It Was Not a Great First Quarter for Most of Retail

Many of the biggest brick-and-mortar general retailers saw significant drops in sales this past quarter.

In this segment from the Motley Fool Money radio show, Chris Hill, Ron Gross, Jason Moser, and Simon Erickson go over some of the weak numbers from J.C. Penney (JCPN.Q), Macy's (M 1.44%), Kohl's, Nordstrom (JWN 4.95%), and Gap this quarter, and explain what might be accounting for their drops. Also, they look at Wayfair (W 5.52%), one online retailer that's achieving growth in the midst of this downturn and what it's doing differently to carve out a niche for itself in the struggling retail industry.

A full transcript follows the video.

This podcast was recorded on May 13, 2016. 

Chris Hill: We begin with the retail industry. It wasn't pretty, guys. General retailers, including Macy's, J.C. Penney, and Kohl's all getting hit this week after weak earnings reports. And it wasn't any better with apparel retailers. Both Nordstrom and Gap falling more than 15% each after similarly weak quarterly reports. There's a lot to get to here, Ron. But when you look at the retail landscape, what strikes you first?

Ron Gross: That there's absolutely no bright spot here. 

Hill: Wow, none?!

Gross: There was no bright spot. Occam's razor tells you that the simplest explanation is probably the right one. I have to move to Amazon (AMZN 1.30%) for that, eating everyone's lunch, including the apparel retailers, as you mentioned. April looks like it may be looking up, but first quarter, holiday season, discounting, promotions, store traffic, average cart size, just all really weak. It leads me to scratch my head a bit, because you say, "OK, unemployment is decent, gas prices are fine. Why aren't people spending? Interest rates are low, what's going on here?" Again, I come back to Occam's razor and Amazon.

Hill: Jason, when you look particularly at the general retailers, one narrative there has to be what we've seen over the past decade with mall traffic, because Macy's, J.C. Penney, Kohl's, they are all pretty dependent on malls.

Jason Moser: Absolutely. The Macy's report was quite underwhelming. The interesting thing about Macy's is, you go to a mall, you probably don't even intend to go to a Macy's, and you end up there for some reason or another. I think it's definitely a testament to the fact that mall traffic is down. I think when you look at J.C. Penney, I think the current economic climate still very much favors J.C. Penney's clientele, that moderate to mid-tier consumer that they're looking for.

The fact that J.C. Penney is struggling really leads you to believe there's a consumer out there right now who doesn't necessarily feel as confident, perhaps. Granted, the unemployment picture looks better. I can't help but think that maybe we're in a situation where we have some sort of under employment. I don't think wages are really all that robust. I mean, we know that the typical consumer savings rate is very low. So if they're spending, they're having to spend out of that paycheck or on credit, and I think people are maybe a little bit hesitant to do that.

Gross: Yeah. Last time we talked about a real weakness in retail, we often talked about a bifurcation of the consumer. There was the high end and there was the low end, and the higher-end consumer was still spending. In this case, no matter where you look, we seem to see the same type of weakness. Maybe to different extents, but still weak across the board. And that's what's interesting to me this time around.

Hill: And Simon, we saw e-commerce in general looking better with the year-over-year numbers for April up just more than 10%. Whereas store-based retail is flat or up slightly, you look at non-store retail sales, and those are doing just fine.

Simon Erickson: The bright spot, right Ron? The one bright spot is that it's going to e-commerce right now. You look at the 1,000 largest retailers in North America last year, web sales were up 15%, actually, compared to only 3% on the stores. So, it's just a transition, perhaps, that people are spending money in different ways. I think there's a lot of companies that are actually doing that transition pretty well, positioning themselves well on the web, and still getting a lot of sales out of that, too.

Moser: Yeah, Wayfair is a good example, besides Amazon. Let's not credit Amazon with everything here. There are other businesses in the world. I think Wayfair is one that I certainly understand, or understood, at least, initial skepticism in buying your furniture online, sight unseen, or at least, not having quite the same idea of how it fits in your home. But the numbers that Wayfair continue to turn in tell us that these guys are doing something right. Look at sales for the quarter -- earnings just came out -- sales were almost 93% repeat customers, which is really a key to their business model. Repeat customers placing better than 55% of total orders, and their active customer base is up almost 70% to 6.1 million customers. 

They're doing the same kinds of things that Amazon does, and really just making sure they focus on the consumer, focus on having that inventory in hand, make the returns policy very simple, and get it to the customer with free shipping in a pretty quick order. Those are the kinds of businesses that I think will be really separating themselves in the coming years, the ones that are very customercentric, and taking advantage of that online channel.

Gross: Yeah, and I'll wrap by saying, maybe we can have some optimism in respect to the second quarter. Retail sales in April were up 1.3%. Auto dealers and online were really the bulk of that. So, it's a little bit specific, where we see the strength. Home sales were the weakest, mostly because of the weather we've been experiencing. But perhaps second quarter will look a bit better.

Moser: I wonder how much of that we would credit to tax refunds. I don't know. I, unfortunately, can't speak from the perspective of getting a refund. Thanks a lot, Uncle Sam! But some people did. And I think, probably, there was a little boost in spending from that.

Erickson: I agree with Jason. You have to have a niche in retail today. You're not going to compete with Amazon in things like everyday items or media or electronics, or even groceries or stuff like that now. You have to have a certain niche carved out. I really like Lululemon (LULU 0.80%) in the space. Saw great growth in direct consumer, the online channel. And they have something they've protected. You have to do something like that for retail to survive.

Hill: Ron, I don't want to pick on Nordstrom...

Moser: But let's do. Come on.

Hill: But I was genuinely surprised by their report, because they were in sort of the same boat as all these other companies we've been talking about here. And historically, that is a retailer that is known, among other things, for really great customer service. I was wondering if this was just a speed bump for them.

Gross: What's interesting is, if you look at the segments, their online and discount segment did quite well. Their main typical stores did not, which is bad news for them. They typically use the online and discount stores as a way to drive people into the bigger stores over time, so it's not a good sign to see that. But I still do believe they're probably the best out there with respect to customer service, and I do like the merchandise they put into the store. Hopefully this is a blip, but time and time again, we've seen that retail is a really tough business.