Why This Retail Earnings Season Is Different

This earnings season one sector will be more front and center than most. And that sector is: retail.

It should not only presumed but rather, expected, they’ll be the typical GAAP vs Non-GAAP shenanigans along with the now bemoaned “buybacks” to make a dismal report read like the fictional tale of an earnings juggernaut.

We’ve now come to expect this, and we know how it’s going to be spun across the financial media. So much so many of us over the last few years have paid little attention to the granular that makes up these reports.

It doesn’t take more than a cursory listen when you begin hearing “They missed on both the top and bottom line. Yet: with buybacks, one time non-recurring, or _________(fill in your favorite here.) They now beat by a penny!” to understand it had nothing to do with anything else – but financial engineering.

That being said, I believe paying close attention to this retail earnings reports; especially those of the “big box store” variety, will give far more insight into where we are going from here than probably any earnings season prior of the last few years. Why?

Well if my observations over the last few weeks are correct. What I’ve both noticed as well as couldn’t help but notice is this: It’s getting near impossible for these retailers to hide the fact they’ve cut more staff and other essentials – then they’ve cut prices. Let me explain.

Currently my residence is smack dab in the heartland of the U.S. near Columbus Ohio. Columbus boasts all that one would acquaint with a metropolitan area. There’s upscale dining, retail, etc., etc.

However, it also now boasts one of the country’s top retail shopping areas. e.g., You can pick up your latest bangle or doo-dad at Tiffany’s™, then walk over to Louis Vuitton™ for the perfect bag to carry it home in, after dining at Smith and Wollensky™, then top it all off with ordering a new Tesla™. All within walking distance of each other. And this cornucopia of high-end retailing has just expanded within the last year to near double its size with stores like Saks™ and others.

But this is where any similarities to what one first conjures up when thinking about “retail shopping” ends. The “middle” or the “big box” retailer is far, far, and away from seeing the activity still being witnessed in the high-end spectrum. And being able to see the dichotomies between the two up close and personal has been not only eye-opening – but jaw dropping too say the least.

Within a few miles drive is the local “upscale” mall complex. It has all the expected big box names as anchors such as “Macy’s™, Sears™, JC Penney™ along with its own share of high-end stand alone retailers around the periphery. i.e., Ann Taylor™, Pier One™, etc. etc.

What I noticed since this past holiday season just a little more than 3 months ago is this: Not only are the stores within the mall empty as in void of customers. Some stores have closed and moved out entirely. And I’m not talking about “rolling lease” or “pop up” styled stores. I’m talking about a few national franchises with nationwide footprints.

I went to this mall purposely the other day looking for one where I had shopped just this past January, and walked the mall twice figuring I must be blind and passed them. Only when I finally looked at the directory (their name was still listed) then went to the destination only to find a “pop up” styled business in its place did I realize that in fact – they were gone. (The name is inconsequential for this discussion)

This really piqued my interest as to start paying more attention for this reason: How many brand named stores have you seen over the years where you’ve rarely (if ever) seen a customer in there but understood they are there year after year because its more of a form of “advertising” rather than a pure retail play? i.e., Pottery Barn™ and others fall into this category in my opinion.

I coined the term years ago of “presence advertising” to describe these. In other words, conducting business there is not analogous to paying the help, bills, and rent. Sometimes being present in certain markets was more important to the overall structure than the actual retail dollars provided by a particular location. i.e., Profit generation or expenses aren’t location specific. They’re cumulative.

That said, what does it say when you have these very stalwarts of “presence retailing” packing it up and moving out faster than their peers can pack away their “take an additional 75% off” sales material?

So with this new-found interest I decided to see just what might be happening at some of the other “big box” anchors as well as a few stand alone’s. What I found with my newly sharpened focus was both eye-opening as well as deplorable.

I held a very low bar at what I might find at Sears™ these days and – it was a good thing. The store reminded me more of the what’s come to be known as the “pop up” variety. All the clothing racks seemed to be on the flimsy rolling ubiquitous 4 sided hanger stands. Everywhere hung signs of “CLEARANCE.” It just had the look and feel of desperation. JC Penny™ didn’t fare that much better from my point of view. And this is in a mall that many would consider as “bustling” and “up scale” by today’s standards.

Then I drove over to a local Kohls™. Both my wife and I couldn’t get over the shape of the store. As I said earlier “deplorable” is the word that fits.

Clothes were piled and strewn over displays like a band of raucous teenagers just pulled off an after school prank. Shelves were mixed with differing items. Pants piled on top of shirts, styles mismatched, sizes mismatched, racks of items mismatched, stacks of piled pants from the bottom of displays knocked over and left disheveled in the middle of an isle. And no, I’m not exaggerating for I haven’t even detailed all I saw. This was just the men’s department!

I stood trying to appear nonchalant as I watched 2 frustrated store employees that seemed all of 18 or 20 years old try desperately to figure out how they were going to re-price and restock a display that looked as if someone ransacked it moments earlier. I could hear the frustration in their tones. One couldn’t help but infer from their discussion there was far from enough help and they were fighting a losing battle. And it showed.

Walmart™ was no better. Best Buy™ was pitiful in as far as selection and feel. Especially when someone like myself remembers when they were “the place.”

The problems inherent in both middle as well as lower retailing are quickly becoming more and more self-evident as well as unavoidable. The “wealth effect, ” the “gas price savings” that were explained ad nauseam throughout the financial media in a tone of “just you wait and see, earnings this season are going to be just awesome” will fall flatter on its face than a “Take an additional 50% off the lowest price” sale sign to an empty store.

If what I witnessed is taking place throughout the country all I can say is: Nobody’s buying it – literally.

To paraphrase one of retailing’s most vociferous watchdogs Howard Davidowitz when explaining the current state of retailing and malls: “What’s going on is the customers don’t have the f***ing money. That’s it. This isn’t rocket science.”

He’s absolutely dead on. And, it would appear now with QE (as of this writing) still in the tail lights, along with the possibility (however so slight) that interest rates may rise, so too are the retailers themselves even more “empty pocketed” than their ailing consumers.

For without the financial engineering and Non-GAAP charades to prop up the “earnings beat” while tapping out their own credit lines to “buy back stock” this earnings season just might garner another mantra they once used as a defense to ward off criticism. For this earnings season truly just might fit that moniker of “its different this time.”

We’ll know soon enough.

© 2015 Mark St.Cyr