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Countdown for the Holidays

BY Marianne Wilson

The leaves haven’t even turned yet in my part of the country, but the holiday onslaught is already well under way. Specifically, the annual deluge of forecasts and predictions as retail consultants, analysts, economists and others try to read the tea leaves with regards to the upcoming holiday season.

I’m always been cautious of actual holiday sales projections (especially the ones early on). Far more helpful, at least to my way of thinking, are the surveys that try to judge the mind-set of the consumers as they head into the industry’s most crucial selling season.

To that end, global management consulting firm Booz & Company has issued its annual Holiday Retail Outlook, which surveys not only consumers but also retail store staff and executives in an effort to determine buying habits and potential trends.

According to the results, in-store competitive browsing, heavy online shopping and downloadable gifts top the shopper behaviors expected this holiday season.

Here are some key findings:

• 52% of consumers will closely consider affordability in their shopping decisions;

• 73% of consumers said they expect to find great deals this season, compared with 62% last year;

• More than 80 million shoppers plan to purchase gift cards this season, about 4% more than last year;

• Downloadable gifts are becoming a distinct and fast-growing category, as 45% of consumers expect to give at least one downloadable gift (i.e., an e-book, a music download or a movie) this holiday; and

• 42% of consumers intend to buy apparel items as gifts, up from 37% last year, and 53% intend to buy at least one luxury item (up from 41% last year), and the item is likely to be one the whole family can enjoy.

The report makes it clear that multichannel shopping will be a core part of how consumers shop. Expect most customers to be simultaneously browsing in-store and on their smartphone. Forty percent of surveyed consumers describe “showcasing” as their new shopping strategy.

“The biggest challenge this season for brick-and-mortar retailers is determining how to drive more than their fair share of ‘showcasing volume’ to their websites rather than Amazon.com or another competitor,” said Thom Blischok, chief retail strategist, Booz & Company, New York City.

As to winning holiday retail strategies, the report offers the following recommendations:

• Develop seamless digital and physical experiences; for example, use QR code-driven promotions to convert a sale, consider free shipping on targeted items, use loyalty points to drive conversion or use online competitor price matching sparingly to drive price perception.

• Prepare online and mobile technology platforms for high volumes, because crashing apps will discourage consumers.

• Ensure that sales associates are very familiar with the website and any mobile offerings so they can help customers navigate among different buying channels in real time.

• Offer free shipping on targeted items or basket sizes. Shoppers are increasingly savvy about their all-in costs; last year, free shipping was a major online sales driver. Booze expects more of the same this year.

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dELiA*s Stylish New Look

BY Marianne Wilson

dELiA*s is showing off its feminine side. The teen apparel retailer has debuted a new prototype at Providence Place Mall, in Providence, R.I. The 3,674-sq.-ft. store has a stylish, upbeat vibe that reflects its target audience.

“The overall environment is fun and girly, stimulating interest in fashion as well as interaction among shoppers and sales consultants,” said Scott Shremshock, principal, Shremshock Architects & Engineers, Westerville, Ohio. The firm designed the store in collaboration with Asset Strategies Group, also of Westerville, Ohio, which provided overall construction and project management services.

The new design offers a more feminine and sophisticated environment, enhanced by the introduction of curves in the floor fixtures, wall panel system, mirror frames, display rods and signage. It keeps dELiA*s signature colors of white, silver and yellow, mainly using the white to emphasize the girlish atmosphere, and accenting the space with highlights of yellow and silver. A sparkly wallcovering (surrounding the wall panel system) and a damask wallcovering in the fitting room lounge enhance the ambience.

The highlights of the design include a central axis “runway” created by platform fixtures for the mannequins and vinyl plank flooring in the center of the store. The planks, which have a wood look, run lengthwise with the two sides perpendicular.

“The runway fixtures and flooring create a more high-fashion feel,” Shremshock added, “while the runway enables the customer to have fun while shopping the items that are shown on the mannequin and easily buy the outfit.”

Other highlights include destination focal areas for dELiA*s staples, such as graphic tees and denim, and an online boutique area where customers can shop for items that are not in stock. The dressing rooms are particularly welcoming, and accented with a warm yellow and pink flower /damask wallcovering.

“The fitting rooms are where we introduced more color and pattern,” Shremshock said. “A partial-height denim wall creates a reveal to this fun area and draws the customer back to get a closer look.”

One of the key goals of the project was to reduce the cost of construction and decrease the square footage while increasing floor and wall fixture capacity.

“The cost of construction was reduced by replacing costly ceramic tile flooring with high-quality wood-look plank vinyl flooring, and replacing costly gypsum board display alcoves with a wall system for merchandise presentation,” Shremshock explained. “Also, an open ceiling was featured instead of a gypsum board ceiling, and the lighting and fixture packages were rebuilt to be more cost-effective.”

Utilizing the open ceiling to increase the height of the display walls allowed for more SKUs to be featured. Instead of a wall shelving running 6 ft. high, a 10-ft. high wall panel system was implemented, which meant an increased number of SKUs could be placed on the display wall.

“Also, while the wall panels are still broken up into sections, we decreased the spacing between the sections and were able to get an additional 24 linear ft. of wall display,” Shremshock said.

Materials were selected with an eye toward reducing the cost of construction and getting the most bang for the buck. Featured materials include wood-look plank vinyl flooring, gypsum board, paint, a stock wallcovering on the sales floor and a custom wallcovering in the fitting room lounge.

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CEO Compensation Trends

BY Connie Robbins Gentry

Executive compensation has always been a hot topic in corporate America — and the retail industry is no exception. These days, two trends are upping the attention paid to pay at the top: the ongoing move to performance-based equity, and the scrutiny compensation packages are receiving from increased SEC regulations and shareholder involvement.

“Everything related to executive compensation is a more rigorous discussion and weighed more seriously than it was five years ago,” explained Cory Morrow, senior principal and executive compensation consultant, retail practice, Hay Group. The global management consulting firm is based in Dallas.

Retail CEO salaries generally hover around $1 million, and the majority of their executive compensation packages are in equity awards, according to Morrow.

“Now when organizations are talking about setting goals for performance-based compensation or what type of equity to grant, even adjustments to salary and what to offer external candidates, their decisions have repercussions that were not present before,” he said.

However, experts warn that to criticize compensation packages that appear inflated without delving deeper into the realities and rationales behind the compensation is a mistake. For instance, the $53.2 million recruitment package awarded to Ron Johnson when he took over as CEO of J.C. Penney Co. in 2011 has been widely critiqued. Compared with the total compensation packages for other CEOs included among the Top 20 U.S.-based public retail companies, Johnson’s package rocked the retail world.

In actuality, the bulk of that package, $52.6 million, was a stock award. The salary and non-equity incentive paid to Johnson was only slightly more than $600,000 — considerably less than the cash compensation of many retail CEOs.

Regardless of how it’s paid, $53 million is a staggering sum. But critics of Johnson’s compensation failed to acknowledge that recruiting talent in the competitive retail arena requires more than the promise of earnings potential at a new company; executives must be fairly compensated for any money left on the table of their previous employer. Certainly that was the case when Johnson left his leadership role at Apple to join J.C. Penney.

Devilish Details: Scrutiny, by definition, must look beyond the obvious to closely examine the minute details and decisions that ultimately comprise the total compensation of a retail executive.

As for astronomical sign-on packages, Morrow noted, “It’s always more costly for an organization to recruit talent from outside because executives are leaving a known quantity for an unknown. Sign-on packages that appear high are related to millions of dollars the executive may be leaving at his former company, which the hiring company has to make up.”

There is also a correlation between the size of a company, the type of retail sector it is in and executive pay levels.

“Different sectors of retail pay differently,” Morrow continued. “Dollar stores and food retailers are more conservative with executive compensation, while fashion retailers pay more.”

This observation is validated when the $17.6 million compensation package of Terry Lundgren, CEO of Macy’s, is compared with the $12 million compensation earned by David Dillon, CEO of The Kroger Co. Both executives assumed their current CEO roles in 2003, after being with their respective companies for several years. Macy’s 2011 revenues were $26.4 billion; Kroger topped $90 billion.

However, both companies appeared on target in their selection of peer companies for setting executive compensation. Macy’s peer group had 10 companies, primarily the largest U.S.-based fashion and department store retailers, plus Walmart and Target. Kroger’s peer group consisted of the eight largest, U.S.-based, publicly owned food and drug retailers, including Walmart and Target.

“After 40 years in the business, my experience has been that the vast majority of companies do a very good job of developing appropriate executive compensation packages,” said Don Lindner, executive compensation practice leader at World at Work, a global human resources association that provides certification in executive compensation. Founded in 1955, the not-for-profit organization has offices in Scottsdale, Ariz., and Washington, D.C.

Paid to Perform: What is appropriate clearly changes over time, and recognizing emergent trends enables retail organizations to establish compensation packages that are both competitive and reasonable.

The most pronounced trend, according to Lindner, and one that has been under way for several years, is the continued movement to performance-based equity.

Jack Zwingli, leader of Information Systems at Farient Advisors, an executive compensation consultant firm with offices in Los Angeles and New York City, described the trend as a shift from “pay for pulse” to “pay for performance.”

“Historically, equity awards and stock options were based on time; typically, option plans would vest over a three-year period regardless of a company’s performance,” Zwingli explained. “Now those options and stock awards are based on some measure of performance. Investors have no problem paying large sums to executives when the company is performing.”

Even directors’ compensation is tied to the company’s performance, with cash compensation reduced and stock awards increased. The objective, according to Zwingli, is to align directors’ interests with those of shareholders.

“Investors are not fixated on the last 12 months; They focus on performance over the last three to five years and increasingly benchmark the company’s success against the relative performance of peer organizations,” he added.

World at Work’s Lindner agreed with that assessment. But he noted that another trend is short-term bonus cycles, due largely to the unpredictable economy in recent years.

“Increasingly, retailers set short-term cycles, with performance goals defined for one year or even semi-annual goals because it is hard to set annual goals in such a volatile marketplace,” Lindner explained.

Whether performance goals are defined in months or years, another positive move is to establish metrics for each executive officer’s performance-based compensation that correlate directly to the business areas that he or she is responsible for and can influence. Chief executives are held accountable for the overall performance of the organization and, for the most part, are held to the tightest standards and greatest scrutiny.

Increased Scrutiny: One of the reasons that public companies are coming under increased scrutiny for compensation packages awarded to their named executive officers is largely due to expanded regulation under the Dodd-Frank Wall Street Reform Act, signed into law July 2010.

The overarching goal of expanded regulations and intensified reviews is twofold: one, to ensure earnings are more equitable; and perhaps even more important, to ensure that executives leading the company, particularly the CEO, have the same vested interests in long-term success as shareholders.

A number of actions and trends have emerged to foster that alignment, the most notable being Say on Pay, another requirement under the Dodd-Frank Act. Say on Pay gives shareholders the opportunity to vote on executive compensation packages, albeit the vote is non-binding. The companies must also allow shareholders to decide whether the Say on Pay vote is held annually, every two years or every three years. Even though the vote is non-binding, the fact that shareholders have this “say” has made public firms more responsive and has increased engagement between boards and shareholders. Through 2012, the Say on Pay requirement did not extend to everyone; but as of January 2013, all public companies will be required to hold a Say on Pay vote.

The natural byproduct of the Say on Pay requirement has been continued influence from proxy analysis firms, such as Institutional Shareholder Service (ISS). When ISS advises shareholders vote against a board’s recommendation, it makes an impression — and when retail companies fail a Say on Pay vote, it leaves a tainted image.

“In recent months, four retail companies failed the Say on Pay vote with their shareholders,” said Farient’s Zwingli. “At Farient, we agree with the shareholders on three of the companies that failed: Abercrombie & Fitch, American Eagle Outfitters and Big Lots. However, it’s our opinion that the fourth company, Best Buy, failed the Say on Pay vote due to the recent scandal with its CEO.”

Zwingli suggested that when investors have pushed back, it is often because peer companies that were used to benchmark comparative compensation packages appear to have been unfairly selected.

“Developing a peer group used to be a rubber-stamp exercise; now it’s a lengthy, critical process,” said Hay Group’s Morrow. “Generally, peer groups should include 15 to 20 organizations to be meaningful, and retailers should select peers from the companies they compete with for business as well as for talent.”

Compensation committees should identify peer companies that have a similar business model, and that are typically in the same industry, and are relatively close in size. The rule of thumb is that peers should be one-half to two times the size of the organization, with size most often defined by annual revenue, although number of employees, assets and market cap are also qualifiers.

Issues Resolved: As investors have gained both visibility and a voice into executive compensation, problematic payment practices have been addressed and progressive trends are emerging. For example, tax gross-ups that were a trend in the ’90s and 2000s, have been halted, and “change-in-control” compensation has been addressed.

Previously, when companies experienced a change in control, whether due to a merger, acquisition or for whatever reason, executive officers received severance compensation simply because of the change. That “single-trigger” policy has been replaced with a “double-trigger” process, which means if an executive officer is terminated following a change in control, he or she receives the appropriate severance package. But when executives remain in place, severance is not paid.

Additionally, there is increased focus and ongoing discussion around the practice of “clawbacks,” which allows the organization to reclaim compensation from past earnings if something negative comes to light about the executive’s conduct or payment. Essentially, the organization retains the right to “claw back” monies paid under questionable circumstances.

There is also a greater balance of equity between options, restricted stock and performance-based shares, according to Farient’s Zwingli.

“Over the last decade, we’ve seen some movement away from option awards to stock awards,” he said. With options, an executive is simply participating in the upside of stock growth. By comparison, stock awards have long-term benefits, which again, better aligns executives’ interests to those of shareholders.”

Connie Robbins Gentry is a contributing editor for Chain Store Age.

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