Retail faces biggest challenges since 2009
Brands could collectively report greatest first-quarter profit drop since recession
NEW YORK— It’s starting to look a lot like the Great Recession redux for U.S. retailers.
More than twice as many stores have closed this year than at the same point last year. Bankruptcies are far outpacing last year’s rate. Retailers slashed jobs at the sharpest pace in seven years this spring. And retailers could collectively report the biggest drop in first-quarter profits since 2009.
This time, the culprit’s not the economy but shoppers whose habits have changed profoundly and permanently, as they shop online more and look for deals.
The results this week from department stores like Macy’s, Kohl’s and JCPenney are expected to illustrate the latest damage by the spending shift and the dominance of Amazon.
“The first-quarter reports will show how difficult the mountain (is that ) retailers will have to climb,” said Ken Perkins, president of research firm Retail Metrics LLC. He says people are increasingly spending on experiences and shopping on phones and tablets, “and stores are facing pressure from off-price stores and Amazon.com.”
Perkins estimates that the114 retailers he tracks will see an average drop of more than 5 per cent in first-quarter earnings, marking the second straight quarter of declines and third in the last six quarters. And he forecasts that nearly half of the retailers will see total sales revenue fall, nearing the level of the last downturn.
“The first-quarter reports will show how difficult the mountain (is that) retailers will have to climb.” KEN PERKINS RETAIL METRICS LLC
The bad news for retail has been relentless of late: The Limited closed all its remaining 250 stores. Payless ShoeSource is shuttering nearly 400 stores as part of its bankruptcy reorganization. Other chains that have shuttered all their stores or retrenched include Abercrombie & Fitch, BCBG and Wet Seal. Mall anchors like Macy’s and J.C. Penney are closing locations. And Sears Holdings Corp. has said there’s “substantial doubt” about its future, though it has insisted that its actions to turn around its business should help reduce that risk.
Perkins believes the rash of store closings and job cuts will be a minor burden on the economy. The vast majority of retail workers are paid less than the hourly average earnings of $25 (U.S.), so the impact is far less than losing higher-paying manufacturing jobs, he said. But Frank Badillo, director of research at MacroSavvy, believes the effect will be wider.
“The economic effects tend to reinforce the widening income equality and redistribution that favour ‘haves’ over ‘have nots,’ professional class over the working class and urban over rural,” Badillo said.
The National Retail Federation, the U.S.’s largest retail trade group, is sticking with its annual sales growth forecast of 3.7 to 4.2 per cent over 2016. But that includes a hefty expected bump of 8 per cent to 12 per cent from online and other non-store business.
Matthew Shay, the group’s CEO and president, said consumers are in good financial shape given a healthier job market and other economic factors, but acknowledges the industry is more turbulent. He points to bright spots like home-improvement chains and off-price retailers such as TJX Cos. (the parent company of Winners, Marshalls, HomeSense and other retail brands), which are still expected to have strong results.
“Retail is not in any long-term danger,” Shay said, but “the pace of change is accelerating.”
Shay says stores need to dramatically step up their investments in e-commerce.
Amazon has made a big push into clothing in the last two years, expanding its offerings of high-volume items like bras, socks and men’s dress shirts where shoppers don’t care about brand names.