FINANCE

Analysis: Sears is headed in entirely the wrong direction

As much as Sears deserves credit for the various actions it has been taking to shore up the company, there is no denying that this (Sears second quarter financials) is a miserable set of numbers. Indeed, the precipitous drop in comparable sales and the continued lack of progress on profit suggests the company isn't moving far or fast enough to ensure its long-term survival.

The ongoing slide in same-store sales, which dipped by 11.5% this quarter, reveals the fundamental weakness with both Sears and Kmart: fewer and fewer people want to shop there, and both firms continue to lose relevance. This is hardly surprising as store environments across much of the estate are now so profoundly unappealing that many consumers seek to actively avoid them, let alone making a conscious decision to shop there.

Sears has long since argued in its transition to a nimbler organization with a lighter asset base, stores are a much less relevant part of the mix. This is one of the reasons why 180 outlets have been shuttered so far this year, with 178 further shops earmarked for closure by the end of 2017, including the 28 new Kmart disposals announced this morning.

Right-sizing the store portfolio is laudable and is something to which every retailer should be attending. The difficulty for Sears, however, is that as weak stores are disposed of comparable sales from the remaining parts of the chain should, in theory, be improving. However, this is not the case.

The decline in same-store sales appears to be accelerating, especially at Sears. Other metrics are also on the slide. Gross margin rates for merchandise are down over the prior year; expenses as a proportion of revenue are up sharply; and, interest payments are higher. All in all, Sears is headed in entirely the wrong direction.

Against such weak financials, Sears has been monetizing assets and securing credit lines to ensure it can stay afloat. However, this financial wizardry is not fixing the underlying problems; it is merely kicking the can further down the road. Worryingly, despite all the changes, Sears still lost $251 million over the quarter — and this is after the $380 million gain from asset sales is taken into account. Moreover, the gap between assets and liabilities continues to rise and now stands at $3.6 billion.

As much as Sears is in a dire position, it would be unfair to accuse it of doing nothing whatsoever. The opening of a new store format in Texas that just sells mattresses and appliances is interesting and provides a much more compelling destination than traditional stores. Meanwhile, the decision to sell Kenmore appliances on Amazon is a smart move that will help expand the distribution of the brand. The problem is that both of these initiatives are tiny drops of positivity in a vast ocean of problems and, as such, are not going to save the company.

The bottom line is that as a retail proposition Sears is fundamentally broken. And its long and painful slide into oblivion shows no signs of abating.

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MARKETING/SOCIAL MEDIA

Teens losing interest in Facebook

BY Marianne Wilson

Retail marketers take heed: Facebook's appeal is fading among teens even as two other platforms continue to pick up momentum.

Facebook’s community of monthly users in the U.S. will grow 2.4% this year to 172.9 million people, thanks to increased adoption by older internet users, according to a report by eMarketer. But the social network’s monthly user base among the marketer-coveted 12 to 17 age group will fall 3.4% over 2016 to 14.5 million people, marking the second consecutive year of expected usage declines by teens and up from the 1.2% slip recorded in 2016.

Monthly Facebook usage among those under 12 and ages 18 to 24 will grow more slowly than previously forecast, too, the report said.

“We see teens and tweens migrating to Snapchat and Instagram," said eMarketer senior forecasting analyst Oscar Orozco. "Both platforms have found success with this demographic since they are more aligned with how they communicate — that is, using visual content."

Indeed, eMarketer’s latest forecast has Snapchat overtaking both Instagram and Facebook in terms of total users ages 12 to 17 and 18 to 24 for the first time in 2017. As a result, Snapchat’s share of U.S. social network users will grow to 40.8%.

Those teens and tweens who still remain on Facebook seem to be less engaged, Orozco said, logging in less frequently and spending less time on the platform.

“At the same time, we now have ‘Facebook-nevers’ — children aging into the tween demographic who appear to be overlooking Facebook altogether, yet still engaging with Facebook-owned Instagram," he added.

eMarketer has increased its projections for Snapchat usage. The social network’s U.S. user base is now expected to grow 25.8% to 79.2 million monthly, with the biggest upward revision made to the 18-to-24 group where usage will escalate 19.2% this year.

Similarly, monthly Instagram usage in the U.S. will grow 23.8% in 2017, a rate higher than previously forecast, to 85.5 million. Within that figure, Instagram will expand its user base among those under 12 years old by 19.0% and those ages 12 to 17 by 8.8%.

“Facebook is fortunate that it owns Instagram, which remains a strong platform for teens,” said eMarketer principal analyst Debra Aho Williamson. “Although usage of the main Facebook app is declining among teens, marketers will still be able to reach them on Instagram.”

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C-SUITE

Target names new strategy and innovation chief

BY Marianne Wilson

Target Corp. has tapped a McKinsey & Company veteran to head up its innovation efforts.

The retailer appointed Minsok Pak as executive VP, chief strategy and innovation officer. He replaces Casey Carl, who left the company in May.

Pak, who will join the retailer on Sept. 11, will be responsible for Target’s enterprise strategy development and retail innovation with the goal of enhancing the shopper experience and accelerating growth. He will also oversee business development, including mergers, acquisitions, partnerships and joint venture initiatives.

Pak most recently served as senior VP, Lego Retail at The Lego Group. He was responsible for leading Lego's branded retail channel, including more than 250 stores and e-commerce sites across 24 markets.

Prior to Lego, Pak spent two decades with McKinsey & Company, where he held various leadership roles and worked with leading global retail and consumer companies. Additionally, Pak led McKinsey’s digital transformation group. Pak also served (on temporary transfer from McKinsey) as the global executive VP and chief strategy officer at LG Electronics.

"Minsok brings deep business acumen and proven leadership capabilities to Target," stated Target CEO Brian Cornell. "Throughout his career, he has counseled numerous companies and led through significant times of change. He brings strategic vision, an innovative spirit and an ability to address complex business challenges by capturing near-term opportunities and charting a course for the future,” said Cornell. “As we build an even better Target for tomorrow, we must plan purposefully to drive growth and continue instilling innovation in every part of our business. I am confident Minsok is the right leader to fill this critical role.”

Pak will report to Cornell, and serve as a member of Target’s Leadership Team.

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