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.  

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.

Stop blaming Amazon for department store woes

Given Amazon’s staggering growth and willingness to lose money to grab market share it’s easy to blame them for everything that is ailing “traditional” retail overall–and the  department store sector in particular.

In fact, with announcements last week from Macy’s to Kohl’s and Sears to JC Penney that could only charitably be called “disappointing” many folks that get paid to understand this stuff reflexively jumped on the “it’s all Amazon’s fault” bandwagon. Too bad they are mostly wrong.

The fact is the department store sector has been losing consumer relevance and share for a long, long time–and certainly well before Amazon had even a detectable amount of competing product in core department store categories.

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The fact is it’s just as logical to blame off-price and warehouse club retailer growth–which is almost entirely done in physical locations, by the way–for department stores’ problems.

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The fact is that, despite other challenges along the way, Nordstrom, Saks and Neiman Marcus have maintained share by transitioning a huge amount of their brick & mortar business to their online channels and have closed only a handful of stores in the last few years. Nordstrom and Neiman Marcus now both derive some 25% of their total sales from e-commerce.

Don’t get me wrong, I’m not saying that Amazon isn’t stealing business from the major department store players. Clearly they are. And as Amazon continues to grow its apparel business they will grab more and more share.

But the underlying reason for department stores decades long struggle is the sector’s consistent inability to transform their customer experience, product assortments, marketing strategies and real estate to meet consumers’ evolving needs.

More recently, those brands that have been slow to embrace digital first retail are scrambling to play catch up. Those that still haven’t broken down the silos that create barriers to a frictionless shopping experience will continue to hemorrhage customers and cash.

Most importantly those that think they can out Amazon Amazon are engaged in a race to the bottom. And as Seth reminds us, the problem with a race to the bottom is that you might win.

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The store closing panacea

There has been a strong and growing narrative that the single smartest thing a struggling retailer can do is to close stores and, in some cases, a lot of them. I first touched on this nearly three years ago in my post “Shrinking to prosperity: The store closing delusion.”

There is no question that, in aggregate, the United States has too much retail space. There is no question that, in concept, the growth of e-commerce can allow an omni-channel retailer to serve some trade areas more profitably without a store and some trade areas with a smaller box. The key is to understand “some” and that starts with understanding why a given brand is under-performing in the first place. The other key is to understand the role that brick & mortar locations play in driving e-commerce–and vice versa.

In most cases, as recent events are bearing out more and more, store closings make an already irrelevant retailer less relevant. And frequently much less profitable as well.

Nearly 90% of traditional retail is still done in physical stores. In five years it will still be about 85%. The math is not that complicated.

Make it harder to get to a store OR make returns in a store OR order online and pick up in a store OR go to a store to research potential purchases OR learn about the brand, etc. and a retailer is almost certain to lose way more business (and margin dollars) to a competitor’s physical store in the vacated trade area than the brand “rationalizing” its store count will ever be able to make up through its website. This is why JC Penney, Home Depot and Lowes should write Eddie Lampert thank you notes pretty much every day.

Moreover, the symbiotic nature of digital and physical channels should not be ignored, yet often is. Several retailers–Sears is perhaps the best example–made the assumption that by investing in digital at the expense of physical stores they could more profitability serve their customer base over the long-term. As it turns out (and as more retailers are learning), e-commerce is often less profitable at the margin than brick & mortar operations and that when you close stores you actually make it more difficult for your e-commerce business to thrive. Oops.

Any retailer in trouble should absolutely analyze whether closing and/or “right-sizing” stores will be accretive to cash-flow. But that analysis MUST include the impact on long-term competitiveness and digital channel sales in the affected store’s trade area. Thinking you are helping when in fact you are merely initiating a downward spiral is a pretty big mistake to make.

Any analyst pushing for store closings and footprint down-sizing should be mindful that it is almost never the case that a struggling retailer’s ills are because they have too many stores or that the stores they have are fundamentally too large. Rather, it is because their brand relevance is not big enough for the channels, both physical and digital, that they have. Be careful what you wish for.

Show me a retail brand that is remarkable and relevant enough to command the share of attention that drives share of market and I’m virtually certain their executives are not spending a second on down-sizing. In fact, most are opening physical stores (e.g Nordstrom, Warby Parker, Amazon, TJX) and, in many cases, a bunch of them.

Show me a retail brand that is consumed with store closings and expense reduction and there is a pretty good chance they are a dead brand walking.

 

Thanks to those who have encouraged me along my path as I took a six month break from writing this blog. During my sabbatical I started a new blog on waking up to a life of love, purpose and passion at any age, which can be found at www.IGotHereAsFastAsICould.blog.