productivity—namely they curate an interesting combination of what already works along with offering up interesting items that add to the overall experience, supported by loss leaders that help spur traffic and complementary items that drive up basket size. Heavy reliance on carrying only the most popular items inevitably causes a regression to the mean, which can easily make for rather boring and/or disjointed stores.

Be careful what you wish for.

Among the many dumb things Sears has done over the years, there were two whoppers that speak to my thesis that I was also “blessed” to witness firsthand. The first happened some 15 years ago when the financial types started to have more influence than the merchants and store operators. This led to an initiative to improve our sagging financial performance where the driving logic was essentially to keep the best sellers and eliminate (or shrink) the products with below average financial performance. While mathematically that sounds appealing, back in the real world it had the effect of lowering traffic and reducing conversion as it made our stores even less customer relevant, while also ignoring the key ingredients to building profitable market-baskets and creating customer lifetime value.

The other little oopsy daisy came a year or so later when we acquired Lands’ End and were rolling out its product to hundreds of Sears stores. The Lands’ End merchants insisted that virtually all of their direct-to-consumer best sellers had to be included in the new Sears’ retail assortment. When translated to carrying a basic depth and breadth of sizes and colors the resulting offering not only didn’t make much sense in the context of other products we carried, it led to inventory levels that had no chance of being productive. But hey, what’s a few hundred million dollars of markdowns among friends?

The lesson, of course, is that a remarkable retail experience should be built from the customer’s perspective, be competitively unique and be mindful of leveraging the unique characteristics that only a physical store can deliver. Digital can be hugely important in informing the brick and mortar execution, but should not overwhelm the overall experience design..

In Amazon’s case, more times than not, it plays by a different set of rules, some of which other retailers would be wise to emulate, others that the competition can only dream about. Amazon’s 4-Star may turn out to be this generation’s Service Merchandise. More likely, however, it is the first of many iterations and merely the tip of the iceberg in a broader and more aggressive move into physical retail.

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.  

On October 16th I’ll be in San Antonio delivering the opening keynote at X/SPECS . November 8th I’ll kick of the eRetailerSummit in Chicago.

For more info on my speaking and workshops go here. 

Customer Growth Strategy · Digital Disruption · Retail

Here’s what investors are missing about the Sears-Amazon partnership

Shares of Sears Holdings spiked last week on news that the beleaguered retailer had expanded its tire partnership with Amazon. Once again, the optimism — or is it outright gullibility? — of some investors astonishes me.

Over four years ago, I wrote (admittedly more than a little bit provocatively) that Sears investors would do far better with a liquidation of the company than with a perpetuation of the charade that there was any hope for a real turnaround. More recently, I opined on the 2017 Amazon-Kenmore deal, as well as the initial Amazon-Sears tire partnership announced in May. My view was that these deals do little, if anything, to stave off the inevitable for Sears. Moreover, I believe they are ultimately of greater value to Amazon.

For what it’s worth, when I wrote (and appeared on CNBC) with my “liquidate ASAP” thesis, Sears’ stock was in the low $40s. When I posted the Kenmore piece, Sears’ shares were down to about $9. My first tire article was written about three months ago when the shares had a bit of an inexplicable run-up, hitting nearly $4. On the day of the announcement SHLD was up 12%, closing at $1.24. Draw your own conclusions, but certainly don’t say that I didn’t warn you.

While on one level I appreciate the audacity of hope displayed by certain eager investors, I believe those who display ebullience in the face of these sort of deals are missing three essential things.

Dead brand walking. The overwhelming issue is that there is no plausible scenario in which Sears remains a viable national retailer. In fact, with Sears having closed hundreds of stores, with many more to follow after the holidays (if not sooner), one could argue it is no longer a real force on the national stage today. The only thing that keeps Sears afloat is Eddie Lampert and ESL’s willingness to fund a seemingly never-ending stream of massive operating losses. The idea that Sears can shrink to prosperity is ridiculous. For all intents and purposes, they are winding down the business. The particular relevance to the Amazon-Sears tire deal is that the points of distribution will continue to contract, perhaps dramatically.

Hardly moves the dial. It’s hard to see material profit contribution from this deal. First, tire installation is tiny in the scheme of Sears’ overall business. This particular offering is solely focused on customers who are willing to buy their tires online and have them shipped to a nearby Sears store so that, a couple of days later, they can have them installed. So to be meaningfully relevant to customers, first the customer has to be willing to wait. Given that a lot of the tire-replacement market is driven by an emergency (i.e., a flat tire) a big chunk of the available market is not addressable. Second, even if waiting isn’t a big deal, there are still likely to be many local competing outlets, many of which are going to be more conveniently located (particularly as Sears continues to shutter locations) and have the tire in stock, ready to install right away. Third, Sears actually stocks a lot of tires, so if you are willing to have your tires installed at Sears, it makes more sense for most people to take a step out of the process and just see if Sears has the tire in stock. In many cases it will. This is a long way of saying that the market opportunity seems quite small. When you further factor in the lower margin given Amazon’s cut, it’s hard to come up with a scenario where this moves the dial in any profound way.

Amazon’s Trojan Horse. Sears is desperate. Amazon is patient, smart and willing to try lots of stuff. Sears has few arrows left in its quiver. Amazon can use this partnership to explore the convergence between digital and physical in a large category, acquire some new customers and continue to probe potential private brand opportunities with DieHard and other Sears brands. Sears need to show Wall Street it still has some life in it. Amazon needs to learn how to get deeper into under-penetrated categories (auto and installed services) to help sustain a robust growth story. For Sears, every little bit seems to count. For Amazon, this is a rounding error even if it turns out to be a disaster. So who’s likely to be getting the better deal?

To be sure, as is true with the potential sale of Kenmore, Sears has very few decent options left. So there is nothing inherently wrong at this point in the company’s decidedly ragged history to executing this particular transaction. But the idea that this materially improves the value of the Sears brand seems just plain silly to me.

See you on the other side of $1.

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.  

Being Remarkable · Collapse of the middle · Retail

Retail earnings: The best of times, the worst of times

This is a big earnings period for retailers. As the reports roll in, it’s increasingly clear that it’s both the best of times and the worst of times for retail.

While performance overall is, on average, much better than a year ago, what continues to come into sharper relief are three inescapable conclusions. First, as I have been saying for years, the idea that physical retail is dying is abject nonsense. Second, retailers that are stuck in a cycle of boring are getting crushed, and the middle is collapsing. Third, as our friends at Deloitte have recently outlined in depth, the bifurcation of retail is becoming more pronounced. The overall conclusion is that the difference between the haves and the have nots is ever more distinct.

On the first point, strong performance from multiple brick-and-mortar dominant retailers, including Target and Home Depot, underscores that stores are not only going to be around for a long time, they will continue to have the dominant share of retail in many categories for the foreseeable future.

On my second point, significant underperformance ( JC Penney ), store closings ( Sears Holdings ) and bankruptcies (Toys “R” Us) continue to be concentrated among those retailers that have failed to carve out a meaningful position toward the more value, convenience-oriented end of the spectrum or, conversely, to move in a more focused, upscale experiential strategic direction. Those that continue to swim in a sea of sameness edge ever closer to the precipice. Increasingly, it’s death in the relentlessly boring middle.

The great bifurcation point, of course, is related to this phenomenon. Despite the retail apocalypse narrative, solidly executing retailers at either end of the spectrum continue to perform well. Sales, profits and store openings are robust at TJX Companies , Walmart and many others that play on the value end. A similar story can be painted for the premium, service-oriented retail brands such as Nordstrom and Williams-Sonoma.

As the scorecards continue to come in, there are a few key things we should bear in mind. The most important is that better is not the same as good. While positive sales and expanding margins certainly beat the alternative, the improved performance at brands like Macy’s and Kohl’s should not reflexively make us think that all is now well. Their sales growth is more or less in line with overall category growth. So there isn’t any reason to believe they are growing relative market share, which is generally a pretty good proxy for improving customer relevance.

Second, we should expect decent earnings leverage with improved sales, given the relatively fixed cost nature of the business. It’s more important to put the margin performance in the context of “best in breed” competitors. Here, most in the gang of most improved still fall short.

Third, a rising tide tends to raise all ships. This happens to be a particularly good time for consumer spending. It’s anybody’s guess if, and how long, retail expenditures will meaningfully exceed the rate of inflation.

From a more strategic, longer-term perspective, we need to sort out what is at the core of improving outcomes. If it’s riding the wave of a particularly ebullient economic cycle, that’s wonderful but not likely sustainable. If it’s starting to realize more fully the benefits of major technology investments, asset redeployment and/or picking up share from a rash of store closings on the part of competitors, that’s also nice, but those gains are likely to plateau fairly quickly. If margin improvement comes from big cost reductions, those often are more one-time gains and may ultimately weaken a given retailer’s competitive position over time.

What really matters, of course, is that most of the gains are coming from fundamentally being more intensely relevant and remarkable than the customer’s other choices. Viewed from this lens, many retailers’ improved results are necessary but far from sufficient.

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.  

September 6th I will be in New York for the Retail Influencer Network Kick-off.  On September 19th I’ll be speaking at Total Retail Tech in Dallas. The following Monday I’m headed to Austin to do the opening keynote at the Next Conference.

Death in the middle · Retail

Eddie Lampert just can’t stop picking at Sears’ carcass

As some readers may know, I began my retail career at Sears. And these days, when folks ask how long I worked there, I typically say, “Too long.” The more accurate, less snarky answer is 12 years.

I learned a tremendous amount during my tenure and, for the most part, am proud of the work I led or was deeply involved with. I have also never regretted leaving when I did. Much of that is because I desperately needed a new challenge and to be in a place where my talents could be better leveraged. Despite quite a few twists and turns along the way, it’s all worked out just fine. Of course, another reason is that — through sheer luck — I managed to get out before Eddie Lampert decided that combining a mediocre retailer with a terrible one might be a good idea.

Anyway, I have written extensively over the years about Lampert’s horribly misguided and at times seemingly delusional leadership of the once-storied brand, and I will not recount that in any detail here. Google my name and “world’s slowest liquidation sale” or “dead brand walking” if you are desperate for that kind of entertainment. You can also see me on CNBC four years ago suggesting that the best thing for Sears shareholders would be for the company to liquidate ASAP. Oh, well.

So when it comes to Lampert, it’s safe to say I’m not a fan. I will point out in all fairness that, largely with the benefit of 20/20 hindsight, I have come to believe that no one could have prevented Sears from sinking into irrelevance once certain opportunities were missed many years ago. While there were unquestionably many chances over the past decade for Sears to do a much better job for its customers, associates, retirees and investors, it was always likely to end badly. Now, sadly, it is just a matter of time before Sears joins others in the retail graveyard, as evidenced by yet another round of stores closing this past week.

When the history of Sears demise is written, many leaders will rightly be taken to task for their lack of strategic insight, their unwillingness to take risk, their hiring of the wrong people and so on. Yet it’s safe to say that Lampert will stand alone in using his other interests (principally ESL Holdings) to stave off the inevitable by both loaning money to Sears and scooping up many of its remaining fungible assets. Now I will leave it to far more adept minds to determine if ultimately this multi-year complex web of financial engineering turns out to be brilliant for Lampert and his fellow ESL investors. Perhaps Crazy Eddie is indeed crazy like a fox?

What really galls me, though, and strikes me as worthy of a fast-track entry into the Chutzpah Hall of Fame, is how Lampert, through his totally inept leadership of Sears Holdings, drives down the value of the company’s assets only to pick them up at ostensibly bargain-bin prices. The latest example of this is ESL’s offer to buy the Kenmore brand for $400 million.

When I left Sears late in 2003 (the year before the Sears and Kmart merger), we had valued Kenmore well in excess of $2 billion, and Sears’ major appliance market share was north of 40%. Today, Sears’ leadership position has totally fallen apart. Today, the trends are relentlessly negative. Today, after two years of searching, ESL may now be the only plausible buyer.

To be clear, I’m not suggesting any intentional manipulation or malfeasance on the part of Lampert and/or ESL. Yet if I were the owner of a great house on a beautiful piece of property, I might be more than a bit suspicious of the buyout offer I just got from the guy who burned it down.

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.  

September 6th I will be in New York for the Retail Influencer Network Kick-off.  On September 19th I’ll be speaking at Total Retail Tech in Dallas. The following Monday I’m headed to Austin to do the opening keynote at the Next Conference.

Being Remarkable · Reimagining Retail · Store closings

It’s just about time for full-on panic at J.C. Penney

It’s been a long sad slog for J.C. Penney. In 2011, after more than a decade of (at best) mediocre performance, the company brought in Ron Johnson from Apple as its new CEO. In what some saw as a bold attempt at transformation — and others saw as a misguided Hail Mary pass — retail’s latest savior changed just about everything all at once, and to put it mildly, the results were disastrous. Sales plummeted by about a third, the stock tanked, and Johnson was eventually shown the door.

Former CEO Mike Ullman returned to stabilize the rapidly deteriorating situation — which he did. Then in August 2015, Home Depot’s Marvin Ellison was brought in as the new CEO. In the more than five years since the Ron Johnson debacle, Penney’s has tried many things to claw back lost market share, improve profitability and become more relevant for a new generation. Very little of it has gained any traction. The stock, which traded around $40 when Johnson joined — and in the $20s when he left — sunk to just above $2 after a hugely disappointing quarterly earning report and the announcement that Ellison was leaving to join Lowe’s.

This is bad. Very bad. And I will be the first to admit that I am a bit surprised.

While it is clear that Penney’s is in some ways the poster child for “the collapse of the middle” that I frequently speak about, there were reasons to believe that Penney’s was well positioned to regain meaningful market share.

First, under Johnson, the company essentially fired one-third of its customers through a series of bone-headed moves. While it is difficult to win back customers in an intensely competitive market, I thought a decent subset would return once the obvious blunders were fixed. For the most part, it hasn’t happened.

Second, Sears, its most similar on-the-mall competitor, has closed hundreds of stores in the past few years — surely Penney’s would pick up a fair share. But if it has, it’s not so obvious.

Third, in addition to continuing to expand its successful Sephora in-store shops, Penney’s has added new products and services (including home appliances and mattresses) to attract new customers, drive incremental traffic and improve store productivity. So where’s the beef?

Fourth, after being a laggard in e-commerce and omni-channel, Penney’s has taken steps to elevate these capabilities. Yet the growth hasn’t followed.

Lastly, the categories in which it competes have performed pretty solidly the past few quarters. Penney’s failure to grow revenue at least 3-4% means it is losing share.

So Penney’s now finds itself in a situation where it has been engaged in years of cost cutting and store closings. There is very little gas left in that particular tank. The problem is no longer fundamentally about cost position or store footprint; it is about customer relevance and revenue. Penney’s finds itself in a situation where competitors have ceded hundreds of millions of dollars of sales through store closings, yet apparently little has migrated to its benefit. Penney’s finds itself in the middle of the best year in recent retail industry history, yet is struggles to keep pace. And now its CEO elects to leave.

It simply won’t get any easier from here.

While the seemingly imminent demise of Sears will provide incremental market share opportunities, we should not lose sight of the fact that the moderate department store sector continues to decline with no end in sight. Sales of online apparel are expected to double within the next few years, which will continue to pressure the economics of brick-and-mortar retailers that don’t execute a well-harmonized multi-channel strategy. Younger shoppers will become increasingly important to the overall fortunes of just about any retailer, and Penney’s has done little to contemporize its brand. And while Penney’s may have a few stores to close, mass store shutterings are almost certain to accelerate its decline. The best barometer of success going forward is robust trade area growth, derived from stable to slightly positive comp store sales and strong double-digit e-commerce growth.

Given the bifurcation of retail and the death of boring, J.C. Penney is a long way from being a remarkable and compelling retailer. Yet the positive retail cycle we are in and the likely shuttering of hundreds of directly competitive stores over the next six to 18 months will give the more-than-100-year-old brand an unprecedented opportunity to grab share. If it cannot improve its performance dramatically over the next few quarters, the issue won’t be whether a transformation is ever possible; it will be whether the once-stored retailer will even be around at any reasonable scale much longer.

And if that doesn’t incite panic, I don’t know what will.

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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.  

On June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago.  For more on my speaking and workshops go here.

Being Remarkable · Reimagining Retail · Retail

Is this the beginning of a department store renaissance? Eh, not so much.

Nearly two weeks ago Macy’s beat quarterly sales and earnings expectations and many on Wall Street promptly lost their mind. Same story with Dillard’s. Then Kohl’s followed up with a similarly surprising upside report that led some to conclude that maybe, just maybe, the long-beleaguered department store sector might be seeing a resurgence or—dare we say it out loud?—the beginning of a renaissance.

Alas, this rising ebullience seems far more driven by a mix of hope, misunderstanding and a heaping side order of denial than any compelling evidence that the tide is turning in any meaningful or sustainable way. Once again we are in real danger of confusing better with good.

To be sure, both Macy’s and Kohl’s sales and profits were much improved over last year. Yet their performance must be viewed from the perspective of both short-term factors and longer-term realities. On the clearly positive side there is solid evidence that both struggling retailers are executing better. In Macy’s case, inventory looks to be well managed (yielding fewer markdowns) and efforts to capture cost efficiencies appear to be paying dividends. A few targeted strategic initiatives, including Kohl’s partnership with Amazon, seem to be driving some incremental business.

With a bit more context, however, these results aren’t really all that stellar. And they most definitely are not yet strong indicators of any substantive turnaround. Notably, both retailers’ sales benefitted significantly from the move of a major promotional event into the quarter. Without this shift, same-store sales would have increased only about 1.7% at Macy’s, and Kohl’s would have been more or less flat (not that this metric is all that useful anymore anyway). That is neither keeping up with inflation nor maintaining pace with the overall growth of the broader categories in which they compete. The optimist might see losing market share at a slightly slower rate as a win. The realist opines that there is a lot more work to do to go from decidedly lackluster to objectively good.

The other thing to bear in mind is that J.C. Penney and Sears (and now Bon-Ton) have been leaking volume through store closings and comparable store sales declines. It’s hard to imagine that Macy’s and Kohl’s have not benefitted materially from this dynamic. While J.C. Penney’s future is increasingly uncertain, any upside from Bon-Ton will be short-lived. Sears looks to be the gift that keeps giving, though likely for only a few quarters more as I expect that Sears will close substantially all of its full-line stores within the next year. While this creates one-time market share gaining opportunities and fixed cost leverage, once the dust settles two factors will come into sharper relief.

The first is the contributions from a strong economy. Recent macro-economic factors have been generally positive for the product categories in which Macy’s and Kohl’s compete. Whether there will continue to be some wind beneath the sails of U.S. retail more broadly—and for the moderate-priced apparel, accessories and home categories in particular—remains to be seen. Clearly my crystal ball is no better than anyone else’s—and maybe worse. But my best guess is that both the economy and the jump ball for market share occasioned by department store consolidation peaks within the next few quarters.

The second factor that looms large seems to be the one Wall Street forgets. The moderate department store sector has been in decline for a long, long time. Some of this has to do with evolving customer trends. Some with stagnant income growth. Some with the rise of superior competing business models: initially category killers, then off-price and dollar stores and now, increasingly, Amazon. And some with more than a fair share of self-inflicted wounds. Regardless, the entire moderate sector, to varying degrees, is stuck in the vast, undifferentiated and boring middle. A somewhat better version of mediocre may the first step on an eventual path to greatness, but it may be just that: a first step.

Lift the veil from a quarter or two of slightly above average performance and the drivers of broader share losses (and related widespread shuttering of stores) continue unabated. Off-price and dollar stores, which in recent years have accounted for the biggest drain on Macy’s, Kohl’s et al., are opening up hundreds of new stores at the same time they are starting to turn up their digital game. Amazon is becoming a bigger factor everyday—and it has yet to make a big push into physical stores. Even if any of the leading department stores miraculously became more innovative and customer relevant they would continue to face significant headwinds. Bottom line: show me someone who believes that a transformation of mid-priced department stores is possible in the foreseeable future and you’ve probably clued me into who has been providing Eddie Lampert with his strategic consulting advice.

As the middle continues to collapse, it is now completely a market-share game. The near-term good news is that Macy’s and Kohl’s competition has made it relatively easy to grab some share. The near-term good news is that a generally healthy economy tends to raise the tide for all. The near-term good news is that Macy’s and Kohl’s operating discipline allows them to convert relatively small sales increases into nice incremental profit opportunities.

The bad news is neither one of them goes from incrementally better to demonstrably good until they make much more substantive and fundamental strategic changes that move them from mostly boring to truly remarkable. Neither brand has spelled out what that looks like in any compelling fashion. And once designed, getting there from here is no small task. Until then, it is way too early to declare victory.

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.  

On June 15 I will be doing a keynote at The Shopper Insights & Retail Activation Conference in Chicago. Contact me for a special discount. For more on my speaking and workshops go here.

A really bad time to be boring · Death in the middle · Reimagining Retail · Retail

Better is not the same as good for department stores stuck in the middle

As most U.S. department stores reported earnings recently, a certain level of ebullience took hold. Macy’sKohl’s and even Dillard’s, for crying out loud, beat Wall Street expectations, sending their respective shares higher. J.C. Penney, which has failed to gain any real traction despite Sears’ flagging fortunes, continued to disappoint, suggesting that I probably need to revisit my somewhat hopeful perspective from last year. And in the otherworldliness that is the stock market, Nordstrom — the only department store with a truly distinctive value proposition and objectively good results — traded down on its failure to live up to expectations.

Given how beaten down the moderate department store sector has been, a strong quarter or two might seem like cause for celebration–or at least guarded optimism. I beg to differ.

First, we need to remember that the improved performance comes mostly against a backdrop of easy comparisons, an unusually strong holiday season and tight inventory management. There is also likely some material (largely one-time) benefit from the significant number of competitive store closings and aggressive cost reduction programs that most have put in place.

Second, and more importantly, we cannot escape the fact that mid-priced department stores in the U.S. (and frankly, much of the developed world) all continue to suffer from an epidemic of boring. Boring assortments. Boring presentation. Boring real estate. Boring marketing. Boring customer service. And on and on. For the most part, they are all swimming in a sea of sameness at a time when the market continues to bifurcate and it’s increasingly clear that, for many players, it’s death in the middle. It’s nice that some are doing a bit better, but as I pointed out last summer, we should not confuse better with good.

To actually be good — and to offer investors a chance for sustained equity appreciation — a lot more has to happen. And while being less bad may be necessary, it is far from sufficient. Most critically, all of the major players still need to amplify their points of differentiation on virtually all elements of the shopping experience. It’s comparatively simple to close cash-draining stores, root out cost inefficiencies and tweak assortments. It’s another thing entirely to address the fundamental reasons that department stores have been ceding market share to the off-price, value-oriented, fast-fashion and more focused specialty players for more than a decade. And now with apparel and home goods increasingly in Amazon’s growth crosshairs, there has never been a more urgent need to not only to embrace radical improvement, but to really step on the gas.

Without a complete re-imagination of the department store sector — and frankly who even knows what that could actually look like — near-term improvements only pause the segment’s long-term secular decline.

It’s unclear how much the eventual demise of Sears and the inevitable closing of additional locations on the part of other players will benefit those still left standing. It’s unclear whether the current up-cycle in consumer spending will be maintained for more than another quarter or two. What is crystal clear, however, is that incremental improvement in margin and comparable sales growth rates merely a point or two above inflation never makes any of these mid-priced department stores objectively good.

Ultimately, without radical change, it all comes down to clawing back a bit of market share and squeezing out a bit more efficiency in what continues to be a slowly sinking sector riddled with mediocrity. Boring, but true.

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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NOTE: March 19 – 21st I’ll be in Las Vegas for ShopTalk, where I will be moderating a panel on new store design as well as doing a Tweetchat on “Shifting eCommerce Trends & Technologies.”