They're not all equal

I have two boys whom I love equally, but differently. They each have strengths and weaknesses. It would be wrong to treat them exactly the same since they aren't exactly the same.

Walking the mall today, it became so apparent that this holiday season is going to have it's share of winners AND losers, even though so many would like to paint all retail with the same brush.

There were a number of teen retailers full of merchandise that was marked down offering an additional savings of 25-33% with purchases of $75-100. It amused me that a couple of these retailers belong to a company that swore they weren't going to discount because it would damage the brand. I could report that these discounts drove scores of customers and purchases into their stores, but my parents taught me early that lying was the wrong thing to do. The mall I was at didn't have an Aeropostale, but I'm pretty sure that they had to be doing better business than what I saw at their competition.

On the other side of the equation, J Crew was running with a moderate amount of inventory at most, had some sales going which projected value, and all of it made me want to buy.

Certain large national department stores with more than 850 stores had a lot of merchandise, few clerks, and not a lot of purchasers among the folks wandering through the store. Those cash registers are more profitable if people line up to buy things at them.

Oh yeah, and if you're at the mall with your significant other and just can't take the hustle and bustle anymore... fear not. There's plenty of peace and quiet in just about any jewelry store in the mall.

There's a lot more detail rattling inside my head about this, but my bottom line is simple: don't believe all the hype that "The Consumer" is back. "The Consumer" doesn't exist, just like "The Retailer" doesn't. Unlike the Borg (yeah, I've been known to watch some sci-fi, so what?), there are differing levels of consumer rebounds and retailers' success isn't homogeneous. If you're not going to do your own homework, or pay to peek at someone else's... stay out of the game.

Be careful out there.

When it happens to the strong...

... You have to believe it is a real trend.

Costco announced this morning that they will be closing their two Costco Home stores. I was just up there a couple of weeks ago, and it was certainly a quieter visit than a couple of years ago when we all were spending way too much money. There's no financial impact to the company: the leases are ending, the employees will transfer to other places, and it will all just go away.

These guys are a strong company financially, and management is amongst the best in retail. If they're making this kind of decision to rationalize their stores and extension brands, it reinforces my belief that we're going to see a lot more of this from the weaker hands in retail. UBS finally published on this topic in the past week, the first that I've really heard from any of the major Wall Street analysts.

Prepare to wave buh bye to brand extensions like RUEHL, Martin + Osa, and others. They haven't been announced yet, but it's got to be close.

Socks and underwear

For many consumers, this is probably going to be The Holiday of Socks and Underwear. For most retailers, that’s going to translate to sackcloth and ashes for earnings.

The consumer is facing rising unemployment, higher food prices, tightening credit, and the evaporation of their balance sheets. Consumers are buying food and basics, all other categories have fallen off the proverbial cliff. They’re trading down wherever and whenever possible, and buying on sale when they don’t trade down. The one unknown is how the recent fall in gas prices will adjust consumer spending (down 45% off the July highs, roughly -15% from this time last year), but my best guess is that other concerns will trump it.

In order to entice shoppers into their stores, the bargains have already started. This is partly because many retailers still have fall merchandise to clear so they can get holiday into the stores, and partly because shoppers have proven to not make a move toward their wallets until the signs say 40% off or more. (JC Penney Tuesday through Thursday: 75% clearance merchandise, 15% off everything else in the store. Why would anyone think retailers are desperate?) Bankruptcy clearance sales are putting even more pressure on the ‘healthy’ (or would it be more appropriate to say ‘not yet in horrible trouble’) retailers, as they have to compete with the clearance pricing.

The one safe haven has been discount stores, but even within that group there are the haves and the have nots. Wal-Mart is the poster child for this recession: the one retailer who after three long years of promises and pain had finally gotten its house in order, and at exactly the right time. Wal-Mart’s mix of food and general merchandise (roughly 60/40 consumables/gm) has served it well. Costco and BJ’s Wholesale also sell a mix of products leveraged to consumables, and their performance reflects that. That contrasts with Target that doesn’t sell nearly as much food (41% of what they sell is apparel/home). Dollar stores are also doing well, as is as Aeropostale a teen retailer that specializes in lower priced merchandise that is still similar to the higher priced Abercrombie and American Eagle.

Macy’s and Best Buy reported this morning. Macy’s is managing through this time by not marking down, controlling inventories, and putting out a feel good message (LOVE LOVE LOVE the ‘Believe’ campaign they’re running) as opposed to some of their competitors (JCP noted above) that are really marketing on price. Best Buy told us this is the worst they’ve seen it. Of course, they’re not selling anything that is absolutely vital to the consumers’ survival (despite what kids might say about having to have the newest computer games.)

Surveys are showing that a majority of shoppers are planning on spending less this holiday season than last year. Those purchases that are made are going to focus on value for the money. That doesn’t bode well for gift cards this year, since a savvy shopper can shop the sales, buy a $100 sweater for $60 (or less) and get the mental credit with the gift receiver for having bought a $100 sweater. On the other hand, if you give a gift card $50, chances are you have to pay $50 for it. Although, there are a number of signs of desperation from the retailers that include ‘buy $100 in toys and get a $10 gift card (Fred Meyer… a Kroger affiliate much like a small WMT) and Mattel’s current offer of ‘buy $100 in Barbie paraphernalia (any retailer) and get a $50 Barbie Visa gift card for mom.’

Specifically on stocks reporting Thursday:
* I’m expecting that WMT could beat consensus of $0.76, although since we’re talking about WMT, it should only be by a penny or two.
* Kohl’s has already guided down to the lower end of $0.51-0.56. They’re going head to head with the rest of the department store space, and it’s a very value conscious consumer. They’re a fabulous competitor and have been able to manage costs extremely well historically which is going to be necessary for success going forward.
* Nordstrom. ::sigh:: Nordstrom is going to be painful. All we know is that numbers will be below previous guidance for $0.32-0.37 (consensus was $0.36, now $0.31, and I fear still too high.) Love management, think they’ve got great systems and cost advantages (commissioned based sales staff), but I am concerned that they’re not only missing the aspirational customers but that now their core customers have pulled way back.

Be careful out there.

Limbo!

All I can think about after this morning's retail same store sales release is doing the limbo... you know, the dance where the refrain is 'how low can you go?'

The numbers are miserable. Of all the companies I track, only two had positive comp store sales (comps): Wal-Mart (+2.4%) and Aeropostale (+1%)... and Aeorpostale's comp was below the expectation for +4%. The department stores had it rough, and the higher end stores were hit especially hard. Nordstrom managed to 'beat' expectations for a -12.5% comp by reporting -15.5%. Saks not only had a -16.6% comp, but said that even their (previously?) well-heeled shoppers weren't buying much if it wasn't on sale. That's saying something for a store that targets customers with an income in the top 5% demographic!

Reports today were filled with companies guiding down expectations prior to the release of Q3 earnings, which start next week. Two thoughts on this: first, if you didn't already realize that things have just been getting worse for the consumer you haven't been paying attention; and second, where the HECK have the Wall Street analysts been? I have to say, many times when I've met with those guys and company managements, I've been amazed at how much more I know about the companies and how they're executing in the stores than the headline analyst did. Scary. Get out and get into the malls, boys. It's eye opening! ::rant over::

Anyway, on the 'opps, we did it again... our earnings aren't going to make previously lowered expectations' list are:

• Nordstrom
• Macy's
• Kohl's
• JC Penney (within range if you include a real estate sale is NOT okay)
• American Eagle
• Pacific Sunwear
• Zumiez

Interestingly, the list of companies affirming guidance or raising guidance is as long, just from different sectors:

• BJ's Wholesale (gas helped a lot)
• Ross Stores
• TJX Companies
• Aeropostale (the only specialty retailer really performing)
• Hot Topic
• The Gap (low sales are okay if you can still make margins)

So what will be come of America's retailers? It's going to be ugly folks. To paraphrase, these are the times that try retailer's souls. My prediction is that within a few years we will have a major contraction in specialty retail. Folks like Abercrombie & Fitch will give up on some of their brand extentions like RUEHL that just aren't working. American Eagle will shutter Martin + Osa. Gap will have to shutter a lot of its retail space. Limited, it's been nice, but can you really make it? Chico's? Coldwater Creek? You're no longer growth businesses, and I'm not sure there's room enough for both of you in this new landscape.

The American consumer has rediscovered frugality, and this time it isn't a phase, it HAS to be religion. I'm just not sure there's a reason to own much beyond the discount stores until more of the pain has passed.