We've had it all wrong about shopping. We've somehow become convinced that bricks-and-mortar stores are losers and Amazon's (AMZN) anointed and can't be overthrown. It's a juggernaut of relentless disruption and destruction that can't be beaten. (See its strengths in the Trifecta Stocks portfolio.)
But this was the quarter that put the lie to that supposition in so many ways. First, as big as Amazon is, with $50 billion in domestic revenues in the last year that means there's more than enough to go around given that our nation had $4.71 trillion in retail sales. So, even as Amazon's growing those revenues in the high teens, it's not the be-all-and-end-all so many think it is.
More important, though, this was the quarter that changed the perception of the moribund state of bricks-and-mortar retail. We need, right now, at this minute, to bury the death-of-the-mall narrative, because there were so many mall-based stores that put up good numbers with good commentary that it's just no longer a true statement.
In fact, this was the throwback retail season where we heard from some of the best merchants that it was neither a promotional quarter -- as inventories for most came out lean, so there will few to no markdowns in back-to-school season -- nor a quarter marked by a weary consumer. The country shopped, they just were very picky where they went, more interested in finding than shopping, as executives at JC Penney (JCP) reminded us.
Let's go over what worked and what didn't and who's got it figured out and who's been run over by convention and cluelessness.
First, fashion's back. That's right, the excitement of fashion.
We saw that with the success -- after several tepid years -- of Nordstrom's (JWN) legendary anniversary sale. The needle moved, the company reported better-than-expected earnings in part because of what I had felt had become a yearly disappointment.
Who else got fashion right? How about Urban Outfitters (URBN) ? One of my favorite merchants, CEO Richard Hayne, put the quarter and the business in perspective when he said on his excellent conference call that it's commonplace to hear complaints these days about a "lack of fashion" or that fashion "is over." But he went on to say, "I saw more fashion excitement in the spring then I'd seen in quite a few years." That, plus "brand momentum" that brought traffic back even to mall stores contributed to the chain having the lowest markdowns ever.
Regular, non-promotional, pricing. Incredible. Remember those days?
I think that's one of the reasons I expect Lululemon to report a strong number Sept. 1. Lulu has brought a new fashion experience, one that had been marred by supply chain issues that are now a thing of the past since private equity firm Advent purchased 13% of the company and placed David Mussafer as co-chairman of the Board. The whole Lululemon team is now first class and it's extended its reach into men's fashion in a pretty aggressive way, spearheaded by Lee Holman, formerly of Nike, who now runs design for both men and women at the company. I love my ABC Pants, even as it was a tad embarrassing when I asked my daughter, who gave them to me, what ABC stands for.
Go Google it, please.
Foot Locker's (FL) another retailer that shined this quarter. The numbers it put up last week, mid-single digits, were strong pretty much across the board. When asked about whether Foot Locker's hurt by some big-box mall stores, CEO Dick Johnson said the "closing of the anchor stores has been going on for a while."
"We believe," he continued, "there is only a couple of places in the mall that people will line up for products, one of them is a Foot Locker Family Store and the other one is the Apple store."
Johnson says the internet has brought on a whole new class of excited shoppers.
"They will take a picture of the sneaker on their foot and they will tweet it out or they'll send it out to their group of friends," he said -- and Footlocker's the beneficiary.
Sellers had swarmed all over Foot Locker because of a subpar previous quarter that may have been brought on by the liquidation of Sports Authority. But one thing's certain. Foot Locker not only reported a good quarter, with excellent sales for Nike (NKE) , which spiked after the report, and Under Armour (UA) , which should have, but the quarter grew stronger as the months went on.
You had to be impressed with both the Bath & Body Works division and the Pink division of L Brands (LB) , the latter of which reported an outstanding comparable sales number that helped lead the company to beat and raise expectations on top and bottom line. Pink's all about fashion, too.
JC Penney's a classic example of the mall comeback story. Brisk sales in many departments, lean inventories, a ton of cash generation, Penney sounded not like the Penney of old, but much better than the old Penney before it was almost destroyed by terrible management. Penney's pivoting back to its high-margin house brands, as well as home furnishing, flooring and furniture to augment its already strong proprietary plus-size apparel and its fabulous in-store Sephora franchise, the one that's boosted by the need to put make-up on before you leave the house because of the selfie generation.
Everyone's trying to cash in on the red-hot housing market and Penney's no different. As chief merchant John J. Tighe put it, "people are investing in their homes. She wants new carpets, appliances, window coverings, furniture and textile." How well are these doing? Chief Executive Officer Marvin Ellison says, "We piloted appliances in 22 stores this spring and were blown away by the response. Appliances have the sales productivity that is ten-times higher than the products we replaced and margins that are eight-times as high."
Penney shares 400 malls with the faltering Sears (SHLD) and Ellison went right there saying, "we think this is a significant opportunity to capture market share and customers from Sears as they continue to downsize their footprint."
I like that competitive spirit.
And it's not just in the mall the Penney is working to capture attention. If you Google "Jeans sale" or "Men's Shirt Sale," JCP is going to come up high on your screen. Even the Amazon Prime devotee is going to click open a new tab and look for a better deal.
We know Amazon Prime's a fabulous bargain, but the bricks-and-mortar operations that get online right, offering a place to pick up or return, can truly benefit, as Ellison pointed out on his call because the omnichannel shopper spends twice as much as Penney as the pure brick-and-mortar customer.
Now, we know that home spend is on its own trajectory, something that perennial winner and non-mall retailer Home Depot (HD) pointed out many times on its excellent call. Sure, Lowe's (LOW) didn't have a standout quarter, but both companies are doing better than anything that's wholly apparel related. That's just a dominant theme running right through the quarter -- shopping for home's just on a different cycle than apparel.
But apparel inventories are better, so look for PVH (PVH) to report a stronger quarter this Thursday on top of its previous barnburner as its Calvin Klein merchandise was called out as strong several time and back to school -- a big PVH season -- looks strong.
No story about the turn in retail is complete without mentioning the comeback of Walmart (WMT) , which I think began when CEO Doug McMillon decided to give across-the-board pay raises to his employees. The good ones had been leaving for greener pastures, costing the company fortunes in endless training, a deadweight loss to the bottom line. There's been better supply chain, stronger online offerings -- who knows what Jet.com will mean -- and an improvement in the look and feel. I think it's a re-energized work force behind the move,
Who didn't get it?
Macy's (M) and Target (TGT) were the two most worrisome and, I think, in many ways, out of step this quarter. Macy's we know is closing 100 stores and going for some profitable growth. But it fits the pattern of the flailing companies with no real special purpose. Its closures, by the way, could be a boon for Dave & Busters PLAY, which is looking for bigger boxes with big parking lots to expand.
Target? What can I say? After coming in hot, CEO Brian Cornell is putting up the most disappointing numbers of any major retailer save Sears, if you can still call the latter a major retailer. I was stunned at that conference call where he actually blamed Apple (AAPL) merchandise and the new in-store CVS (CVS) outlets for some of the weakness. CVS sure didn't squawk about it other than positively on its call. Who goes to Target for Apple? I don't know who, because many of the Apple non-cellphone product lines Target sells put up terrific numbers elsewhere, including namesake Apple stores. Target seems lost right now in many aisles, never a good thing in a fast-changing retail world.
So, let's stop talking about the death or the mall or the waning days of bricks and mortar and instead celebrate those who are fighting back with more retailtainment as Penney's Ellison says, and aren't bemoaning the American consumer, because business is just too strong to keep whining.