Practical analysis for investment professionals
24 May 2016

The C-Suite Speaks: Overstored Retail

Posted In: Weekend Reads

The C-Suite Speaks: Overstored Retail

Each week our team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts as well as other forums.

Retailers continued to report soft earnings last week. Most seem to agree that the softness is primarily focused on the apparel industry and that this is not a broader consumer issue. As retail spending moves increasingly online, however, it’s clear that the United States has too many retail outlets, and that the industry will need to shrink over time. That could pose problems for those with investments in the sector.

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The Macro Outlook

As everyone knows by now, retail has been soft.

“A very strong start to the quarter in February was overcome by softer-than-expected pre-Easter business and then a further deterioration in April versus our plans.” — Kohl’s chairman, CEO, and president Kevin Mansell (Department Store)

“Post-Easter sales and traffic trends softened noticeably consistent with what you’ve heard from many of our competitors.” — Target Corp EVP and CFO Cathy Smith (General Merchandise)

Walmart was pleased with a 1% comp.

“We’re encouraged by the Walmart US comp and believe it is attributable to real improvement in our store experience. Our customers are giving us positive feedback and I’m seeing it myself on store visits and you can see it in the traffic numbers. We delivered comp sales of 1% in Walmart US due to continuing traffic increases which improved 1.5% this quarter.” — Walmart president and CEO Doug McMillon (General Merchandise)

It’s not obvious to everyone what’s causing the weakness. Consumers are paying more for gas.

“We know as the guest and our consumer has moved through the course of 2016, prices at the pump, fuel prices have risen and that certainly has an impact.” — Target Corp chairman and CEO Brian Cornell (General Merchandise)

But most seem to agree that this is not a broader consumer problem.

“Obviously, the retail industry is going through a rather painful period of rationalization. Rarely have I read so many negative articles about our industry. Unlike much of what has been written, I don’t believe the consumer is the problem. I think our customer is in relatively good shape.” — Urban Outfitters chairman and CEO Richard Hayne (Apparel Retail)

Weather may be one contributing factor.

“So far in May, our retail segment comp is lagging behind the first quarter trend, and I’m going to attribute that, as far as I can tell, to weather. . . . In the first week of May, we had six out of seven days of rain here in the Mid-Atlantic and temperatures were somewhere between 10 and 20 degrees below normal.” — Anthropologie Group CEO David McCreight (Apparel Retail)

Consumers may also just be spending on experiences rather than goods.

“When we look at our categories, and we look at what customers are spending, you’ve heard the data all week. It’s entertainment, it’s experiences, it’s home beautification, and apparel was down because of the share of wallet with other places.” — J.C. Penney CEO Marvin Ellison (Department Store)

Home improvement is a particularly strong segment.

“Our view of the macro environment remains consistent. We believe that housing data indicates continued tailwinds for our business.” — Home Depot chairman, CEO, and president Craig Menear (Home Improvement Retail)

“The outlook for the home improvement industry remains positive. . . . Housing remains a bright spot.” — Lowe’s chairman, president, and CEO Robert Niblock (Home Improvement Retail)

But are consumers “spending” on their homes or are they “investing” in them?

“We continue to capitalize on a favorable macro backdrop and consumers increasing desire to invest in their homes.” — Lowe’s chairman, president, and CEO Robert Niblock (Home Improvement Retail)

“Within overall categories, today’s consumer, our guest, is reinvesting in their homes. They’re spending money on home improvement.” — Target chairman and CEO Brian Cornell (General Merchandise)

Whatever the cause, retailers are having to take big markdowns on inventory.

“The clearance and promotional environment is really noisy. There’s a lot of excess product out in the marketplace . . . There’s some heavy, heavy discounting going on.” — Nordstrom co-president Erik Nordstrom (Department Store)

And the weakest players are struggling to survive an “over-stored” environment.

“Simply put, America is over-stored and overstocked. We have approximately 10 times more retail space per capita than our European counterparts and more direct-to-consumer choices too.” — Urban Outfitters chairman and CEO Richard Hayne (Apparel Retail)

“Time to recognize the over-storing of America is coming to an end, and that the sooner we reduce the store count, the better it will make retailer stronger, more focused, and more profitable.” — Perry Ellis International executive chairman George Feldenkreis (Apparel)


A move to a consumer-led economy could potentially increase China’s import demand.

“It is also increasingly becoming a consumer economy with a very large emerging middle class with wealth and a taste for imports. We believe that presents an opportunity for us as China becomes more than just an export market.” — Expeditors International Form 8-K (Freight Forwarding)

Brookfield Asset Management’s CEO says that Chinese capital investing in the United States is not a sign of capital flight.

“We are seeing . . . very significant amounts of capital being invested from China to other more developed markets. . . . Most people interpret that as people taking money out of China and wanting to have it out of China. And that’s possible some of the money is that. But a lot of it is that the institutions in the country have been encouraged to invest outside of the country.” — Brookfield Asset Management senior managing partner and CFO Brian Lawson (Asset Management)

Rockwell Automation sees positive developments in Europe.

“So I would say that we are seeing improvement [in Europe] and it’s been driven from both emerging Europe and then specific countries in mature Western Europe, particularly now that the south has come back a little better, strength in Italy, particularly in some of the home and personal care OEM segment. France has turned positive as well as Spain.” — Rockwell Automation chairman and CEO Keith Nosbusch (Industrial Automation)


If data is strong, most members of the Federal Open Market Committee (FOMC) agreed that it would be appropriate to increase interest rates next month.

“Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.” — FOMC April 2016 Meeting Minutes (Central Bank)

ICE says that its IPO pipeline is rebuilding.

“I’m pleased to say that we’ve already seen a handful of IPOs early in 2Q and our pipeline continues to build.” — Intercontinental Exchange CFO Scott Hill (Securities Exchange)


E-commerce is not as profitable as physical stores.

“We’re looking at ways to improve how we consolidate the distribution side. But it is a challenge. E-commerce definitely is a lot more expensive versus brick and mortar.” — Perry Ellis International vice-chairman, CEO, and president Oscar Feldenkreis (Apparel)

Off price retailers benefit from full-price retailers’ pain.

“We are in one of those modes right now where . . . our most difficult challenge is controlling how much we buy right now, because the markets are plentiful and they are plentiful with spring summer goods coming up. Based on the environment going on, that’s probably no surprise.” — TJX CEO and president Ernie Herrman (Off-Price Retail)

Once you train your customers to expect promotions, it’s difficult to dial them back.

“When you start tightening up in promotion, you are playing a game of chicken with your customers, and they try to wait you out.” — Gap Inc. CEO Arthur Peck (Apparel Retail)

The apparel industry has been dealing with deflation perhaps a quarter century.

“I think that I was talking about the industry, where there has been price deflation. And I think the price deflation is going on for probably 20 to 25 years now.” — Urban Outfitters chairman and CEO Richard Hayne (Apparel Retail)

Jack in the Box said that the impact of McDonald’s all-day breakfast is starting to moderate.

“It was certainly compounded, though, by the aggressive marketing of the breakfast all-day promotion from one of our major competitors. But as we move here into Q2 and Q3, we do see that the impact on the 10:30 to noon timeframe . . . has waned. And we also see that the impact outside of that timeframe has been negated.” — Jack in the Box chairman and CEO Leonard Comma (QSR)


Artificial intelligence (AI) is the next big thing for technology.

“When I look forward, what I see is an AI-first world and for every customer is going to be able to get whole another generation of productivity out of artificial intelligence, machine learning, and deep learning.” — Salesforce chairman and CEO Marc Benioff (CRM)

Walmart said it saw some upswings in electronics.

“While entertainment continues to be a sales headwind, we did see some improving trends in electronics.” — Walmart EVP and CFO Brett Biggs (General Merchandise)


Industrial comps will start to get easier as the year progresses.

“Traffic comparisons will start to get easier as we go through the year, but that doesn’t change the fact that the markets are very tough right now for our customers.” — Westinghouse Air Brake Technologies president and CEO Ray Betler (Railroad Brakes)

Agricultural equipment markets may be stabilizing.

“Although the underlying strength of the ag market remains subdued, conditions appear to be stabilizing.” — Raven Industries president and CEO Daniel Rykhus (Industrial Technology)

Materials, Energy

Fertilizer prices may have bottomed.

“We think that things have bottomed, if that’s the right term in terms of sentiment, in terms of potash prices.” — Potash president and CEO Jochen Tilk (Fertilizer)

Cement prices are rising.

“The price environment is strengthening. We have driven a clear directional shift in pricing in Q1 2016.” — LafargeHolcim CEO Eric Olsen (Cement)

Dry bulk shipping companies fear for their survival, which means the industry may be at the bottom.

“One thing is for certain . . . we have reached the level where everyone, and by everyone, I mean every shipping company feels like is not very well prepared for what is coming. And this is for me the absolute bottom of the market. It’s a good thing that almost everyone is pessimistic about the market because the cleansing is going to happen.” — Diana Shipping director, COO, and secretary Ioannis Zafirakis (Dry Bulk Shipping)

Miscellaneous Nuggets of Wisdom

Irrational competitors with deep pockets create a challenge for rational players.

“The nightmare scenario for any businessman is that you have a rich, dumb competitor.” — Liberty Media Corporation chairman John Malone (Billionaire)

Sage advice.

“Always analyze the downside and structure everything so that you live to fight another day.” — Liberty Media Corporation chairman John Malone (Billionaire)

Prioritize your family.

“I let business take too large a part of my life for a period in my life and probably neglected the kids more than I should have.” — Liberty Media Corporation chairman John Malone (Billionaire)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

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