"Levi's New Outfit for Success"-Let's look at the numbers and the reality

The above is Gartner L2's article written on 14 February 2019 (read, click here) that glorifies Levi's rise to file an IPO and their high rankings on customer search.

As Scott Galloway is a principal of Gartner L2 and a glorious skeptic (I miss "Winners and Losers in a Digital Age), I am a bit surprised that he and Gartner are so much of a cheerleader and lost all the righteous skepticism.

IF they looked into the numbers, they would see that Levi's

a. WAS public and privatized in the early 80's led by KKR.

b. has barely grown in the last ten years compared to the global denim market

c. is making most of its profit (and doing more than 50% of its business) in Europe and Asia, where customers will pay a high price for the prestige of the name, NOT the fashionability or even quality of the jeans compared to others.

d. Is NOT a major player in the global denim market, despite the fact that its brand name is somewhat generic for the product.

Let's take a look, tell me if you see something I am not seeing.

Let us start with the global denim market, as reported on Statista:

OK, then let's look at Levi's:

The majority of the increase in business in 2017 came from Europe and Asia (mostly Europe). 

The plot thickens- US sales actually REDUCED in profitability despite a small increase, while Europe and Asia provided more than 80% of the revenue on 43% of the sales. How this happened is that Levi's can trade on its name in these markets to be able to charge high prices that it cannot begin to get away with in the US market.

So the name brand that is generic to US denim (reputed to be the inventor of same) is selling more offshore than in its home country. Is that healthy for a brand's longevity? If you check the story of Esprit, which was the most iconic brand of women's sportswear in the 1960's and 1970's, and now cannot even be found in the US, you can gain some insight.

So what does that tell you about Levi's strategy and their prospects? To begin, that Levi's value proposition delivers less than 5% of the global market, and that number is being supported by sales outside of the US.

Next, that it is unable to make money in the competitive US market and has to  compete on price, thus reducing its profitability. Warren Buffett would tell you that this is proof positive that Levi's has either no MOAT or a very narrow one which is getting narrower.

We know for a fact that being an iconic brand with a storied American History is no guarantee of success IF you don't preserve your identity and relevance. Enter Sears, which is not dead yet corporately, but in the minds of shoppers, is.

Let's view this as I would demonstrate to my Marketing class: IF we look at the fundamentals of Strategy as detailed in Michael Porter's Five Forces, we can clearly deduce that, for Levi's in the USA, they are powerless to defend Threat of Entry and Threat of Substitutes; Power of Buyers is high because, in all three, switching costs are LOW. Further, brand loyalty is less and less of an issue in the US; is it temporary in Europe and Asia?

Levi's seemingly has convinced Gartner L2 that they are the resurgent force in the jeans market and on their way to being the major player that they were 40 years ago; it is their job to do that. And they also want their customers to know that they are environmentally sensitive and solidly behind sustainability. Great for the planet, but do customers care?

The numbers don't bear that out. 

Finally, regarding the IPO, I hope their return to public financing won't saddle them with the fatal dose of debt that killed Sears and Toys R Us, among others.  Based on the numbers in the 2017 Annual report, their debt is about $1.1 billion. Once the bots in the stock market get a hold of Levi's, and decrease their share price and market capitalization by 20% in one day if the results are not rosy and sunny, DESPITE their iconic brand  (like Kraft Heinz), that will be extremely damaging to their future.

So what is my recommendation? Levi Strauss, FORGET the IPO until such time as you have a firm brand footing and real price and profit growth in the US (by radically upgrading your value proposition). I believe a reason that Bob Haas wanted to take the company private back then was the unreasonable treatment in the stock market; that has not gotten better in the last 40 years. 

(Full disclosure: I worked at LS&Co before and when KKR took it private. I was the leader of the team that marketed the Women's 501, which was an attempt to give Levi's the fashion relevance that it still seems to need now (since women buy more jeans than men). 

Best of luck, folks. Go back to the basics of Strategy and reexamine. Leave the ego at the door.

Why does Eddie Lampert want to keep Sears alive?

A related article to one on CNN.COM, "Sears gets out of bankruptcy alive," (https://www.cnn.com/2019/02/07/investing/sears-decision/index.html) asks the question, "Why does Eddie Lampert want to keep Sears Alive?" (https://www.cnn.com/2019/01/28/business/why-lampert-wants-sears/index.html)

Lampert insists he believes Sears can still be a viable retailer, after its relevance and market value have shrunk from the top of the retail heap to nearly nil. Yet, he gives no plan as to what is going to change to reverse the death spiral that Sears is now on. He claims, ""for one simple reason -- We believe in the potential to create a successful, multi-faceted, 21st century company that can benefit from the changes in today's retail environment."  How? Merchandising? Market Positioning? A Strategy? None of the above are explained.

The author of the article points out several key points that I believe lead to the true answer to the question:

1.   “But if Lampert's $5.2 billion bid to rescue Sears fails -- as its creditors want -- he has a secondary bid ready to go. Under the alternate plan, Lampert would pay $1.8 billion for just the stores.”

2.  “Lampert managed the company since 2005 as if it were a slow-motion liquidation, said Philip Emma, analyst with Debtwire and an expert in retail bankruptcies. He steadily closed hundreds of stores and the spun off assets, such as Land's End and Craftsman tools.Keeping Sears open means Lampert could continue that strategy.”

3.  ”Over the years Lampert has loaned the company $2.4 billion, most of it backed by hard assets such as real estate.

4.   “That debt, and the new cash make up just more than half of the $5.2 billion bid price. The remaining $2 billion comes from promise that Sears will pay off some of its liabilities and debts. So if the bid is successful, Lampert will again get control of the company, one that he says is worth $5.2 billion, by putting up only a fraction of that amount in cash.”

Real Estate. That is what the author of the article is clearly implying is the reason. Looks like that to me too.

Smart deal. A clever long-term plan. But a tragedy for all the families of those who worked for Sears loyally over the years, and for the customers that made Sears an important part of their lives for more than 100 years.

"Macy's on the Brink"

This week Macy’s stock plunged nearly 20% based on a pitiful Holiday 2018 report where owned sales increased only .7% (this compared to a nationwide holiday reported sales increase of 5.1% and online increase of 16.5%). This was the day of reckoning for the failed and confused strategy Macy’s had pursued over the last 20 years, and their impotence to meet the competitive situation in the market.

The death sword to Macy’s is their price, price and more price strategy that has for years blurred the distinction between them and TJX, Target, etc.  which was taken with a chaser of “fashion” and acquired fashion resources. This was all smoke and mirrors, for what the customer saw was overwhelmingly price, upon price and if you use your card or blah blah, more price. Add to that crowded, confusing and over inventoried stores that convey no message except price. Tragic Result: Loss of Identity and Relevance.

The market itself outdid Macy’s and made Macy’s irrelevant. Fashion is super abundant online and in stores, such as Everlane, Untuckit, Zara, etc. etc. and price is the wheelhouse of others who advance that as their strategic message (see TJX). 

Michael E. Porter, the modern guru of strategy, clearly says that, in order to succeed, your strategy must be Unique. Macy’s used to be unique. What are they now?

Almost 2 years ago, in April 2017, my very first article on my blog wwww.isourcerer.com was “The Death of (Apparel) Retail (As We Knew It)-Part I- The Survivors”in which I said, “Some of them: Inditex (Zara, Massimo Dutti, Zara Home), Uniqlo, H&M, Primark, Amazon, Costco, Sam’s Club. Why are they growing while others (like Macy’s, JC Penney) are dying slow and painful deaths?”

And 

“So let’s be clear- the imminent expiration of the world of Macy’s et al. is NOT due to PRICE.  Macy’s can get down and dirty with the best of them. It is about VALUE. The brand value which deparment stores used to represent and which differentiated them from the discounters is gone- eroded by the overdistribution of brands. Since middle class brand worship is dead, department stores are resorting to promotion to bring in consumers (while at the same time killing the manufacturers by making them pay for the buyer’s incompetence and the stores errant philosophy). Most important, losing the TRUST and respect of the consumer.”

And

“There was a time when self-respecting middle class America did not want to be seen shopping at, or wearing product from “the mass market.” Now there is no distinction about shopping in Macy’s- it is a confusing and discouraging experience- and no shame to shopping at the new normal.  If you go to Uniqlo, Massimo Dutti, or sit home and shop from Amazon, it is a satisfying experience- can it also be a badge of honor?”

One year later after including the same message in many articles, I wrote the unfortunate truth: In my article, “Macy’s- The Asteroid That Killed Retail” I compared Macy’s to the Chicxulub asteroid that killed the dinosaurs and changed the world in that, during their takeover of Federated (NOT a merger) and May Co. and Broadway, they sanitized regional department stores that had been in people’s lives for decades and made them, arrogantly, MACY’S. This effectively buried the American department store heritage, the Bailey Savings and Loan. NOW department stores are “irrelevant”-why?

I don’t think that the department store format is necessarily dead. Years ago, it represented the great moderate middle for those who wanted quality at a price. And it was “our A&S, or our Filene’s” etc. That needs to be revived. Different segments of the country have different needs and ideas. One universal marketing strategy won’t work.

Retail dive reports (“Macy’s On the Brink): "Macy's in the Northeast and in California was a higher-end department store," "There's New York City and Boston and San Francisco, and then you had everything else. And for the 'everything else' part of Macy's, nothing that this guy [CEO Jeff Gennette] is doing is meaningful in a Dayton, Ohio, or a Kansas City, Missouri. The stuff he's doing that's good probably isn't even enough in New York, so it's too little, too late, and not applicable to the whole chain." Correct. 

Mark Cohen, an esteemed professor at Columbia and a former colleague at A&S (one of Macy’s victims) says in the article, “"Macy's didn't have to mean something years ago because Macy's had a reputation. Now most of what Macy's sells can be found elsewhere, often in a nicer place," Cohen said. "Or in front of your computer at home."  

And “"Macy's is caught between the fantasy and the lack of reality (emphasis mine), between Herald Square and Union Square and everything else in the world," he said. "The web and the store have to speak with one voice, and underlying it all, which is the most challenging, they have to answer for themselves and their investors and their customers — 'What is Macy's?'" 

What is Macy’s?

In light of the dynamic current market and in the context of competitive strategy, Jeff Gennette, please answer the above question so we (and your customers) all can understand.

Can Macy’s survive? Absolutely. Remember, Macy’s is not just a department store- its real estate holdings probably have more market value than the company itself. What it takes to revive the retail, in my opinion, is, first, facing the truth. Then, a TOTAL reexamination of strategy, followed by an overhaul of the value chain, and, most important, humbly restaff with people whose experience and dedication will get you there (Basil Liddell Hart’s Great Captains)- Merchants with a proven track record, regardless of their AGE (they are out there). 

Since the fish stinks from the head, leadership should be replacedwith those who have no stake to defend themselves in the current mess, and who will embrace the fact that Macy’s is of much smaller relevance in today’s market (I avoided irrelevant) and have the market, marketing knowledge and vision to rebuild from there.

Full disclosure/true history- I am a former A&S (Federated) buyer who took great pride in the iconic regional department stores in our company-You know them no matter where you are from: A&S, Filene’s, Woodward and Lothrop, Marshall Fields, Burdines, Bullocks, shall I continue?  Nothing short of criminal to deprive the loyal residents of their shopping home. As I said earlier, THIS is what killed department stores, because, truly, who gives a crap about Macy’s in Indiana?

Last and worst, after returning from China in 2017, and seeking to find my role back in US, I had several phone interviews with Macy’s because I felt (correctly) that I could help them. Needless to say, never got even a face to face. I was told that I was not qualified for a position with the title, Strategy (or others). How’s your strategy working out for you now, Macy’s?

Last year, in my Baruch class on Leadership in the Fashion Industry, I listed Macy’s after Sears and JC Penney as a potential fatality. And here we are.

Let’s summarize: Macy’s, the only way back from the brink (a few of many things that need to be done):

1.    Make yourself relevant again; reinvent your message in the spirit of what department stores WERE- fashion destinations with value. 

2.    As Mark Cohen said, we should be able to answer the question “What is Macy’s” with a UNIQUE strategy.

3.    Hire some people who can select the right items instead of filling your floors with redundant merchandise- MERCHANTS (regardless of their AGE).

4.    New management team who has no baggage and the vision to succeed.

5.    Be humble about what you are now and what you are not.

6.    Create an omnichannel strategy that will help you WIN (not like today where you allow your competitors to sell the same thing on your web page as long s they pay).

7.    Have a national and global retail strategy that reflects the different needs and wants of different regions- maybe bring back the old names (you own them anyway) or just append a regional name to Macy’s (Like Macy’s Indiana). But, most important, you cannot have one buying strategy for the whole nation- you need to learn about your regions and follow them. If you go to Massimo Dutti in Shanghai and in Parma, Italy, you will find the merchandise is mostly different. 

Truthfully, I don’t expect my advice to be sought or followed, therefore I do expect that Macy’s will continue to be a great stock to short in the future. I hope for Macy’s and its loyal employees sake that I am wrong.

Can Jill save JCP?

Jill Soltau was appointed CEO of JC Penney in October of 2018. Her retail background is Sears (ouch!), Shopko (oops-just filed for bankruptcy) and, most recently, President and CEO of Joann Stores (a privately held fabric and craft chain with sales of about $2.5 billion). Her background in those department stores, hopefully during better days, is in merchandising.

Here’s what she faces at JCP:

“The company says comparable-store sales for the nine-week period ended Jan. 5 fell 3.5% on a shifted basis; on an unshifted basis, comp sales fell 5.4%. “(Seeking Alpha, January 8, 2019)

This while the rest of the retail world (or most of it, anyway-see Macy’s) is reported to have increased sales for the Holiday 2018 season by 5.1% and online sales reported to have increased 16.5%. (Seeking Alpha)

2017 revenue at JCP was about $12.5 Billion with a net loss of $116Million. By contrast, Amazon Cyber Monday sales were about $7.9Billion. 

The above is not intended to inflict pain or rub salt in the wound, but to highlight the question: What is the current position of JCP in the consumer’s mind? Answer- forgotten. Or at least an afterthought. Or an after-after thought.

Why? As I have pointed out many times about the big losers at retail in my blog www.isourcerer.com, and most recently in the 2018 article, “JC Penney and Sears: The Hollow Men-An American Tragedy,”  (read it here), it has lost its relevance, its identity in the consumer’s mind.

So how to get it back and not only survive but grow in today’s dynamic retail environment?

Here’s my two cents for JC Penney (pun intended):

First- JCP needs a Strategy. Taking a lesson from my class on Competitive Strategy at NYU, let’s paraphrase Michael E. Porter’s definition: The core of a strategy is a value proposition that makes you unique. What do you offer your customer that nobody else does (the answer is not price-only). 

This unique value proposition is your identity. So what is JCP current identity? What makes them unique? Clearly, not enough people know or think they know. Then, what can JCP do to create an identity that everyone will remember? To me, the most valuable thing about JCP is its name and what it represents in the history of American retailing. Nobody else can match that, so here is the beginning of unique. 

JCP needs a new story. Rebuild the brand on the images of what made American retail great. The catalogue, the early stores- THEN, fast forward to today.

So, what about today? From a merchandising and process standpoint, JCP needs to reinvent itself.Buying more of what is selling now in the stores won’t do it. Find a niche in the customer’s shopping map. Clearly, not as a luxury brand and hopefully not as a price monger (Walmart, TJX, etc. are deeply imbedded there). 

So where? Look at Zara and those disruptors that are successful now, such as Untuckit and Everlane. Based on their sales increases, they are filling a need that is not nearly maxed out. Value Fashion Merchandising. 

Then how? First, completely redo your value chain to gain speed to market, and don’t be satisfied with four seasons a year. Newness. Give the customer a reason to come back. 

Second, redo the store experience. There is lots of history to draw upon. Maybe, for example, redo the stores with the trappings of the past-wood, fabric, lighting that would suggest that, when you shop at JCP, you are a part of history that has updated itself to the present day.

Most important, hire the right people. Not consultants- like hiring a head football coach from baseball. People who have walked a mile (or, like some of us, hundreds of thousands of miles) in retail and wholesale shoes.Merchants. With battle-hardened Experience. 

Finally, for my advice today (there is so much more to this), update your process. Your web site needs to reflect merchandise you want that you can order online or try on/pick up in store. Not this.For those of you who didn’t click the link, here are some highlights:

and this:

From the comments on LinkedIn, it seems Jill is a great people person, and she acknowledges that her success rests on finding the right people. Good- but which people and to do what?  To paraphrase another marketing guru, Peter Drucker, in his iconic concept Management by Objectives, everyone needs to buy in and be passionate about the mission (learn more here).

I also wish you the best of luck and hope for your success, Jill. As a former retail merchant who watched Macy’s singlehandedly destroy the nation’s regional retail, I am rooting for a revival. Macy’s is kindly stepping out of the way. 

More sense of urgency, I think. You don’t have years to solve this problem. 

Good luck!

Sears is dying because of—Pensions? I don’t think so.

Sears is dying because of—Pensions? I don’t think so.

On September 13, 2018, Edward Lampert, CEO of Sears Holdings, said in the Sears Holdings blog:

In addition to the very difficult retail environment, Sears has also been significantly impacted by itslong-term pension obligations(emphasis mine).In the last five years, we contributed almost $2 billion, and since 2005 we have contributed over $4.5 billion, to fund our Pension Plans. (https://blog.searsholdings.com/eddie-lampert/update-on-our-transformation/)

He also said:

Like many other brick and mortar retailers, Sears has encountered very substantial obstacles to profitability as a result of the enormous changes to the retail environment caused by the ever-increasing trend to online shopping. 

The second statement is clearly true. The first one is an excuse for bad marketing and merchandising. My view is that failure to reinvent themselves and become relevant in the current retail environment- online shopping or not- is why Sears is dying, not pension costs.To support this thesis, let’s compare Sears to another mass merchant who faced the same brick and mortar challenges that Sears did-Target. Go into a Target store today and you see tangible evidence of what they have done to face the changing retail landscape--neat and clean stocks, private brands that look much better than mass market, etc.- at Sears there is no such evidence (remember the Sears Holdings group also includes Kmart). 

That being said, Sears has some iconic private brands such as Kenmore, Craftsman and DieHard, which should have led the pack. In apparel, there is little private brand development, Sears and Kmart relying (except, notably, for Joe Boxer, which they ruined as a brand) on national brands which can be bought anywhere).

Let’s go back to 2005 and compare with today for both retailers in several key financial and market elements that would tell the story.

First, market capitalization and share price:

Who	Market cap ($Billion)	Date	Market cap ($Billion)	Date	Difference ($Billion)
Sears	24.14	4/23/2007	.135	9/14/2018	(24.005)
Target	40.58	4/13/2007	46.29	9/14/2018	5.71

Who	Share Price ($)	Date	Share Price ($)	Date	Difference (%)
Sears	140.69	4/23/2007	1.25	9/14/2018	(99.1)
Target	60.61	4/17/2007	87.92	9/14/2018	45.1

(Sources: Seeking Alphaand Macrotrends.netsame for all below)

So, in 2007, Sears share price was more than double Target’s. Market cap substantial. Share price is the interpretation of value creation by investors and market cap is the number of shares x share price. Share price may be inflated by limiting shares; that being said, it is still an indication of  who wants your shares. Doing the math, Sears outstanding shares in 2007 171.6 million; today 108 million. Target, on the other hand, 670 million in 2007 versus 526.5 today. Yet the value per share is substantially higher.

Let’s look inside the financial statements of both companies. Heavy pension obligations would have significantly impacted Sears SG&A. Let’s take a comparative look at both companies at key points in time:

SG&A % at (date)	1/31/2005	1/31/2007	1/31/2009	1/31/2018
Sears	20.5	21.8	23.6	30.7
Target	21.0	20.0	20.0	19.8

Until the current number, I don’t see a disastrous difference between the two. Do you?

Let’s dig deeper. To get to the bottom line, we must first look at the Gross Margin % line for both:

GM % at (date)	1/31/2005	1/31/2007	1/31/2009	1/31/2018
Sears	25.0	28.7	26.8	21.1
Target	31.2	31.0	29.5	28.8

Overall, Target has done a much better job of managing GM (which has nothing to do with pensions). As we know, GM is a function of initial markup AND markdowns due to bad merchandising decisions on quantity or style or both.

We should next look at revenue for both companies:

Revenues ($B at date)	1/31/2005	1/31/2007	1/31/2009	1/31/2018
Sears	19.8	53.0	46.8	16.7
Target	46.0	59.5	65.0	71.9

(The big jump for Sears between 2005 and 2007 would be due to the merger with Kmart which created Sears Holdings.)

Now, the picture becomes clearer! Notice that in 2007 Sears and Target were in the same ballpark. Then the divergence begins-Target has grown continually, albeit not dramatically, while Sears has—tanked. So the main financial thesis is this: Sales and Gross Margin (discuss reasons later) were the reasons for Sears decline; blaming it on pensions is an excuse (which got a lot of press).

If we look back at SG&A for both retailers for the last ten years, we can see no dramatic difference (until today). Expenses are slower to impact for a retailer of this size than sales and gross margin-which is impacted by merchandising and marketing.We also know the concept of profit flow through—incremental sales which do not directly cause additional expense flow directly to the bottom line.

Clearly Target has had its struggles, well documented, as Sears, but the difference is that they managed to remain relevant and grow the business. Why?

Before we answer that, let’s look at two who did really well during that period—Walmart and TJX. Walmart has made a big push into online business, TJX none; both remain key brick and mortar retailers. Let’s take a look at some numbers:

Who	Revenue 2005 ($B)	Revenue 2018 ($B)	GM% 2005	GM% 2018	SG&A% 2005	SG&A% 2018
Walmart	284.3	500.3	23.7	25.4	17.6	21.3
TJX	14.9	35.9	23.6	28.9	16.7	17.8

So- Somewhat a tale of two retailers, but can help us reach a conclusion. Walmart GM% is less than Target or Sears, and their SG&A has grown 21% over the period despite sales almost doubling-ouch.

TJX, on the other hand, has improved GM% dramatically and managed SG&A well (only 6.5% growth—that being said, my principle would be that, if SG&A % doesn’t go down with that degree of sales increase, your expense control is sloppy at best. 

What is common to all is that they have had challenges putting a lid on SG&A, in some cases despite blistering increases in sales. Calculate for yourself the absolute difference in $ of Walmart’s SG&A from 2005 until now. So-Sears SG&A over the period seems no excuse.

Which leads us to the bottom line conclusion. In no part of the blog post does Edward Lampert mention merchandising, marketing, efforts (except to say they are seeking partners for existing brands). That is where the others have succeeded and Sears has failed-generating sales through relevant and timely merchandising and marketing. Nothing else really counts in retailing.

Let me be clear- I am sure Edward Lampert knows the above, better than me, because he faces the real numbers every day. BUT- while the pension obligations were unescapable and not much could be done about them, EVERYTHING can be done every day about merchandising and marketing. THAT is where Sears failed.

PROOF: What’s in a name? How to develop a brand—Kmart Australia, which originated there in 1968, shortly after the US version, is a blazing success. You can read all the media and annual reports online, but here is some information from an article published in 2016 entitled, “What’s in A Name: Kmart succeeds as Kmart depletes”:

Late of September last year Sears Holdings announced its plans to possibly close 204 US Kmart stores. The same time last year Wesfarmers Kmart in Australia boosted earnings by 16.3 percent. So why are two similar stores facing two very different financial outcomes?

And, 

Both stores came from the same founder in the 60's, deal directly with cheap value ranges, focus on quantity and easy accessibility items and even have similar logos. So how is one chain dominating the industry while the other one suffers a slow demise?

Among other things, but what I said:

Wesfarmers Kmart’s image is a bit different to Sears Holdings. It hints that it is still youthful and cool, even though it’s good value. Their ads are often full of vibrant people aged 18-22, exceedingly lithe and probably unlikely to be found at an actual Kmart.

Like Target.

Edward Lampert, with all due respect to your expertise and difficult job, what did I get wrong? It is nothing but distracting and misleading to even imply that, significantly (your word) your problems came from pensions and the difficult retail environment. 

(You may also want to read my previous article, “J.C. Penney and Sears—The Hollow Men-An American Tragedy”on my blog http://www.isourcerer.com)