bizzXceleration: Performance, Value and Profit

Strategic/Structural Changes

Customer version 3.0 What if the current retail recession is about more than the overall slowdown of the global economy? In our view, there's more here than meets the eye. Put another way, when the good times are back, our bet is that many retail businesses will still be wondering where their customers are. Customers, like products, evolve through releases. We've really seen two major customer releases to date (call them Customers 1.0 and 2.0), and we're now encountering another release (3.0). Rest assured, these aren't soccer moms or the creative class. So what are they? Customers 1.0 The birth of managerial capitalism created the first customer "release" in the late 19th century. At the time, the twin innovations of mass-production and mass-marketing, fueled by the transportation revolution, opened up national and then global markets for consumer goods. Customers 1.0 were superseded by a new release in the 1970s as retailers continued to expand their presence and manufacturers produced ever more goods and brands. The resulting competition for customers gave rise to category-killer and ultra-niche retailing, Wal-Mart Stores Inc. and warehouse discount clubs, the proliferation of hyper-specialized catalogs, the expansion of consumer credit, and online retailing. These days, the latest release, Customers 3.0, has entered the market in force. With a seemingly infinite array of companies, brands and products vying for scarce customer time and attention, Release 3.0 was a near inevitability. Now, customers dictate how they will purchase and consume -- where, when, and how much -- using a variety of channels largely, if not exclusively, configured by them: In this era of Customers 3.0, you might say that customers now own the retail world; businesses just live in it. It's no longer enough for retailers to say that they will be customer-focused, media-agnostic or multi-channel. These new customers are rewiring the retail world to design their own buying processes that fit their specific needs. In so doing, they are altering both channels of influence and distribution.

You'll never pay retail again Times are tough. The economy is weakening, consumer confidence is at a low and Americans are struggling just to buy basics like gas and groceries. So when it comes to getting goods that fall beyond the bare necessities, shoppers are getting smarter. Not only has scouring the Web for the best possible price become standard protocol before buying a big-ticket item, but more consumers are employing creative strategies for scoring hot deals on everything from stereos to sweat pants. Comparison shopping, haggling and swapping discount codes are all becoming mainstream marks of savvy shoppers. And retailers are playing along.

Thousands of retail stores are closing Howard Davidowitz a retailing expert says 4,500 retailers closed their doors in 2007 and 7,000 will do so in 2008.  Davidowitz blames too much debt (up 30%, and hard to get access to more), too much retail space (nearly 2x as much as needed, he blames Wal-Mart) and too little consumer spending (blame low sales on the recession and gas prices) are the reasons why the retail sector is in so much trouble. He then goes on to list four companies who are closing all their stores, and seven who are closing many stores. Another blog Oligopoly Watch goes on to list seven additional companies in serious trouble.  In total almost 3,000 stores are in the process of shutting down, from companies that have been in business anywhere from 20 to 110 years.

Profit from retail's survivors As consumers continue to tighten their belts, a world of hurt is hitting retail businesses, wounding or even bankrupting weaker companies such as Sharper Image and Linens 'n Things. For investors, it's time to play a real-life game of "Survivor." Identify the winners, and there's a chance to make a bundle. "It's just a tough environment out there," says Keri Spanbauer, a retail sector analyst at Thrivent Financial for Lutherans. "Maybe the consumer pulls back, but if your competitor next door goes out of business, you can do well." And finding those fittest companies, as well as their sickly competitors, may be as simple as doing a little balance-sheet reading, looking for companies not saddled by debt. Here's how the retail sector got into this mess: During the previous bout of economic good times in the late 1990s, many retail CEOs called a truce on price wars, making it easier for second-tier competitors to thrive, Balter says. Second-string retailers got another boost from the consumer-spending bubble created by the home-equity-loan boom and tax cuts. And low interest rates gave the retailers access to cheap money, which they used to open more stores. Now as the consumer cuts back, the sector needs to shed its excess supply -- as expressed in square footage of store space -- after a period of excess. Balter expects many more retail sector bankruptcies over the next 18 months. When competitors go into bankruptcy, it's easier for them to get out of leases and close stores, leaving the field open for the stronger survivors.

Players: Winners, Losers and BM's

Wal-Mart Forecasts Profit That May Trail Estimates Wal-Mart Stores Inc., the world's largest retailer and a benchmark for the U.S. economy, posted higher first-quarter profit and said earnings may trail analysts' estimates after record gasoline prices buffeted consumers. Sales at stores open at least a year may be unchanged in the three months through July, the retailer said today. Wal- Mart dropped $1.37, or 2.4 percent, to $56.65 at 4 p.m. in New York Stock Exchange composite trading. The forecast may be further evidence that consumer demand is slowing, pushing the U.S. economy toward a recession. Chief Executive Officer H. Lee Scott ordered discounts as deep as 30 percent to spur demand for drugs, groceries and flat-screen televisions and lure customers to Wal-Mart, which accounts for almost a tenth of spending at U.S. retailers. ``Wal-Mart, Target and Costco are all continuing to gain market share in this environment,'' Susan Kahn, a Target spokeswoman, said yesterday in a telephone interview. They're probably taking shoppers from retailers with falling comparable-store sales, she said.

Wal-Mart puts the squeeze on food costs With gas, grain, and dairy prices exploding, you'd think the biggest seller of corn flakes and Cocoa Puffs would be getting hit by rising food costs. But Wal-Mart has temporarily rolled back prices on hundreds of food items by as much as 30% this year. How? By pressuring vendors to take costs out of the supply chain. In fact, it's the small suppliers that are feeling the pain from Wal-Mart's pushback the most. Bushwick has seen its costs rise 10% over the past year, but has passed only half that amount on to Wal-Mart and its other retailers. For consumers who are having a hard time paying $3.80 for a gallon of milk, however, without those measures that sticker shock would be a lot worse. Wal-Mart: More shoppers are living paycheck to paycheck

Off-Target Discounter a victim of its own success as it grapples with image and consumer troubles. The Minneapolis-based retailer posted a decline in profit and same-store sales for the fiscal first quarter, and in the understatement of the day, referred to the current economic environment as "challenging. It used to be enough to have cute clothes and accessories, unique house wares, food and general merchandise at low prices. But now it's losing shoppers to more promotional retailers. In a way, Target is a victim of its own success. It made its name selling discretionary merchandise, which is higher margin than basics like groceries, and now those "extras" are out of fashion and the retailer isn't seen as a go-to place for bargains. Part of this is image. Target's prices actually are lower than many of its rivals, but it's seen as being a higher-priced alternative to Wal-Mart Stores. But it's also got a problem with its consumer. Traditionally, Target attracts a higher-income shopper than its larger rival Wal-Mart, but headwinds like slumping home values, rising food costs and soaring gas prices have made seeking out rock-bottom prices something of a national pastime. So low-end shoppers have already been shopping at deeper discounters and now the mid-level shopper has fled. Meanwhile, a survey by the International Council of Shopping Centers showed that 67% of consumers were trimming spending either considerably or modestly. About 62% are cutting back on clothing and shoes and 51% on consumer electronics, all big departments at Target stores. Once the economy eases, Target  is going to be sitting pretty. Its discretionary merchandise is what makes the chain stand out, and Wal-Mart has so far been unsuccessful tapping into this niche. Target's clothing, home decorating and its exclusive brands have been successful draws. These are areas where Target's coveted higher income and well-educated consumer will start spending again, however cautiously. Target Profit Declines as Consumers Curb Spending

MarketWatch First Take: Whole Foods Market's reality check Call it an extension of the Starbucks syndrome. The high-end purveyor of organic foods with the killer cheese counter is up against some serious macroeconomics. Like Starbucks Corp., Whole Foods has seen growth in its same-store sales slowly erode as it tapped out its core market of upwardly mobile customers. According to the company's latest earnings report, released after the closing bell Tuesday, year-on-year sales at stores open for at least a year slipped to 6.7%. Two years ago, that number was still up around 12%. This downward trend is hardly surprising given the ample evidence that Americans pulled far more equity out of their homes than was prudent and bought bigger cars than they needed back in flusher times. Now, adding to the anxiety of the overextended middle class, food prices are going through the roof. The U.S. Labor Department reported this morning that the cost of a bag of groceries jumped 1.5% last month, its steepest one-month rise in 18 years. All of this points toward tough times ahead for premium-food providers. Everyone who has ever indulged their inner foodie at Whole Foods knows that when it comes to putting bread on the table, they can do it for far less at Safeway or Kroger stores. Sure, the selection is not as exotic, but the number of people likely to swing by Whole Foods for a $10 slab of ripe Camembert is withering, and it's never been the kind of place you drop in on for toothpaste and toilet paper. Whole Foods shares tumble 12% on slower sales growth

Toys 'R' Us, Tesco: Korean Hits By relying on local partners' expertise, the U.S. toy store chain and the British retailer are succeeding where Wal-Mart failed. Now the British supermarket company is pursuing much bigger Korean numbers with a strategy that's similar to that of the American retailer. On May 14, Tesco announced a $2.2 billion takeover of Homever discount chain Both Tesco and Toys "R" Us rely heavily on expertise of local partners for their business strategy, and the British company's new acquisition, which will boost its Korean sales by about a third, indicates their common approach is a winning formula. "Tesco is a rare foreign retail player to flourish in Korea, and the key has been its well-executed localization…What have Tesco and Toys "R" Us done right? Unlike Wal-Mart and Carrefour, Tesco didn't try to repeat its strategy from back home. While Koreans were enthusiastic about the massive discount stores that began replacing mom-and-pop shops in the 1990s, they never liked the lofty shelves and concrete floors of the warehouse experience. The local consumers also prefer not to buy in bulk—the method big foreign discount store operators imposed.To cater to local tastes, Tesco formed a joint venture with Korea's Samsung Group in 1999. The joint venture's Home Plus chain has tried to satisfy the local appetite for fresh fish and vegetables, ensuring that sushi, squid, cucumber, and spinach are restocked frequently. It has also provided such services as a guide to direct shoppers to a parking spot. Tesco has since increased its stake in the venture to 94% from the original 50% and Korea has emerged as the British company's most profitable overseas market, accounting for half of all its Asian sales.

Toys 'R' Us Unwraps Plans for Expansion Toys "R" Us is in an expansion mode, buoyed by rising sales and profits and a new strategy for boosting foot traffic: putting its toy stores in buildings side-by-side with outlets of Babies "R" Us, the company's infant-products chain. When a buyout group that included Vornado Realty Trust bought Toys "R" Us Inc. in 2005, analysts suspected the new owners would sell off the bruised retailer's valuable real estate and get out of the toy business. Nearly three years later, Toys "R" Us is instead in an expansion mode, buoyed by rising sales and profits and a new strategy for boosting foot traffic: putting its toy stores in buildings side-by-side with outlets of Babies "R" Us, the company's growing infant-products chain. Suddenly, the world seems safe again for toy retailers. Last week, Macy's Inc. said it will open FAO Schwarz toy boutiques in 685 of its stores. That represents the first major buildout of the brand since hedge fund D.E. Shaw & Co. bought FAO Schwarz in 2004. Toys "R" Us and FAO Schwarz both fell victim to the ever-increasing speed at which children are outgrowing more traditional toys in favor of electronic devices. The chains also were hammered by the discounting of Wal-Mart Stores Inc., which became the biggest toy seller a decade ago and now commands 25% of the market.

Maybe Gap's getting its groove back Inventory controls enable apparel retailer to generate sizable growth in quarterly profit. Full-year earnings target affirmed. Gap Inc. posted a 40% jump in first-quarter profit, leading some analysts to believe that the retailer's long-awaited turnaround may finally be taking hold. Gap Chief Executive Glenn Murphy has boosted profit by keeping inventory lean to avoid steeper than expected discounts needed to clear any unsold merchandise. He's also named designers Todd Oldham and Patrick Robinson to help revamp merchandise at the company's struggling namesake chain and Old Navy, the company's largest unit. Gap has lost sales and traffic after a string of fashion miscues alienated its shoppers and the company lost younger consumers to Abercrombie & Fitch Co. and other clothing retailers, analysts have said. Earlier this month, Gap said that its traffic patterns and sales continue to be challenging in the current economic environment. AnnTaylor, New York & Co. beat views on inventory control

Schultz's Second Act Jolts Starbucks For two decades, Howard Schultz enjoyed uninterrupted success building Starbucks Corp. into a hip chain of coffee shops that richly rewarded shareholders.But with profits off and the stock sinking, Mr. Schultz is cast in an unfamiliar new role: the person who must re-energize a company that has lost its edge. That has unleashed an intensity in him that is rattling the feel-good Starbucks culture. Barely two years ago, he and Starbucks, which now has about 16,000 cafés world-wide, were riding high. In October 2006, Mr. Schultz told a throng of analysts and investors that breakneck growth would one day give the chain 40,000 locations, or more than McDonald's Corp. But early last year, Starbucks seemed to be losing its edge, a complaint Mr. Schultz himself voiced in a leaked memo. It wasn't setting the agenda with new products but just adding drink flavors and ordinary items like breakfast sandwiches. Stores had grown cluttered with stuffed animals and other noncoffee items. Price boosts were starting to annoy customers.All through 2007 the stock slid, and it fell more in November when Starbucks reported a year-over-year dip in cash-register transactions per U.S. café. In December he toured Starbucks outlets abroad, finding those in places like Romania and Spain looking chic and full of excited customers. Cafés back home struck him as tired by comparison.

Downturn may nail the Depot expected to report profit of 37 cents a share on sales of $17.6 billion, according to analysts surveyed by FactSet. A year earlier, the company earned 53 cents with sales of $21.6 billion. Both Home Depot and its smaller rival Lowe's Cos. have been hurt by turmoil in the housing and credit markets. Home Depot and Lowe's shares have both lost about a quarter of their value in the past year. Home Depot has been trying to increase its existing store productivity by improving customer service, better showcasing merchandise and making its stores cleaner and better lit after it lost market share to Lowe's, analysts said. Lowe's said Monday its market share gained 0.7 percentage points, though it wasn't specific about where it took share from. The downturn in the market has led other retailers from Wal-Mart Stores Inc. to J.C. Penney Co. to scale back their growth plans. Home Depot earnings hammered

• Home Depot's Job Cuts: What Took so Long? Now HD will have 230 District Teams that will shoulder the HR duties. If HD has gone to this length to communicate with employees at the store level and have someone there for immediate response to questions the fact that employee moral is so low is really shocking. It means that either these people were not trained properly or that the policies enacted are so poor, efforts to right the ship are going to have to be extraordinary to fix it now that the immediate contact will be gone. Now, HD has cut corporate HQ staff level in order to concentrate on customer service. But, aren't most of our customer service complaints due to dealing with unhappy, poorly trained employees? If they can't fix that issue with HR in the building, one has to question their ability to do it when they are removed...

• HD: Mgm't Change NeededHome Depot has been late in enacting cost cutting moves, whether it be stores closings or operational ones. With housing not rebounding before next year, investors ought to expect more of both. If you believe that Home Depot's service issues are behind it, think again. Unlike Lowe's (LOW), Home Depot seems to be consistently playing catch up. There does not appear to be a plan here, just a reaction to events. This all began last year with the sale of the Supply unit and the announced and now canceled share repurchase. Until some type of plan emerges, I will be avoiding shares. Even if macro conditions do improve, management has not shown any ability to run things in a specific direction.

Lowe's profit falls 18%, hurt by housing market -- Lowe's Cos., the No. 2 U.S. home-improvement retailer, said Monday that its first-quarter profit dropped 18%, hurt by the declining housing market and a spate of other economic worries that cut into consumers' discretionary spending. The company lowered its full-year outlook and said it's taking a close look at its store expansion pipeline. The challenging economic environment of the past six quarters continued into the first-quarter, leading Lowe's to miss its own sales plan, the company said. Cooler and wetter weather in the first two months of the quarter also dampened demand. Lowe's said it is controlling payroll and other expenses and taking a closer look at its new-store expansion by either postponing some planned openings or walking away from some potential store prospects after some new stores missed the company's internal projections.

Sears still struggling Sears Holdings swung to a first-quarter loss as sales in established U.S. Sears stores dropped nearly 10% from a year ago. Sales have been declining at a startling rate at Sears.  Sears Domestic’s comparable store sales declined 9.8% while Kmart’s comparable store sales declined 7.1%. Total domestic comparable store sales declined 8.6%, led by drops in the home appliance, lawn and garden, and apparel categories. Since investor Ed Lampert took control of the company several years ago, Sears has been content to watch sales drop as the company focuses on boosting profit and buying back stock. But weakening consumer spending and tough competition have thrown a wrench into that strategy, and shoppers have grown exasperated with the company’s failure to update its stores - all of which explains why Sears shares have lost half their value over the past year. So what’s Sears’ plan? For now, another stock buyback - $500 million worth, this time.

Sears 'nearing sunset'? Billionaire hedge fund investor Edward Lampert's struggling Sears Holdings Corp. said Thursday it would repurchase another $500 million of shares and gave its first earnings forecast for this year, projecting a higher adjusted profit after a drop in the previous year. Investors, however, shrugged off those remarks, sending shares lower as they focused on the company's unexpected first-quarter loss amid sales shortfall and increased discounts. Sears shares have lost more than half of their value in the past year since Lampert's Kmart engineered the purchase of the department store operator in March 2005. Investors bid up the stock of the combined company, hoping that Lampert, often compared with billionaire investor Warren Buffet, would capitalize on the big real estate holdings the company had and generate promising returns. Times have changed. Investors' hopes about a lucrative real estate play haven't panned out, as declining mortgage and credit markets have squeezed financing and soured many real estate deals, investors said. The company said cost control will lead to higher earnings before interest, tax, depreciation and amortization this year and that its sales decline has moderated since the end of the first quarter. But investors and analysts said it's still too early to see light at the end of the tunnel for the battered retailer.