Retail Sector Likely to Notch Worst Quarter in Four Years 

Economy is not to blame

Author: Andria Cheng

April 5, 2017

Despite encouraging macroeconomic signals, in the retail space much of the news has been grim. And that’s likely to translate into the worst first-quarter same-store sales reports in years.

Retailers’ combined same-store sales are expected to rise just 0.3% in the fiscal first quarter, the industry’s worst performance in four years, according to Retail Metrics, which tracks Wall Street estimates. The measure is an average for 110 chains, from Walmart and Home Depot to Macy’s and JC Penney.

Initially, in February, the average was projected to register a 0.8% gain. That was revised down to 0.6% in March, and now has been lowered yet again.

If not for a positive contribution from Walmart, the industry actually is on track to see a small decline in quarterly performance. The quarterly same-store sales data is a key industry performance metric because it strips out results from newly opened and closed stores.

“Retailers can’t blame the economy for their ongoing woes,” said Retail Metrics President Ken Perkins, pointing to the better-than-expected private sector ADP payroll numbers released Wednesday as an example. “Things continue to change rapidly, resulting from the tectonic shifts taking place on the consumer spending front.”

The quakes shaking the sector include Amazon's continued growth, consumer use of mobile devices in and out stores, and evolving consumer tastes that have led many shoppers to favor purchasing experiences over things.

Amazon by itself is eating up an enormous amount of the overall industry's key area of growth potential, which is ecommerce. Slice Intelligence estimated that Amazon grabbed 53% of all retail ecommerce sales growth in 2016. 

A reflection of the rugged retail environment is the fact that few retailers now report same-store sales data on a monthly basis--mainly because the comparisons were so consistently bad. What once was a virtual flood of reports has dwindled to a trickle. Just seven chains are expected to release monthly numbers on Thursday, compared with the more than 60 retailers who used to post monthly numbers before the Great Recession, Perkins said.

“Retailers got tired of putting out monthly metrics that were down month after month,” Perkins told eMarketer.

To be fair to retailers, he said the monthly numbers tend to have an outsized effect on companies' stocks, which in turn can lead management to take a short-term view of how they run their businesses.

Indeed, fast-casual bakery chain Panera Bread, which on Wednesday agreed to be taken private by the investment firm that owns Krispy Kreme and Caribou Coffee, was partly driven to make the move out of a desire to get out of the glare of the public markets.

“I think businesses operate better in a private setting,” CEO Ron Shaich told the Wall Street Journal, adding the sale would give it a “competitive advantage.”

Panera, which on Wednesday reported an above-industry-average first-quarter same-store sales gain of 5.3% at company-owned bakery cafes, at least is going private from a position of strength.

Office-supplies chain Staples, which reportedly is exploring a sale after its attempt to acquire rival Office Depot Inc. failed, still has to contend with declining sales.

“We doubt a buyout of (Staples) could eventually materialize,” said Jefferies analyst Daniel Binder in a note. “The office products sector continues to be challenged and (Staples) is attempting to shrink its way to better profitability without significant reinvention.”

The office-supplies sector is among the worst-performing in the already not-so-sexy retail sector. The segment is expected to report a 3.3% decline in first-quarter same-store sales, lagging the industry average, Retail Metrics data showed.

Both adult and teen apparel retailers, luxury and department store segments are among other sales laggards.

And there’s no shortage of evidence for that. Luxury label Ralph Lauren, which has seen sales hurt by lower demand and traffic at both department stores  and at its own stores, said this week it’s shutting down its Polo store on New York’s Fifth Avenue as part of an attempt to cut another $140 million in annual costs, as part of its plan to return the company to “sustainable, profitable growth.”

Meanwhile the 4,400-store Payless ShoeSource, which bills itself as the largest specialty family footwear retailer in the Western Hemisphere, this week filed for Chapter 11 bankruptcy protection, joining a list of other retailers, from Wet Seal to Limited Stores. The company will immediately shut nearly 400 underperforming stores.

“This is difficult, but necessary, decision driven by the continued challenges of the retail environment, which will only intensify,” said CEO Paul Jones in a statement.