J.C. Penney and Sears: The Hollow Men- An American Tragedy

The story of J.C. Penney and Sears today reminds me of T.S. Eliot’s 1925 iconic poem, The Hollow Men.The last four lines of that poem read:

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

This story is nothing less than a Modern Tragedy. What happened? Perhaps the two most iconic retailers in the US, maybe the world, are slowly fading to nothing. Without fanfare, without noise. Both are almost gone, and more than probably will be soon. Yet, the retail scene in the US is the strongest and most dynamic in the world. 

Let’s take a real quick history tour and then look at the numbers. Numbers are the Single Version of The Truth.

First, J.C. Penney:

·     First store 1902

·     Renamed J.C. Penney 1913

·     1917-175 stores, 500 stores 1924, 1000 stores 1928.

·     1928 business $190Million (=$2.71 Billion 2018)

·     First Catalog 1963

·     1971 business $5Billion (=$30.2 Billion 2018)

·     First Internet Store 2001

·     2012 it was revealed the 30% of the company’s bandwidth was used for viewing YouTube videos- 1600 Heads rolled.

Next, Sears:

·     Started in 1892

·     Catalog 1906

·     1907 business $50 million ($1.3 billion 2018)

·     2004 bought by Kmart, became part of Sears Holdings).

Let’s look at key financial data:

J.C. Penney:

·     8/22/2008 Stock price $38.32 (9/12/2008 stock price $41.43)

·     8/22/2018 stock price $1.81 (Citi puts the fair value at $.50)

·     Market Cap=$547.5 Million (that is Million, not Billion)

·     Revenue $12.34 Billion (-$1.19%)

·     Cash $182 Million

·     Debt $4.22 Billion

Sears:

·     8/22/2008 Stock Price $62.80 (5/4/2010 stock price $91.04)

·     8/22/2018 stock price $1.19 (no, I didn’t miss any digits)

·     Market Cap $133.2 Million

·     Revenue $15.29B (-27.34%)

·     Cash $466 Million

·     Debt $5.53 Billion

Wow. So where did all that business go? Here are a few places:

Walmart:

·     8/22/2008 Stock price $59.21

·     8/22/2018 Stock price $95.72

·     Market Cap $283.52 Billion

·     Revenue $510.16 Billion

·     Cash $15.84 Billion

·     Debt $53.80 Billion

Target:

·     8/22/2008 Stock price $52.66

·     8/22/2018 Stock price $85.88

·     Market Cap $44.39 Billion

·     Revenue $72.64 Billion

·     Cash $1.06 Billion

·     Debt $11.39 Billion (a lot, but still less than revenue OR Market Cap)

TJX:

·     8/22/2008 Stock price $18.00

·     8/22/2018 Stock price $105.80

·     Market Cap $66.76 Billion

·     Revenue $36.77 Billion

·     Cash $3.12 Billion

·     Debt $2.23 Billion 

(This is a healthy company, folks)

Macys:

·     8/22/2008 Stock price $20.13

·     8/22/2018 Stock price $37.69 (peak price 7/17/2015 $72.31)

·     Market Cap $11.74 Billion

·     Revenue $25.40 Billion

·     Cash $1.07 Billion

·     Debt $5.54 Billion

(This is a case who could have easily shared the same graveyard as JCP and Sears, but showed some fight. Not out of the eyes of the Grim Retail Reaper yet)

Saved the best for last:

Amazon:

·     8/22/2008 Stock price $85.28

·     8/22/2018 Stock price $1903.70

·     Market Cap $918 Billion

·     Revenue $208.13 Billion

·     Cash $27.76 Billion

·     Debt $45.79 Billion

Wow.

So, 10 years ago JCP and Sears Stock price was higher than any of the others, except for Amazon. 

Today, any of the above could buy 100% of BOTH Sears and Penney’s stock for cash on hand. Not that you would want to.

What happened?

They lost their fastball. And their relevance. And their identity. But, most important, they managed THEMSELVES into oblivion.  A dear departed friend said, “The fish stinks from the head.” This is the case here. The management not only drained their moat but made it into a parking lot with free passes. Ten years ago, when they were on par or above the retailers that have eclipsed them today, they could have reinvented themselves and embraced the changes in retail-the retail experience, fast fashion, ecommerce, etc. (we all know what they are). IF they did that, their iconic name would have added extra weight to the effort. So who to blame? The buyers, store personnel? Maybe they hired the wrong people, or failed to hire the right people; maybe they lived in a bubble of denial. Any way you look at it, it is MANAGEMENT, who probably collected 7 figure salaries and bonuses as Rome burned. Hey, what if they all gave the money back?

Walk through a JCP or Sears store today and look at their apparel. You honestly cannot imagine in your worst nightmare who is the target customer.

Messiness and crowdedness are horrible, but not necessarily the issue. TJX stores are messy and crowded. But the merchandise is relevant, clearly. Walmart is a nightmare to shop in, but it has its customer convinced, that the price is worth the price of the nightmare.

Target has bridged the gap between mass merchant and fashion destination. Macy’s is trying to keep its level while discounting just about everything.

What these mass merchants like Target have figured out is: IF you can get the prices you need (which you can, see below), it costs the same to buy a tasteful, fashionable garment as an ugly one.

Example: I can buy a blended cotton/polyester mens dress shirt for $4.30 FOB China; with duties and transportation lands around $6.00-$6.25. So if I am not a hog on markup, I can sell a good looking shirt for under $15.

I wish I could have been a fly on the wall at Penney’s or Sears to see just how all that ugly merchandise got past the chief merchants and was put into production. Or maybe the chief merchants just sipped coffee and let the buyers do their thing? Sorry, the retailer in me will never go away. Like my former boss Mike Jeffries (at Federated), I look at something really ugly in the store and say, “ who could have chosen this?” Not hard. The above discount merchants like TJX and Target managed to give the customer fashion value. Clear: there is no price for ugly.

Still today, the only thing of value for both JCP and Sears today is their name. Their merchandise, and management could be scrapped with no loss. Just like Amazon did with Whole Foods (used to be called Whole Paycheck), someone clever could play the Sears or Penneys name into an iconic destination with an American Experience. So much history, and iconic imagery! I am sure of this, but the cost of doing so could be prohibitive.

At this point I only wish the two of them could have gone out according to Dylan Thomas 1947 poem, Do Not Go Gentle Into That Good Night. Here, the iconic verse is:

Do not go gentle into that good night.
Rage, rage against the dying of the light.

Target vs. Walmart REVISITED 8-21-2018-Who is your money on now?

December (17) 2017, on my blog www.isourcerer.com  I wrote, “Target vs. Walmart-Who is your money on?”in which I gave the advantage to Target.

Both Walmart and Target have had positive market news recently due to better earnings- to be fair, the whole retail sector is looking attractive to investors. 

So, to revisit the question, who is my money on and who should your money be on today, eight months later?

Let’s take a quick look:

1.    Target:

a.    Today after earnings report= +5.67% -reached a 52 week high of $88.86 

b.    Has steadily climbed to this level from a 52 week low of  $54.21 (If you bought TGT on 12/18 when I wrote the above article, it was $64.08)

c.     EPS of 5.28 and PE 15.28

2.    Walmart:

a.    Today, 1 week after earnings report +.45% $96.51

b.    52 week low $77.50, 52 week high $109.98 (WMT dropped to the mid $80’s last March-April (due to lower than expected online sales increases) and stayed there until this recent (8/17) earnings report. IF you had invested the same day as Target last December, you would just be a little below even now ($97.90 12/18/2017)

c.     EPS of 4.86 and PE of 55.22

Investors are skittish and reactive, but overall they almost always follow the winner.

For all the reasons I gave before, my money is still on Target. Yours?

Suggestion to Walmart: Spend a little less time worrying about Amazon and more worrying about Target- and your nasty store experience.

Amazon changes the world-Again

 Well, today, July 16th is Prime Day. Until tomorrow midnight, Amazon is offering special deals, which creates a major sales opportunity in an otherwise quiet retail season. While Amazon does not divulge exact results, they did tell that results in 2017 increased 60% from the year before, and Jeff Bezos expected even better results this year. Actually, never mind that. As of this morning, Amazon's stock is up $17/share. X the 485million shares outstanding, that is an increase in market cap of $8.25billion. As a point of reference, Macy's market cap is $11 billion, Bed Bath & Beyond is $2.7billion, and Target's is $21billion. So, without the sales results, Amazon has gained 3 Bed Bath and Beyond, 3/4 of a Macy's, and 40% of a Target.

Holy Crap! The rest of the retail world is rushing to defend itself by creating their own events:
1. Target.com- 25-40% off online Tuesday 7/17 only (wait-that is like trying to start Black Friday sales on Saturday, right?)
2. Macys.com- "Black Friday in July." Extra 25% off Extra 15% off blah blah Macy's usual discount doublespeak.
3. Bed Bath & Beyond- "Beyond Week A.K.A. Summer's Black Friday." Various deals.
4. Gap and Gap.com- The only one to mention in store although I am sure this will be the case for all-"The Great Gap Sale" up to 70% off.
5. JC Penney- "Cyber in July" online only extra 30% off.
6. Rite Aid- 30% off online
7. Best Buy- Big Deals Days 2 day sale online only although I believe if you walked in to the store to buy a 50" TV rather than have them ship it they would give you the price..

Naysayers:
1. Walmart.com- No special deals mentioned. Prideful and stupid, just because you didn't think of it first? Wonder what their sales will be YOY for the 2 days..
2. Ebay.com- This is interesting. "1 day of deals?! We're here all year. NO memberships. Just Kick Ass. Oh yeah, that will make me shop on Ebay today rather than Amazon and most everywhere else!
Again, pride goeth before a fall, right? Which is what will happen to their sales for the next two days.

So what's the bottom line of all this?

1. I think retailers have no choice but to follow
2. I don't believe the positive impact for the followers will be anywhere near that of Amazon.
3. Amazon owns this event. So it will be the first and maybe last place to visit.
4. IF you are an Amazon shopper, your visit to the others may be parenthetical.

I wonder what the cost of the markdowns will be for the others, and what will be the impact on their bottom line and sales/sq. foot in their stores because a. nobody is buying anything at regular price today or tomorrow so unit price will be lower; and b. since they are pushing online as the source of discounts, they are cannibalizing their own in-store business.

What this really shows is the cowish herd nature of American retailers, the lack of aggressive marketing, and basically the fear and trembling of anything Amazon does. So why didn't they come up with the idea-actually, Amazon shamelessly stole it from the Singles Day Event in China (11/11) which has been going on for years.

So Amazon changes the world-again. Further cements its dominance of online retail. BUT WAIT- this year Whole Foods joins the party. Sometime in the future the other retailers may just need to close for these two days and save the money.

Actually, Amazon has some practical reasons for a Prime Day in July, according to one Seeking Alpha analyst:
1. Increase the perceived value of the Prime membership fee;
2. Reduce seasonality and thus logistical surges;
3. Add Whole Foods and thus, brick & mortar, to their influence;
4. Mess with the heads and cause panic, maybe stampede, amongst the rest of the retail herd.
https://seekingalpha.com/article/4187494-amazon-prime-day-2018-will-huge?app=1&dr=1

So what are we going to do, retailers? Keep following, or come up with some bold ideas that will establish you as a leader, not a bovine herd, and raise your market cap by 1% or more in one morning?

I truly am embarrassed for you, because Amazon didn't reinvent the wheel. They just made it spin faster. IF I were CEO or CMO of one of the other guys, I would not sleep until I came up with something to make my store stand out from the crowd- and from Amazon.

My Fifth Horseman-Inditex-And Why You Will Never Catch Them

In Professor Scott Galloway’s groundbreaking book, “The Four”, he describes why and how “The Four Horsemen” are dominating global business. They are Apple, Amazon, Facebook and Google. How did all this happen? Did we all fall asleep and wake up in a Brave New World? For some of us, maybe..

After explaining why they are so dominant, Galloway explains the factors they have in common, and the elements that a potential Fifth Horseman would need to have to sit alongside the Four in global business. He calls these elements The T Algorithm, which contains eight characteristics:

– Product Differentiation
– Visionary Capital
– Global Reach
– Likability
– Vertical Integration
– AI
– Accelerant
– Geography

In case you didn’t read the book, here is a brief explanation of each:

1. Product Differentiation
The product is king- marketing a mediocre product doesn’t work anymore; Map out the entire value chain of the product.
2. Visionary Capital-
Attract cheap capital by articulating a bold vision; Cash builds your MOAT.
I should elaborate on this one. Cash is king, right? And debt kills the mighty, even the (former) Category Killers like Toys R Us. Below is a chart I compiled for my Global Marketing class:

Company	Market Cap ($B)	Sales ($B)	Cash ($B)	Debt ($B)	Debt/Cash %	Debt/Market Cap %
Amazon	692.56	177.86	90.98	44.14	48.5	6.37
Apple	886.58	238.79	77.15	122.4	158.6	13.8
Google	720.36	111.02	101.87	3.69	3.62	.5
Facebook	477.91	40.65	41.71	0.00	0.00	0.00
Macy’s	8.64	24.83	1.49	5.88	394.6	68.1
Inditex	94.53	29.30	7.99	.02	.2	.02
Nike	108.78	35.26	4.75	3.48	73	3.2
L Brands	10.08	12.63	1.53	5.79	378.4	57.5
Walmart	253.81	500.34	6.75	46.48	688.6	18.3
The Four	2777.41	568.32	311.71	170.23	54.6	6.1
United Kingdom (GBP)	2629.41 (GDP)		152.88 (National Reserve)	2271.1 (National Debt)

Company

Company

A little bit shocking when you look at it this way, right?
1. The Four combined cash position is more than the UK National Reserve;
2. The Four combined are the worlds 5th largest economy;
3. The Four combined debt (colored a bit by Apple) is 54.6% of their cash position and only 6.1% of their market cap compared to, say, Macy’s at 394.6 and 68.1%, respectively, and the UK whose debt is (gulp!) times the national reserve.

3. Global Reach-
Product appeals to people on a GLOBAL scale; Product transcends cultural boundaries; Product needs a passport at a young age.

4. Likability-
Customers want to date the Prom Queen? Company image and product strikes and keeps a positive chord; negativity is fast and destructive.

5. Vertical Integration-
Control as much of your product supply chain and the user experience as possible.

6. AI-Behavioral Targeting-
Knowing what you want based on what you do or say; much more effective than demographic targeting, social targeting, focus groups etc.; Not only know your behavior, but control it. This is the new marketing.

7. Accelerant-
Attract top talent- be a career accelerant; Drains the pool for the rest- consequences?

8. Geography-
Need to be near a technology/business center with knowledge base and knowledgeable talent; major cities will see great growth.

The candidates for the Fifth Horseman Galloway gives are (for the most part, Uber and Airbnb possibly excepted now):

1. Alibaba
2. Tesla
3. Uber
4. Walmart
5. Microsoft
6. Airbnb
7. IBM
8. Verizon/AT&T/Comcast/Time Warner

Galloway points out that none of the above are a slam dunk for the position.

For me, the best candidate was missing and what I want to propose here- Inditex. Here’s how Inditex ticks the eight boxes of the T Algorithm:

– Product Differentiation- All units have shown a great knack for moving product at just the price, just the style, just the color, just the time to have gathered a very loyal following
– Visionary Capital- Take a look again at the chart above. Inditex debt is $.02 billion, a miniscule fraction of their cash position and market cap. Virtually debt free.
– Global Reach- “The clothing retailer has more than 2,200 stores in 96 countries and is the flagship brand of the Inditex Group. Zara is renowned for its ability to develop a new product and get it to stores within two weeks, while other retailers take six months. Zara added a net of 51 stores in 2017, plus 38 Zara Home locations. Spain is the biggest market with 563 stores (including Zara Kids and Zara Home), followed by China (223 stores), France (150), Russia (144) and Italy.” https://www.forbes.com/companies/zara/
– Likability-passionate customer following,;  Amancio Ortega just an ordinary good guy
– Vertical Integration- Factory and logistics ownership setup in Spain will never be matched.
– AI- Unknown, but must be very sophisticated to monitor product and customer; I believe Inditex has digitized their supply chain to a level people are only dreaming about today.
– Accelerant- Who wouldn’t want to work for them?
– Geography-Maybe the only question mark.
– Plus-SCALE nobody will ever match- They can be imitated, but, unless somebody commits a lot of money and resources (most important human), they will not be caught.

So what is the point for the rest of us? For the companies who are not- and will never be-Inditex?

My advice would be;
1. Stop whining;
2. You have seen a formula that works. But you can’t copy it, if not only because it is too far ahead of you. So find your own formula to delight-yes, delight- the customer and dramatically collapse your supply chain.
3. Understand that the world of fashion and consumer goods is changing from a stable mass-market model to an SKU-rich, quickly changing environment.
4. If you are successful, it will chiefly be accomplished by improvements in technology-such as Blockchain for supply chains which I wrote about before in this blog. Today, there is an article per day about Blockchain or other digital technology, but mainly about the last mile-payment and logistics. In order to really collapse your supply chain, you must control the first mile- design to manufacturing- as Inditex does.

Warning- this may be a case of Creative Destruction- you probably will have to chuck out most of what you do and replace it with something better. Do you have the courage to kill the old man so the baby can grow?

Great thanks and acknowledgement of all materials quoted from (unless otherwise indicated):

The Four: The Hidden DNA of Apple, Amazon, Facebook and Google, by Scott Galloway

• Publisher: Portfolio; First Edition edition (October 3, 2017)
• Language: English
• ISBN-10: 0735213658
• ISBN-13: 978-0735213654
Available on Amazon (of course!)