(Real Talk Series 8) Creditntell
Guests: Jim Rice, Sheema Shah, and Michael Blackburn
Topics: Creditntell, analytics
Transcript:
Chris Ressa 0:02
This is retail retold the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC management.
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Welcome to retail retold everyone. Today we have a special episode, we have some of the industry’s top analysts from the credit intel team.
We have Jim rice, Seema Shah and Michael Blackburn here. Welcome to the show, everybody. Thanks, Chris. Thank you.
So for everybody who’s out there who might not know you? Why don’t you all tell us a little bit about yourselves? Sema, who is SEMA Sha?
Sheema Shah 1:37
Hi, thank you for having me. So I joined credit, intel about six months ago, where I cover some of the distressed names and home furnishings and apparel prior to joining here as an equity analyst for about 20 years covering the retail and consumer space at Bloomberg intelligence research platform and also at a couple of investment firms, hedge funds and family offices. And so I’m excited to be here to join you today.
Ressa 2:02
Great. Jim, who’s Jim rice,
Jim Rice 2:05
okay, I’m formerly of the Boston Red Sox, the other Jim rice. I’ve been with credit Intel for 13 years. Been in covering retail for over 40 years. Believe it or not. I’ve been covering department stores, I guess, distressed department stores would be a redundancy, right? And some of the distressed parallel retailers. Previous to credit, Intel i was with Susquehanna on on the sell side and worked in factoring and also another agency a competitor of credit, Intel’s
Ressa 2:45
got it. And Michael, who’s Michael Blackburn. Well, I’ve
Michael Blackburn 2:49
been with credit Intel fnd reports for about 20 years now, monitoring primarily the grocery and drug space, as well as the sporting goods retailers. Prior to that I was in corporate finance, working in Treasury, capital markets, risk management, those types of roles.
Ressa 3:09
Awesome. And we also have Josh sufen on the line. For anyone who is interested in the credit Intel services. Please go to the credit Intel website. And you can find Josh there and he will be more than happy to discuss with you what credit Intel has to offer. And so that leads me in Ken, can you somebody on the panel, give me an overview of what credit Intel is and what you guys do.
Rice 3:42
Sure. Josh? Cool. So I’ve credit Intel, we monitor the financial health of retailers. So we have three of our analysts on the call today. But we have a team of 20 analysts who all monitor against financial health retailers looking at both public and private companies, and updating all of our subscribers on what’s going on with these companies every single day. And our whole goal is to really be an extension of your team, you get to speak with our analysts and find out all this amazing intelligence that we have.
Ressa 4:12
I’ll add, you know, the thing that I think credit Intel does. Amazing is the customer service. You know, for those who are subscribers know that when you click on a retailer, you can see the analysts you can click a link that can send an email directly to that analyst. They’re extremely prompt and answering questions. And if you can’t get them that way, which never happens, you can also pick up the phone and call them and they will, you know be very responsive and it’s one of my favorite parts of credit Intel. I can tell you without that extreme service. For me, it would be less impactful. And so I really appreciate about that culture that credit Intel has. And, you know, for those who are lazy like me, at the moment, if you need something, you can text Josh, and he makes it happen. So I do that probably all too often.
Blackburn 5:21
That’s what we’re here for. We love it.
Ressa 5:24
So, you know, SEMA? I think we’ll start with you, you’re the you’re the newest to the credit intel team. And, you know, because there’s nothing crazy or interesting happening with retail today. But you know, given that, why don’t you tell us, you know, what’s going on? What’s the real estate of retail today?
Shah 5:43
Well, the real estate of retail at this moment is, let’s say it’s volatile. I think that’s a good way to start right now. So I guess prior to where we are, at this moment, retailers were already facing different issues, depending on how they’re omni channel, competitive issues, in many cases. But as we went into the COVID, situation, retailers were faced with the unprecedented closure of most of their stores, if not, unless they were essential retailers. And what you saw there was that those who had invested in omni channel and had an online presence still able to service their customers. And to me, that was the big differentiator between who has done better in this period and who might be struggling. And as we are starting to reopen, we’ll continue to see where the customer is and how they’re feeling about returning to stores or I think where we’ll continue to see online strength. So that’s where I think the broader retail space is the consumer, I think is mixed, given the unemployment rates, and some of the pressure that some of the population was feeling prior to this COVID situation. So I think as we exit from this, you’ll continue to see the mass merchants and continue to be one of the dominating players going forward.
Ressa 7:03
Michael, what’s your take? What’s the real estate of retail today?
Blackburn 7:08
Yeah, I mean, as building on what Seema just said, multichannel is really the the top of I think most retail right now, it’s less stores, but not store lists. I mean, as we saw, throughout this COVID period, the preferred method of online digital sales was curbside pickup, so you still need that brick and mortar space. So there’s going to be more growth than just pure EECOM. The other trend is the next thing, you know, the, we have an economy built on consumption and the consumer are afraid to shop. So again, that’s pushing more and more of this revenue towards the digital channels. The other thing that we’re starting to see, and whether this turns out to be just a fad, or a real trend is the D densification. You know, people now are like, do I want to be in a city? Or do I want to move out to the suburbs. Also, that D densification. In terms of the malls, that’s going to be difficult for them to come back, people don’t really want to go back into a closed, confined space. So if you’re a strip mall, retailer, that’s going to be an advantage. So you know, company like Kohl’s, which obviously, like the rest of the apparel players, and most of their stores closed, maybe they’re in a slightly better position. From that perspective, the other major trend is going to be value. You know, if you go back to 911, you go back to the Great Recession. value was key coming out of both of those down cycles. And that is going to continue to I think play going forward.
Ressa 8:46
Got it? Do you have anything to add?
Rice 8:50
You know, working off what Mike just said, Because I covered the off price retailers. So they got hit pretty hard in q1, because they generally don’t have a web presence or very small web presence. Ross doesn’t have a website, Burlington is getting rid of their website. And TJ X is it’s only 2% of sales, it’s more of a convenience. So obviously they didn’t have any online sales during the quarter. But the proposition, the value proposition remains, and we’ve seen where they’ve had tremendous sales since stores have opened. Both Burlington and THX reported positive comps and it was a small sample size and a small amount of time, but positive comps, in stores that had opened. So I think for the off price retailers, especially with the amount of merchandise that’s going to be out there for them. They’re going to be one of the winners of the of the pandemic once once this is all the dust settles here.
Ressa 9:55
So appreciate that color on the general overview and so Jim You know, you cover off price and department stores? And on some level, do the do the off price retailers need the department stores to exist? Because their value proposition is, you know, based on the fact that they’re, you know, they’re, they’re more cost effective than the department stores if they does that hurt them? And then is there a lack of product if there’s less than less department stores over the long haul?
Rica 10:27
That’s a great question. And, and ultimately, I think they like having department stores around. And it came up with a VIP Phil’s found us and which is a client of ours, visa vie Macy’s. So their CEO was on CNBC, and it was talking basically, about that, and saying that, you know, selling to the off price retailers is not a great business model for them, that they need department stores. You know, that’s, that’s what they’re selling the full price that’s when selling, you know, their best products. So, I think there’s a kind of a symbiotic relationship, maybe between the two. I mean, they keep grabbing market share, you know, Macy’s is trying to fight it with, you know, with their own off price. Brand. But I think, I think ultimately, you know, department stores, help off price retailers.
Ressa 11:29
And so are they, the department stores, this amount of product that’s going to be available to off price is the abundance of inventory better or worse. For pretty off price retailers,
Rice 11:51
it’s bit better, because they, you know, they can pick and choose, you know, which brands the better brands they want. And it’s gonna be interesting, because some, some vendors are talking about doing pack and hold themselves, you know, for non fashion forward merchandise, because, you know, basically that they have three choices with the merchandise, it’s either market down significantly to their normal distribution channel, what maybe department stores, try and sell it off price retailers are are trying to do packing hold themselves if they can, for the next season. So there’s, there’s a lot of people looking for warehouse space. And it’s kind of unclear, you know, which way it’s gonna go at this point. But that’s a big question for vendors, you know, what to do with this merchandise? That’s, you know, that’s out of date already. Pretty much.
Ressa 12:48
Interesting. You know, Michael, you had touched on the acceleration to online and the, the curbside pickup, you know, one of the things that I keep pointing out, and that is concerning is, and I’m wondering how it affects both retailers and the consumer is the acceleration of online just means that retailers are now selling more in a channel that’s not profitable. And so how did you know? I’m hopeful. And I It seems to be the case that curbside pickup might be the last mile, that might be the answer. I don’t know if it truly will be. But I believe that curbside pickup has proven to be convenient to the consumer, the consumer wants it and that the it might be the last mile. And that would be good. But if it’s not, you know, all these retailers have accelerated online and a business. That’s not That’s not profitable. And so either that that cost gets pushed to the consumer. And I think if we have an economic downturn, that’s not going to play out well. For the retailer. There’s no doubt that consumer wants convenience, and they want it now. But from the business side, we haven’t figured out how to do that profitably. And so how does that play out?
Blackburn 14:27
Right, yeah, so pretty much across the board, it’s very little if any profit in online revenues, you have additional costs. If you take the grocery sector where you might have a five or 6% EBIT margin, it’s razor thin and now you have the added cost of an employee going and picking and packaging and then holding and bringing it out, as well as the additional costs. I think the trend is and again looking at the grocery space. The focus has been investment automation robot products. And that’s that’s really the only answer to this puzzle is you need to automate more, that’s going to improve your accuracy, it’s going to reduce your costs, reduce your shrank and improve your pick accuracy as well in terms of getting the right merchandise into your stores. So that’s really going to be the key and there’s going to get into the grocery space, there’s somewhat of a not a real battle, but not a consensus yet on how that’s going to move in terms of is it going to be, you know, the Albertsons Wakefern are holds focus, which is more and micro fulfillment, the smaller less capital intensive distribution centers that might be 40 50,000 square feet or less, even actually, the 15 to 20,000 square feet, versus the large Okada style, that’s Kroger has made a big investments which are costing $50 million plus and take a year or so to ramp up. So I think what it may end up being is kind of as a spoken hub type of strategy, we will have the large distribution centers, the Okada facilities and the smaller micro fulfillment, kind of surrounding those to fight provide fill in for the relative customers in the different markets. So
Ressa 16:20
there’s no Admin Center stores.
Blackburn 16:24
The microfilm is not stores, but they are going to be fulfilling the orders. Right? So then they could ship them to the stores? Or, yeah, there is a question how do you even just go to the micro fulfillment center and pick up your order there, that hasn’t been happening yet. But you know, there’s gonna, there’s gonna need to be some changes as well, in terms of the brick and mortar space to deal with this as well. I mean, you need to change the store format, the parking lots, create a better system, so there’s not people waiting in cars. And ultimately, you know, we saw a big ramp up right in grocery, again, about a third of households are now using some type of digital online ordering. That’s up from about 15%, just last summer. So it’s been a big shift. The grocery space wasn’t ready for that we’ve seen a lot of issues in their ability to handle that they don’t have the capacity yet to deal with that. Looking at our hold, and there are pea pod service there, there was wait times up to two weeks to get your groceries delivered. So you know, were customers satisfied with that experience? And will they go back to it once they feel comfortable shopping? Again, when you say,
Ressa 17:34
I don’t know, if you’re able to, you know, unpack the numbers these way, this way. But you said so 33%, digitally? Oh, of that 33%, what percentage do you think was fulfilled at the store versus delivered direct to home.
Blackburn 17:51
And the majority that was at store, I mean, I think going into this, it was a rough estimate of maybe up to 40 50% was pure delivery. And most of that is being handled by Instacart, which is a third party. And that’s not really a long term solution either, because you’re handing over all that data to a third party, potential competitor, you really want to keep that data in house.
Shah 18:15
So I think what’s different for non food is one that there’s not a perishable factor to it. But you are seeing in many cases store in some capacity either through curbside byline pickup in store or also ship from store. And then retailers are working with their vendors to do direct ship. And these type of fulfillment options significantly improve digital sales and it gets just more traffic within the store, which is a key component of what retailers have been trying to do going forward.
Ressa 18:46
Given the the challenge to profitability without a store, the digitally native brands that don’t have stores, you know, going into this unprofitable, going into COVID-19 unprofitable and now positioning into a potential economic downturn. What what is the fate of the digitally native brands that do not have a store presence, you know, outside of Amazon,
Shah 19:15
or digitally native brands, you see that they are able to garner the attention and traffic of usually typically younger consumers. They tend to be more relevant to what you’re seeing with those type of brands. After they build some skill online. It’s either to open a few select stores themselves or partner with existing brick and mortar retailer. So you see that with beauty with Ulta and Sephora. Previously, we saw that with Casper who had a relationship with target so that way they’re able to leverage the the store of a partner and for the partner it helps them to be able to drive traffic of potentially a different consumer than their normal demographic. So that’s what we had seen historically or pop up stores which is an other short term way to like marketing, but also able to get people to be aware of your brand and to come in and check out things.
Ressa 20:07
That kind of defeats the whole direct to consumer. If now, these digitally native brands who are these DTC are now wholesaling their goods into Target in other places, is that a different business model?
Shah 20:24
It’s a slightly different business model. But I think the majority of those retailers still have their sales coming from the online. So in many cases, to me, it’s the marketing, it’s a way to market your product to a consumer base that you don’t have either, right, because it’s hard to consumer may not be the same as the typical Kaspar consumer, for example.
Ressa 20:46
Is are those digitally native brands do if we do actually hit an economic downturn, unemployment the way it is? And it’s hard? It’s it’s challenging to be profitable, online only? Are they in trouble?
Shah 21:04
I would say, yes, broadly speaking, just because the nature of their business model is to spend most of their SGMA either on employees or marketing, and shipping. And so if you’re not able to have the top line growth at a sustainable high level, you’re going to be spending more than you’re making. So I think you’ll see some risk to those businesses in a downturn.
Ressa 21:28
I asked because in headline news, we read about some of the bankruptcy risks on the, the Tuesday mornings in the JC Penney’s of the world, but I, I don’t read about any of these digitally native brands, these DTC brands that were unprofitable going into this and I keep, I keep wondering, you know, what’s going to happen, you know, they were unprofitable going into this. And now there is this, you know, potential economic downturn, these changing consumer behavior, I would think that there is some risk there.
Shah 22:08
I would agree with that completely. I’ll let somebody else jump in. But you do see, I think what you’re saying is correct. And you’ve seen some of the larger retailers that have acquired the online brands like Bed Bath and Beyond had requite acquired One Kings Lane and Walmart acquired ModCloth, and other things, they may have been able to get some technology out of it. But even with the infrastructure of a larger established brick and mortar retailer, they tended to be unprofitable on ended up being closed or sold. So I think that you’re right, in that respect, Jim, or anyone else? Comment?
Rice 22:40
Just the pre COVID-19 consensus was kind of you had to be an omni channel retailer, you couldn’t be brick and mortar alone, and you couldn’t be digital alone, you had to have all these different channels. And it’s probably even more so post COVID-19.
Ressa 22:57
Got it. I think that, you know, that sums it up pretty well. And so, you know, Seema, you were talking about the, the non grocery and hat and the acceleration of online and non grocery. And we were talking, you know, I had mentioned the, you know, I’m I’m hopeful that the curbside pickup is the last mile out of the house that playing out in the non grocery world.
Shah 23:23
I think it’s actually been quite successful. So prior to COVID, there were some of the more established big box retailers who were off mall or in their own strip center had already started to implement curbside pickup, because it was an added convenience for their consumer and it was sort of an an extension of the service of Bovis buy online pick up in store. So what you saw already was that in many cases, for retailers across the spectrum from Tractor Supply, to you know, Home Depot, and even some of the other ones like Best Buy, you saw that 70 to 80% of their online orders were already being picked up or fulfilled somehow through their store. So either through customer pickup or through ship from store. So what happened was during the COVID situation when people wanted contactless pickup or fulfillment, this sort of accelerated that movement to curbside pickup. And I think in many cases, it’s been quite successful. It’s definitely more profitable for the retailer. And it’s an added convenience for more consumers and it’s less costly for them to to the extent that shipping is still a cost that a consumer has to bear. So I think it is pretty close to the last mile people will there always be a portion of consumers who want the package sent straight to their home. But as you get more fulfillment from stores that is a cheaper I guess delivery cost mailing from a local store and also retailers can partner with their vendors to ship directly so but as you move towards using your store as a fulfillment center, you’re improving the profitability and I think For most non essential items you need that works out for a lot of consumers.
Ressa 25:05
That’s awesome. Good Intel. And so, you know, I want to move Jim to the department stores. You know, that hasn’t been evolved to a marketplace. Hmm. No, no, no. So, you know, we had some, we had Nordstrom closing stores, we had JC Penney in the filing, and we had, you know, Macy’s announcing store closings, and you know, Sears was a stores date store, Sears, and we had, you know, all all this turmoil, what’s going on? What and what’s the future outlook here on department stores?
Rice 25:54
Well, I think part of it is, you know, COVID kind of condensed everything and in pressure everything so, changes that are probably going to happen over five or six years are happening over five or six months. So I think you know, apartment stores have had a shrank there were too many stores you know, struggling to remain relevant losing market share to fast fashion, off price especially. They, they’ve been making some changes merchandising wise, as far as getting merchandise to the stores quicker, you know, speeding up their supply chain, and things like that. I don’t think they’re going away. I mean, Lauren Taylor will be the next domino to fall. But I think the chains in place now. possible exception of Belk because, you know, there are no Bo and I have a lot of debt. But I think we’re gonna see, you know, smaller, little more nimble department stores, post COVID. And, you know, I think the ones that are out there now survive, just, you know, a smaller, smaller chains.
Ressa 27:14
What is the product mix of a department store look like in 2021?
Rice 27:19
I think it’s gonna be less parallel, you know, just like malls, they over relied on apparel. So they became giant apparel stores, accessory stores. So I think you’re gonna see more home more beauty and less reliance on PrEP, maybe more, more footwear, less light reliance on apparel. So the merchandise mix will be tweaked a little bit. Got Kohl’s and Macy’s.
Ressa 27:49
And so, you know, what do you think happens, you know, with JC Penney, this iconic brand, and you know, now, where they are today? And, you know, do they come out of this stronger, what, what what happens?
Rice 28:02
It’s still, you know, it’s still probably 5050, whether whether they’re going to be able to emerge from bankruptcy or not. There’s some push from some of the secured creditors to liquidate it fairly quickly. For them to get a big return on on the buck. It seems from the early rulings, the judge looks like he wants it to continue as a going concern. And, you know, he may push it in that direction. I don’t think he wants 108 year old business employing about 100,000 people to go away. And I do think they were moving in the right direction, you know, obviously needed to close some stores, which they’re doing now. But I think they finally had a merchant in place, and they had some good ideas. They seem to have a pretty good management team in place. So, you know, if if they’re able to come out. I think there’s room for JC Penney, I think they can be relevant to a certain middle class segment, you know, bigger Latino market also. So, if if they can, you know, maneuver, make the financial maneuvers and come to an agreement with the secured debt. I do think a smaller percentage could survive and I think a lot of mall owners don’t want them to go away.
Ressa 29:27
Yeah. You know, one of the things I was wondering is, you know, and you mentioned Van Heusen earlier, you know, what happens to these brands that are reliant on department stores as a channel to sell their goods, whether it’s Nordstrom, whether it’s JC Penney, Macy’s, do they does that? Does that force them to start to open their own stores? Does that force them to go into different retailers? Are you going to start to see brands that never were in an off price now in an off price do they start to open stores what happened? as to some of these brands,
Rice 30:01
probably all the above. So yeah, I think they’ll diversify their distribution channels a little bit, I think they’ll move to open more stores, although, in many cases, that’s not their, their field of expertise that doesn’t always work out that well. But, you know, they’ll have to, if departments or strength or you know, most of them go away, you know, they’re gonna have to figure something out, because that’s, that’s their main outlet, some of these some of these big brands like that.
Ressa 30:37
So, So, Michael, one of the, you know, we heard a lot about grocery through COVID-19, and the increased sales of grocery. What I didn’t hear a ton about was the drugstores. And you know, what’s going on with the drugstores? And what happens to drugstores on a go forward? What do they look like?
Blackburn 31:05
Well, what happened was, they for the most parts are a surge in demand, some panic buying in the front end, so you couldn’t get your toilet paper at Stop and Shop. So you went to CVS and Walgreens. And then in the back end, in the pharmacy side of the business, there was a pull forward of medications, if you recall, even before this with the trade tensions with China, there was concern about the pharmaceutical drugs supply. The majority of the raw ingredients used for most of our pharmaceuticals are sourced from China, and then manufactured in China or other countries abroad. So most of our drugs were shipping in from other countries. So that was a pull forward, if you had a chronic disease you’re dealing with and maintenance medication, you will pull for pulling forward your scripts, rather than every 30 days, you did a 90 day script in March. So they saw a big surge in demand in March, that kind of leveled off coming in going into April and May. And so they’re starting to dow catch up, I expect it to kind of plateau and we kind of return to normal times now in June as we kind of got through that period. The bigger trend is and I think this is mostly favorable is that all the retail drugs in three big chains, Walgreens, CVS and Rite Aid had been shifting their strategy from a point of convenience that you know, your your corner drugstore, you come in, you get, you know, your gum and prescription and maybe, you know, you sundry items to one of our healthcare, a healthcare company. And I think at the front of this, and the one best positioned, at least initially is CVS, which with his acquisition of Aetna, just over a year ago, is a fully vertically integrated healthcare company.
Ressa 32:58
Yeah, that was fascinating. You know, they, then they’re now on the channel and to end really fast.
Blackburn 33:03
Right, so their insurer, they even have some provider care facilities, their pharmacy benefit manager, which manage the whole claim process, and they’re the retail retailer as well. So they they’re looking at themselves as the front door of health care. And that’s going to create a lot of efficiencies in terms of managing from the insured data all the way down to the patient when they get their prescription fulfilled. We all know it’s kind of a antiquated and confusing system that throughout that whole kind of supply chain. So their their big push was this health hub format that they were starting to roll out, adding more pharmacies type services, adding more health care services. So very similar to a lot of these 24 hour care clinics, they wanted to be staffed with a nurse practitioner or physician assistant, and deal with a lot of the more minor types of health care concerns whether you have the flu, or just needed a quick stitch or something like that, or even just doing basic testing. So they’re going to start to see a big surge, particularly as we get to the test, we continue the testing phase, CBS has already rolled out over 1000 testing facilities for COVID-19. Then ultimately, once we do get to the vaccine phase, they’re going to be very ready for that part of the business as well to kind of jump in there at that point. So this shift in strategy has been pretty appropriate. And I think they’re all pretty well positioned for that. And again, I think CVS is really ahead of the game from that perspective. And then you have the overall general trends that we’ve already been seeing and just an aging population, and the increased use of pharmaceuticals as a form of health care. And if you look at healthcare spending, Pharmaceuticals is only about 10 to 15% of the total healthcare spending. So it’s the cheapest form of healthcare spending keeps your overall health care spending down. If you stay on your meds, if you go off your meds, you end up in an emergency room. And that’s the most expensive form of health care. So all these trends are very favorable in terms of the growth side, the negative thing and of it has been the margin side in terms of lowering reimbursement rates for pharmaceuticals, a lot of headlines in recent years with the epi pen being kind of the headline case, in terms of the kind of the runaway pricing in terms of inflation for a lot of the branded types of pharmaceuticals out there. The reality is, prescription drugs in the aggregate have only been increasing one to 3% a year in the last couple of years. A big reason for that has been the shift from brand to generic drugs. And that’s really helped keep the price of drugs lower. It was also much more profitable for a lot of the drug retailer. So that’s been the focus of third party payers, the government and insurers in terms of pushing down that reimbursement rate for those generic drugs. So I think they’re all pretty well positioned there. It’s been kind of a bumpy road the last couple of months first, a surge, now kind of a trough and starting to level back often more normalized volumes.
Ressa 36:19
Got it fascinating. The Do you think that the footprint of drugstores in the in the US is appropriate? Is it too much or given the new trends? You know, where, you know, maybe there’s some optimization, but we are in, you know, it’s an appropriate footprint.
Blackburn 36:45
It seems to be an appropriate footprint. I mean, there’s been some consolidation, obviously, Walgreens picked up a little bit less than a half of the Rite Aid business and then announced they were closing several 100 of those locations as they consolidate that footprint. And it was more aggressive than I guess we initially thought. So that kind of points to maybe it wasn’t such a great deal for Walgreens. But that for the most part has been behind us. CVS has also closed a few stores, but in the aggregate is still adding locations. I think we’re probably at a stable point in terms of the retail footprint, they are still opening stores and continue to close a few as well. And again, CVS is on a net positive store count. Movement, Rite Aid is more or less flat. And I think Walgreens now is kind of leveling off as well.
Ressa 37:37
Got it. Seema. So you cover home furnishings and being working remotely. home furnishings are becoming near and dear to my heart. And I know they’re near and dear to a lot of Americans out there. What’s going on in the home furnishings world?
Shah 37:57
Sure. So I would say broadly speaking, home, the focus on the home has really increased as people are staying home. So you’re seeing that in the home furnishings and decor sector. And also, I would say to some extent in the home improvement sector. If you want to start the home improvement sector, because people are at home, and having to work live and teach their children at home, we’re really noticing their surroundings. And so in many cases, you’re seeing an increased spend on projects inside the home and outside the home typically do it yourself projects as people didn’t want outsiders to come in because of COVID. So that’s been a plus, I would say for the home improvement retailers other than the fact that two thirds of their sales are from essential necessary break and fix type of situation inside the home and home decor you that again, as people had to move to work at home and teach their kids, there was a surge, I think in sales of office products, desks, and other types of merchandise in that sense. But more so as we’ve gone on and people are actively at home and the the time that home is increasing, people are spending more I think on the home decor side and you’re seeing that strength. If you look at somebody like Wayfarer, whose online sales have been extremely high I think in the quarter to date they were almost 90% The company said Bed Bath and Beyond also had very strong online sales in the month of April and nearly 85% And that’s as people are working to to decorate their homes, but also to spend on small appliances and other things as they get back and just enjoying being in their home. So you’re definitely seeing a strength. But you know, that’s not true for all of the retailers. It again matters on the services you provide the product selection and how relevant you are to the consumer in terms of stylistically, but also what you represent, right. Something that’s really important now is being socially conscious. And you see that with someone like Westown which is owned by William Sonoma, that’s really helped them gain share with millennial Those and Gen Z, because they’re socially conscious. So I think having a brand message, you become top of mind when people are then focused on this category. And I think for some of the math players, home has also been very strong. So just being at home, want to make your environment a little bit better.
Ressa 40:17
So you spoke about one that I’m always fascinated by which is Wayfair. And I don’t know net and look them up. Are they profitable yet is Wayfair making money.
Shah 40:27
So no, on an even basis, they’re not making money a year ago, they would have said that if they have stopped investing in their supply chain and international growth, they were positive and their US segment would be positive on EBIT, adjusted EBIT that basis, excluding that investment. But given that they continue to invest in growing internationally, which is Canada, Germany and the UK, and developing their supply chain in the US, they continue not to be profitable. But I think part of their investment in their supply chain has really helped them during this period where supply chain and logistics has been very important, because they had invested and they had the most highly sought after products in their warehouses already. They were able to still continue to have next day delivery. And they didn’t have that delay that many other retailers had. But I think their goal is more about gaining market share and mindshare and continue to build up that globally versus being profitable at this point. How
Ressa 41:29
stable is this unprofitable? Nature that they keep running? And no, it’s investment in they’re continuing to invest in the business. But at some point, you have to generate free cash now.
Shah 41:48
Agreed. So I think what happens at least in this type of space, where it’s all about market share and mindshare is you have those companies that take the lead in a particular category. So you could say Wayfarer, you could say Warby Parker, Amazon generally, and they are typically allowed to buy the street meaning Wall Street and investors to take that time to invest and perhaps fall back on their profitability that allows them to get further ahead. It’s not a sustainable model indefinitely. But in the near term, when it’s all about gaining market share and mindshare. I think they’re given that leeway that many other retailers are not. And that’s sort of been my case about why Amazon was such a tough competitor for many of the existing retailers. It’s not that is that because they were always able to invest and sort of act irrationally, if you could say that from an economic point of view. Whereas other retailers were not were punished by the street for taking the time to invest in marketing and technology, because it was margin caused margin pressure. So I think it’s not a sustainable model. But certain companies are sort of given that opportunity to get ahead and get that wind shear that many brick, you know, Legacy retailers or not, and the smaller online players are not able to get that leeway if that makes sense.
Ressa 43:06
Yeah. So can you educate the audience when you say mindshare? What do you mean?
Shah 43:11
I’m talking about coming to the top of a consumers mind when they’re looking for a category. So it’s been said that about 30% of retail starts at Amazon. So they have that mindshare, that if you’re just going, particularly for a commodity type of product, and you’re a prime member, you start at that website, and then you may go on and third. So having that mind shares to the extent like I need a new fridge. First thing you’re gonna go look at is okay, Home Depot sells appliances that they come to mind. And I think, in wayfarers case, they’re building up with their multiple brands that mind share with the younger consumer that when you need to get some sort of furnishings or decor for your home. That’s the place that you might look to start out with particularly online. So I think it’s about being relevant, particularly to the millennials and the younger generation who are going to be the largest vendors now that Gen X and baby boomers are sort of aging out.
Ressa 44:04
Do they you mentioned 30% for Amazon, do they? Are there metrics available to find out how much mindshare certain retailers have? Is it out there?
Shah 44:16
It’s hard to you know, people look at different things like Sensor Tower data, which shows how much an app has been downloaded or Google Trends to see how much the name of a brand or is being hit on the internet. So it’s hard to particularly get that as an outsider. But also companies will tell you when they do their research, they have unaided and aided brand awareness. So sometimes you get those stats, but it’s hard from an outside perspective to get that without certain metrics like that, or, you know, online scraping that can tell you how many times something was hit, but you could also there are sort of like a mosaic. You could look at Instagram, to their Facebook page to their Twitter page, and you can kind To get a sense of consumers reaction to that brand and how many followers they have, so it’s not scientific, but it’s sort of a way to gauge one brand versus the other.
Ressa 45:09
Got it? All right. So that was all fascinating. We’re, we’re, we are running short on time, and I want to be conscious of all your schedules. So I’ve got a few. I’ve got one more question. And then we’ll pivot to what I call retail wisdom. What question in each one of you what question, are you dying to have answered? What what question about retail right now your sector and retail is really burning on your minds that you all are looking to have answered? And you’re very curious about, and Jim will start with you.
Rice 45:45
Right now is, I guess, for me, what kind of comfort level are people absent a vaccine? What kind of comfort level are people going to have going back into stores?
Ressa 45:59
Got it makes sense? We haven’t seen
Rice 46:01
we’ve seen some evidence, but you know, jury’s not out yet.
Ressa 46:05
Yep. Michael, what’s, what questions burning for you?
Blackburn 46:10
I think for both grocery and drug, it has more to do with the supply chain, what lessons are we going to learn from this in terms of managing these essential ingredients in products that we use need and require every day? In particular, the pharmaceutical channels, will we bring more of this manufacturing back into the United States, with the grocery space, there’s been a lot of consolidation, we see a lot of the headlines about the meat processing facilities, closing down a lot of that mergers and acquisitions, we really heightened this whole supply chain. So when you have a supply chain that said tight, any bit of stress and the thing snaps, and that’s what we’re seeing, we didn’t really see it with the pharmaceuticals, but we could. So will we learn these lessons and find ways of bringing this back into United States? I think the problem with that, obviously, though, is it’s going to be more costly. And obviously, we’re all very afraid of inflation and rising costs.
Ressa 47:15
Great perspective, and Seema? What What? What questions burning on your mind?
Shah 47:21
To me, really, at the end of the day, it’s about the consumer, they drive the economy, they are the customer. And so I really would love it sort of piggybacks off what Jim’s question is, like, where are they if I could get the details as to really how comfortable and strong the consumer is? And where? And do they have that? Do they feel like shopping because we’re getting into back to school on holiday, and it’s the key period. And so it’s just like, how comfortable they do they feel it with their financials to go out and spend, because that’s really what it’s about at the end of the day, either online or in store. And so I just don’t feel like we have a full understanding of where the consumer is, and what they’re going to be spending on if it’s just going to be focused on essentials or discretionary.
Ressa 48:09
What’s your guess? Where do they spend? See,
Shah 48:12
I guess it’ll continue to be honest essentials. And you’ll still see some I think they will start to spend somewhat on discretionary because you’re seeing that, but I don’t know what their capacity is to continue to help the economy grow at the pace that it had been growing. And so I’m not sure if that’s being baked into what people are assuming like, even until there is a vaccine, people might not be comfortable going out. But even if there is a vaccine, are the jobs are going to come back? Are people going to have the capacity to spend? I think they will do some on credit, they will but not maybe to the extent that many retailers might need for the broader economy. All right.
Ressa 48:50
Well, that was fascinating stuff. Thank you so much. We’re going to pivot to what I call retail wisdom. And so I have two, two questions. For you all individually, you can individually answer. So question one extinct retailer, you wish would come back from the dead? Jim, you’re up?
Rica 49:17
Okay, I’ll go back a while and I was always fascinated with this company. And I’d like to see what they do with current technology and that Service Merchandise if you remember them.
Ressa 49:27
Totally. Yeah, that’s awesome. Yeah, yeah. Michael.
Blackburn 49:34
I, it’s a tough question, because most of these companies fail for a good reason. I guess one company that stands out was Sports Authority, particularly the guard sports banner. I was always a fan of guard sports when I live in the Denver area. And I thought it was a shame what you know, when they did file, primarily, they were a casualty of an a leveraged buyout, very unnecessary leveraged buyout. So that would probably either one I would like to see come back Sema,
Shah 50:04
I would agree that it’s pretty much a very tough question because you sort of adapt to what’s out there. But I think from an apparel standpoint for me for like, where to work and comfortable, there was this old company that was owned by the limited brand called learner, it was in the mall, but they had a lot of clothes that were at a good price, a good value, and that certainly fit my size and we’re good for where to work. So that would be something that’d be nice if it came back if we start going back to the office, but it was a long time ago.
Ressa 50:33
I remember them for sure. All right, so last question. So I’ve been working from home remotely. And I’m in my basement as you guys can see from about seven to seven, and next week I will be down at the New Jersey Shore working from there. Still working, but giving my family a change of scenery and there’s a pool and so I need needed a new bathing suit. And I I’ve been looking at a bunch and I am currently on Tommy Bahamas website right now. And I am looking at the Baja hibiscus Row eight inch board shorts. What do they retail for on Tommy Bahamas website? Jim Europe
Rice 51:29
Tommy Bahama is not cheap. I’m gonna go 3499 3499 Michael.
Blackburn 51:39
I’m gonna go a little bit higher 9999
Ressa 51:45
and SEMA?
Shah 51:47
I was gonna end up in the middle. I think it’s about 75 to 85 bucks.
Ressa 51:55
All right. Well, Michael, you were like just about spot on. they retail for $99.50. But thank you for playing everybody. Well, listen, everybody. This was fascinating. Thank you for being my first multiperson podcast. We’ve done 35 Plus episodes since last fall. And this is the first multi guest podcast and so really appreciate. Thanks for coming on. If there’s anything I can do for you. Any questions you have from the real estate side, don’t hesitate to reach out.
Rice 52:30
Thanks, Chris. Thanks.
Ressa 52:33
Thanks, everyone. Thank you for listening to retail told, if you want to share a story about a retail real estate deal that you are a part of on our show. Please reach out to us at retail retold idlc mgmt.com. This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you’re a retailer, broker, entrepreneur, architect or an attorney. Also, don’t forget to subscribe to retail retold so you don’t miss out on next Thursday’s episode