Investing in retail? Here’s what to watch for

  • By Leslie Zane,
  • Barron's
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A cloud of confusion has hung over retail in recent days, after disappointing holiday earnings from Macy’s (M) and Kohl’s (KSS) sent stocks “reeling,” and gave “investors 2019 jitters.”

Even good news disappointed some investors: Target (TGT) had a “surge” of holiday shopping, with “more shoppers who also spent slightly more per visit.” Costco (COST) posted some strong numbers as well, and a prominent analyst gave it an Outperform rating. But because those numbers weren’t as impressive as a year earlier, its stock took a dip. Kohl’s also posted same-store sales growth, but by just 1.2%, creating a stark contrast from its more impressive numbers a year earlier. The retailer has now announced some store closures.

One sign of how investors are sometimes too quick to write off an entire sector: Nordstrom (JWN) stocks tumbled “in sympathy” with Macy’s and Kohl’s even though, just two days earlier, its stock was climbing due to an upgrade from Morgan Stanley (MS) .

Looking at all this, how is an investor to know where to place bets? After more than 20 years working with hundreds of brands on both in-store and online sales, I’ve learned that three key factors separate the winners from the losers. When placing bets on retailers, look for companies following these strategies.

Prioritizing growth targets over core customers

Brands have a choice to make as to where they’ll put their biggest focus: winning over new customers or getting current customers to spend more. Sure, ideally both will happen. But one has to take precedence.

Businesses can’t achieve substantial growth if they put the bulk of their resources into focusing on existing customers. Success comes from winning over new ones. But many retailers struggle with making penetration the priority.

“It’s clear to see where Kohl’s is losing ground: not among its core shoppers over the age of 35, but with those between the ages of 18 and 34,” an analyst with Prosper Insights & Analytics explained in 2016.

The company has been working to change that, chasing millennials. But when a top official from Kohl’s spoke at an event I attended late last year, the vast majority of his remarks described initiatives that cater to existing customers. When you hear a brand keep talking about customer rewards and loyalty programs, instead of putting greater attention on specific ways to draw in new customers, it’s a signal that you won’t be seeing the kind of growth that rewards investors.

Proven accomplishments in customer service

It’s no secret that in the age of Amazon (AMZN) , people need a compelling reason to physically go to a store. But far too many retailers just give lip service to this idea.

Which retailers are creating the most alluring experiences for shoppers? The 2018 Retail Reputation Report from reputation.com tabulated 4.7 million customer reviews to find out.

“This year, the stores with the highest Reputation Scores in overall customer experience were Bass Pro Shops, Disney Store, Nordstrom, Costco, and Barnes & Noble (BKS) , ” the group announced in November. Kohl’s and Macy’s didn’t make the top 25.

Note that this doesn’t mean Kohl’s and Macy’s are failing entirely in the retail experience. The report found that overall, consumers are happy, with Macy’s, Kohl’s, JCPenney (JCP), H&M (HNNMY) and others hovering “close to 4 stars.” But they’re lagging behind their competitors. With limited time and easier options, merely being satisfied isn’t enough for shoppers. A retail destination has to pull the customer there.

Not depending on digital to fix the brand

As retail leaders undertake digital transformation, many mistakenly think that shifting sales from stores to online is a victory. It isn’t. When you see digital sales growing but multiple stores closing, it suggests that the brand is giving into the fatalistic idea that retail is dead.

Mastercard reported that the shopping season from before Thanksgiving through Christmas was “robust,” giving “retailers much to cheer about.” But that overall picture includes online sales. And the news for in-store shopping isn’t as rosy. “Department stores finished the season with a 1.3 percent decline from 2017. This follows two years with growth below 2 percent, some of which can be attributed to store closings.”

To boost their value and accelerate growth, retailers need to use their stores to surround customers in multi-sensory pleasure, where they can see, hear, touch and feel the brand. Digital capabilities should be integrated into the retail format and continue the relationship with the customer when they leave. But online sales should never be pursued as a replacement for going to the store. Trader Joe’s (one of the top retailers on reputation.com’s list) understands this—and has big numbers as a result. So does “wildly successful” Warby Parker.

The key that differentiates all these retailers from Amazon is their brick-and-mortar presence. It’s management’s responsibility to reimagine their stores and make them so exciting that they bring in a whole new era of shoppers (part of the reason for Target’s success, and something Macy’s is working on). The more retailers do this, the more investors stand to gain.

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