Thinking About Retail: Product Profitability and Retail Performance
A few weeks ago Herb Greenberg had an interesting post on looking beyond same-store sales and what it tells you about retail performance. It struck me as interesting, accurate and a little sad. We've known for years that what you really ought to consider is profit margin on the product, and perhaps category, level. If you've got good enough control of your operations and the technology to monitor that is. Very difficult. Looking at gross margins is a major step - in fact it's a spectrum of sophistication. Below you'll find some interesting pointers to further readings on thinking about retail business models, which have been under great pressures for years (decades) with both no end in sight and no "next big thing" either. The thing is, Tesco has that capability on the product, operations and technology fronts. And judging by what little you can guess at in the stores so does Trader Joe's. So let me quote from Herb.
Looking beyond same-store sales
When Bed Bath & Beyond in early June warned of lower-than-expected earnings for its fiscal first quarter, a first for the home-furnishings retailer, much of Wall Street was surprised. After all, the company's sales at stores open at least a year, a widely followed industry benchmark, had been holding their own.
As recently as three months before that warning, "it was the only home-furnishings retailer that was still outperforming," recalls Rob Wilson, president of Tiburon Research Group, which provides research on retailers to hedge funds. "It was gaining market share."
Yet that profit warning didn't catch Wilson off guard. He says that while same-store sales are an important indicator, they can be misleading if they aren't viewed in the context of other metrics. At Bed Bath & Beyond, for example, Wilson became concerned six months earlier after Chief Executive Steven Temares mentioned on an earnings conference call that the gross profit margin had been lifted by "volume incentives," which in turn lowered its costs.
Without that, the gross profit margin might have fallen. Several months later, in May, Wilson told his clients: "The cracks are beginning to show. ... In addition to a macro environment that will finally catch-up with Bed Bath & Beyond, the business model is exhibiting a few earnings quality concerns in the past few quarters (that) imply the company is ripe for a materially lower than consensus" earnings performance for this year.
And my comments:
A good point, one we all forget but also one for which there is no data. The two things in working with retailers in re-engineering their businesses I learned to really look at were product profit margin and product mix. That is how much were they making and what were the trends on what they were selling. That data doesn't appear to be reported anywhere but it's what drives a retail business. On a large-scale think WMT enterring grocery years ago and changing the industry or more recently it's entry into electronics. Is SBUX recent downdraft independent of Dunkin Donuts and McD's entry into the edges of that marketspace ? It's the great game of retail and nobody reports on it. :)
Further On-Point Readings:
(*****) Best Buy Boutique Strategy Turns Retailing Upside Down, Boosting Earnings Best Buy Co. became the largest U.S. electronics retailer with its trademark lookalike big-box warehouses. It plans to get bigger by opening more stores that tailor to individual customers. In a test run that started in 2004, Best Buy boosted the number of stores it operated in Dallas by 50 percent. Sales at the new outlets rose faster than expected during the three-year experiment without sapping sales as much as forecast at older stores, Chief Executive Officer Brad Anderson said in an interview. That was ``a significant development,'' Anderson said. ``It opens all sorts of doors with potentially a better return on investment.'' The experiment helped prompt Best Buy to raise its target for total U.S. stores by 40 percent to 1,400, which may lift the share price 29 percent in the next 12 months. To meet local demand, Best Buy customizes stores to customer types, catering to soccer moms at one outlet and tech geeks at another. The expansion pledge is a sign to investors there is more room for Best Buy, already the market leader, to gain share and boost sales nationally, said Anthony Chukumba, an analyst with FTN Midwest Research Securities Corp. in New York. Best Buy sales will rise 30 percent by 2010 according to estimates compiled by Bloomberg. That's two-thirds faster than the pace forecast for Circuit City.
Lowe's Popularity Can't Beat Home Depot's Locations In the battle of the big-box home centers, homeowners give a slight preference to Lowe's Cos. (LOW) but Home Depot Inc. (HD) still gets more of their money thanks to the larger chain's convenient locations, according to a recent survey. The survey by Consumer Specialists, a Germantown, Tenn., marketing research and consulting firm, found the two largest U.S. home-improvement retailers are closely matched competitors. Lowe's rated higher than Home Depot in most areas, including product selection and customer service. Asked which chain they like better, 53% of respondents chose Lowe's, while 47% chose Home Depot. That's an even wider gap than a similar survey in 2006, which found a 51%-49% preference for Lowe's. But Home Depot ranked significantly higher in having convenient locations, which turned out to be the strongest predictor of where respondents spent the biggest chunk of home-improvement dollars, the firm said.