3 Wall Street Analysts Get Candid About What’s Really Happening to Retail

On a humid summer afternoon in New York City, three key market watchers who have convened at Footwear News’ headquarters to discuss the current state of retail are hard-pressed to find a jumping-off point. Store closures, bankruptcies, consumer shifts and the effect of one hard-to-ignore e-tail giant are all top-of-mind.

“There is definitely the structural concern — Amazon is having an impact on every retailer,” Canaccord Genuity Inc. analyst Camilo Lyon said, breaking the ice reflectively. “That’s fairly well-understood, and it’s becoming the de facto way of thinking.”

Nevertheless, company- and sector-specific shortcomings are hard to ignore, noted Susquehanna Financial Group LLLP analyst Sam Poser. “When it comes to how badly department stores are doing — it’s suicide and not murder,” he said bluntly of the meltdown, which has seen Nordstrom, Macy’s, Sears and J.C. Penney resort to a variety of tactics, including store closures and layoffs. “[These retailers] cannot say that external forces are doing this to them.”

Both Lyon and Berenberg Capital Markets LLC analyst Corinna Freedman* agreed that the effect of Amazon and other digital developments may be overblown in some cases and that other factors have significantly contributed to negative trends. “Assortment mix is definitely a problem for department stores — they have way too much apparel,” Freedman said.

In a spirited conversation, Lyon, Freedman and Poser got candid on retail’s biggest challenges, its most equipped performers and what it will take to power through.

What were the key issues impacting fashion firms in the first half of 2017?

SP: “This year is one of the weirdest calendars for retail that we’ve ever seen — everybody has gotten hurt by it. Tax returns move out of February into March, and Easter moves out of March into April and so on. The only company that had a good Q1 — and 
it wasn’t because their business was great but that they guided well — was Caleres with Famous Footwear. In general, though, business isn’t as bad as everyone is making it out to be.”

CL: “Amazon is affecting every retailer. However, within athletic,
 the bigger issue has been the cyclical [problem] that started with Nike going through an innovation lull last year. This year, more of Nike’s platforms have decelerated quicker, so it’s harder to mask those issues on top of the fact that you have everything that was strong for Adidas last year starting to slow down and contract. On the fashion side, we’re seeing more of the disintermediation impact because a lot of the channels that those brands sell through are seeing a slowdown from [Amazon’s] impact.”

CF: “We’ve had so much in the first half: the Amazon overhang, a terrible calendar and [dismal] weather. March through May was one of the wettest seasons we’ve had over the last 100 years, and June continued to be overly wet. Americans don’t shop when it’s rainy, and 80 percent of sales are still in brick-and-mortar. I believe sales have improved since the weather became more seasonable in July. I expect that we will see a nice inflection for the second half as comparisons get easier.”

What factors are to blame for 
the dismal performance across department stores?

SP: “Most department stores have been lowering the bar for themselves, and the result is that business is poor and they’re closing stores. Amazon is [successful] because department stores have given them the opportunity to [do so]. Department stores are trying to fix their issues by offering better product, and not through having better engagement with their customers. But they must work on engagement — otherwise, they’re all battling to the bottom.”

CF: “Department stores have floors and floors of apparel, which the customer doesn’t want to pay full price for anymore — especially kids and teens. They want to spend on accessories and footwear and things they get mileage out of. Department stores have to be more nimble and work on assortment.”

CL: “If you think about what department stores offer — there’s nothing they sell that can’t be bought elsewhere. There’s no uniqueness and reason to go there, because it’s not like you can get anything special. They’re basically competing on transactions. We’ve gotten to a point where millennials and Gen Z are the largest-consuming demographic — and they’re much more comfortable with online shopping. There’s a slow adoption — on the part of D-stores — in figuring out how to evolve and create newness and uniqueness for that customer.”

Do you anticipate more retail bankruptcies or have we seen the bulk of them?

CF: “I hope the worst is behind us. When we look at the real estate trends to get a sense of the market, vacancies are down actually. So there are new concepts that are coming up that no one’s talking about and areas that are actually growing. The mall absorption is up 4 percent in the first quarter year-over-year — which means more new stores are opening than are closing right now.”

CL: “We expect to see Academy Sports & Outdoors file for bankruptcy. They are showing several telltale signs: They have a levered balance sheet, negative traffic and are private- equity-owned. There’s a competitive pressure there that Dick’s is also responsible for in
 the sporting goods space. And Amazon has also played a part here. The weather this past winter has also put some firms — that were without lifelines — over the edge.”

What do brands and retailers need to do in order to be successful right now?

CL: “The way the retail landscape is set up right now, you have to have three pillars that all work together. You’ve got to have good product, an expertise in logistics and supply chain, and some kind of technological advantage — either in-house or by partnering with an outside technological beast.”

SP: “If you don’t know who you are and can’t communicate that, then you won’t be successful, regardless of how good the tools you have in place are. We see a lot of companies that talk about having technology and other [innovation], but their business is terrible. The [firms] that know who they are will use the tools — e-commerce, digital, social and mobile — to get ahead. There are companies — DSW and Finish Line are two examples — that have these tools but don’t know who they are and how to [employ] their tools [effectively]. They have no message.”

What firms are best equipped to navigate the current landscape?

CF: “If I had to put my money on one company that’s going to survive for the next 50 years, it’s Nike. I also [believe in] Amazon, but our top pick is Nike. I prefer the brands to the retailers because the margins are getting squeezed out everywhere, and Nike has an ability to recapture gross margin by lowering sourcing costs. I love the manufacturing revolution that’s going on there. Athletic brands will inherit the earth. The health-and-wellness trend is not fading. The population is getting older, and there are a lot of favorable demographic trends that support Nike and athletics.”

CL: “Steve Madden is hitting on all cylinders right now. They’ve been crushing it on trends; they have an ability to be in-season; are quicker to market compared with anyone in their grid; and they have a very strong, burgeoning relationship with Amazon that no [other brand in the space] has. They check off all of the boxes; their business is on fire.”

SP: “Steve Madden is my No. 1 pick. The brand actually has people in Seattle managing their Amazon business. What Madden does better than anyone else is that — on top of speed, supply chain and all of that stuff — they know their customer, and they talk to her at every place that she is, and they do it through technology.

*Since FN’s interview, Corinna Freedman has exited her role with Berenberg Capital.

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