Guest Post: Retailers - Reality Check Time

Tyler Durden's picture

Submitted by Jim Quinn of The Burning Platform

Retailers - Reality Check Time

Having worked for a big box retailer for 14 years, I understand the
dynamics of a high growth rollout of stores as a key to increasing
market share and profits. Some of the best retail names in the US have
practiced the identical strategy of concentrating many stores in each
market to drive the small competitors out of business. This strategy
worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early
part of this decade. The combination of solid same store sales and
opening new stores is a fantastic combination during good times. The
results actually make the CEOs of these companies think they are
brilliant. Their store expansion models based on rosy assumptions are
followed like they can’t go wrong.

What these CEOs didn’t realize was that their expansion plans were
based on lies and frauds. If they had advisors who could give them a
reality check, they could have avoided the massive downsizing that
awaits them. Their hubris didn’t leave room for a reality check. The
population of the US has grown from 281 million in 2000 to approximately
308 million today. We’ve had a 10% population increase in 10
years. Consumer expenditures have grown from $6.7 trillion in 2000 to
$10.3 trillion today. This is a 54% increase over the course of the
decade. Amazingly, real average weekly earnings have only gone up by 6%
in the last decade.

The chart below tells the story that retail CEOs have been ignoring
for a decade. Consumer credit has advanced from $1.5 trillion in 2000 to
$2.4 trillion today. This 60% increase in consumer debt has allowed
workers who have barely increased their earnings to spend like they made
a lot more money. This debt fueled consumption binge led major
retailers to expand in order to keep up with the delusional consumers.

Graph: Total Consumer Credit Outstanding

Retail America has run directly into a brick wall. Below are charts
detailing the expansion history of four of the most admired retailers in
America. Lowes grew their store count from 600 to 1,700 over the course
of the decade, a 183% increase. Wal-Mart grew their store count from
4,000 to 8,500, a 113% increase. Target grew their store count from
1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300
to 1,050, a 250% increase. Same store sales are the true measure of a
retailer’s health. When comp store sales are +5% or better, retailers
make substantial profits and confidently build new stores. As the charts
below clearly show, comp store sales have been in a substantial
downtrend since 2006. The new stores that have been built in existing
markets are over cannibalizing their existing stores.

Lowes has 500 more stores today than it had in 2005, $4 billion more
sales, and $1 billion less profits. Target has 340 more stores today
than it had in 2005, $12 billion more sales, and the same profit. Kohl’s
has 240 more stores than it had in 2006, $1.6 billion more sales, and
$100 million less profit. Only Wal-Mart has kept the profits flowing,
mostly due to its international expansion. The tough times have only
just begun for these retailers.

Lowe's - Annual Sales Growth

Walmart - Annual Sales Growth

Target - Annual Store Count Growth

Target - Annual Sales Growth

Kohl's - Annual Store Count Growth

Kohl's - Annual Sales Growth

The American consumer is still heavily indebted. Much of the retail
spending in the last decade came from mortgage equity withdrawals. Using
your home as an ATM is history. Home equity is at an all-time low and
25% of homeowners are underwater. Home prices are destined to fall
another 20%. There are 15 million people unemployed. Consumer
expenditures still account for 70% of GDP. In order for the US economy
to achieve equilibrium, consumer spending will need to regress back to
65% of GDP. This will require an annual reduction in consumer spending
of $800 billion. The CEOs of these retailers have not grasped the
implications of this coming adjustment in our consumer society.

There are three major errors that have been committed by every
retailer in America. They failed to recognize that the spending per
household was 30% over inflated due to debt financed demand. They then
extrapolated the spending per household using a 5% to 10% growth rate.
Lastly, they ignored the fact that
their competitors had the same strategy. There are 1.5 million retail
establishments in the US. Thousands of these stores are going out of
business every year.

Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their
predicament. They are still blinded by their hubris. The point of
recognition will occur within the next year. Each of these retailers
will be closing hundreds of underperforming stores in the next two
years. Time for a reality check.