J.C. Penney Dilemma

Well, What Would YOU Do?!

There's not a more compelling retail dilemma going on right now than the J. C. Penney turnaround. "Will they or will they not survive?!" Surely, 116,000 employees (down from 150,000 a year ago) are anxious to find out.

Before you quickly answer, "Here's what I would do to turnaround Penneys" (everybody's a retail consultant, after all...), consider some facts:

• Brain drain: A high percentage of the best brains have either been fired or decided to quit in the last year;
• Sales have been declining 25% or more for the last six months;
• Gross margin dropped in 2012 to 31.3% from 36% the year before;
• A monster operating loss in 2012 eroded 20.9% of the owners' equity.

Now, let's read their financial status the way it is taught at The Retail Owners Institute:

• The Current Ratio ("the ability to pay vendor bills on time") dropped from 1.8 to 1.4. Hmmm; no wonder they are begging for loans at ANY cost!


• The Debt-to-Worth ratio ("the number one measurement of financial strength") rose from 1.8 to 2.1.  Ahhh; of every three dollars in assets, two dollars are "owned" by OPM, other people's money.


• GMROI (Gross Margin Return on Inventory Investment, the #1 inventory productivity measurement) dropped from $2.13 to $1.74.  Oh my; both profits and cash flow have been hammered.

But, look at a few, but very major, intangibles:

• Mike Ullman, the ex-CEO that the Board brought back, is reputed to have remarkably good relations with key vendors and factors. Question: Can he restore enough confidence that the Back-to-School orders now being placed will get shipped?!!  

• With 1400 stores, there are a huge number of landlords that will do all they can (that's a key word) to prop up Penneys.  

• There may well be some equity in the Penney name and 100+ year history. But, only if the "value" of the name and history as an asset is greater than any "liabilities" associated with the name and heritage; the Balance Sheet MUST balance!   

(For more perspective on JCP's performance compared with the Department Store retail segment, see this Retail Benchmarks page on The ROI site.)

So, if you had a billion dollars sitting around, would you be inclined to loan it to Penneys?!!

Lost Your "Competitive Edge"? Then, It's Time to Get Out of Retailing!

For retailers worldwide, January is a month of reflection. Cold, hard-nosed reflection. 

• "As I consider restocking, and go through the process of assessing 2012, I keep wondering, 'WHY am I doing this?!'"

• "Sure, I love my merchandise and the customers who love this merchandise. But, my results just are not good."

• "My staff and others are telling me that some of our best customers are going to a competitor. Hmmm...." 

Do some of these thoughts and concerns sound (all-too) painfully familiar?

If so, The Retail Owners Institute would suggest that all of these concerns reflect the same missing ingredient: you have lost your Competitive Edge. 

The solution? Re-discover and establish a distinctive and compelling Competitive Edge! Fast!!

Ask yourself, "What do we offer that separates us from all our competitors?" 

• Absolutely the lowest prices?

• Absolutely the broadest inventory assortment?

• Absolutely the very best location?

• Absolutely the wanted lines that no one else has?

• Absolutely the best e-commerce operation in your market?

• Absolutely the services for customers that are unique and special?

• Absolutely the most efficient and frugal operation around?

• Absolutely the biggest outlet for your merchandise anywhere? 

And of course, "absolutely" means without question, obvious to everyone. That is the only way any of these strategies represents a true Competitive Edge.

What if you do NOT have a true Competitive Edge? 

Then, absolutely, you should consider cutting your losses and closing down!

Kidding yourself that you are okay regarding a Competitive Edge is one of the tell-tale signs of a retailer in decline.

Reflection time is over. 

It's time to commit. Act now! Reclaim your Competitive Edge!

Must Retailers Pass Through the "Valley of Bankruptcy" in Order to Change?

Last week, we received an email from a long-time follower of The ROI. It included a comment and a question that you, too, may have wondered:

"How do you go about changing the mindset of the owner/CEO about GMROI, inventory management best ideas, etc?

Our CEO stills buys by intuition, hunch, seat-of-the-pants. He likes to use phrases like: stack-em-high, watch-em-fly. One-to-show, one-to-go.

Can CEO's go from mediocre to great, or do they have to pass through the valley of bankruptcy first?" 

Quite a question, isn't it? Speaks volumes about the underlying concerns.

Thanks to what we call "Retail Darwinism", those Owners & CEOs who still "stack-em-high, watch-em-fly", who buy by hunch and intuition, are in fact disappearing.  They are not making the "mediocre to great" transition. Is the "valley of bankruptcy" the only alternative?

"Am I running this business...or is it running me?!?" 

Every case is different, of course. In our work with retailers in "turnaround" situations, we've found that the fear of impending failure, the acceptance of being on the brink of bankruptcy, can prompt changes.  Of course, sometimes it is too little, too late.

Then there are the times that fear is more paralyzing than motivating. These retailers simply do not appreciate how much control they could have!  Not able to recognize their alternatives, they become frozen in the headlights. This is especially true for those who have delegated the "accounting and financial stuff."

So, how can Owners and CEOs be motivated to change? It starts with increasing their financial skillset and confidence. Enabling them to have a positive answer to "Am I running this business…or is it running me?!"  Knowledge IS power! 

That's not to say that Owners & CEOs need to do all of the accounting and bookkeeping themselves. Far from it!

But since Owners are responsible for projections, for playing "what if…?" about their business, they must understand the cause-effect financial levers in their business. That's how they can be empowered, better able to respond as the business environment changes.

Emails such as this one cause us to redouble our dedication at The Retail Owners Institute® to help retailers "Turn on their financial headlights!"  The ROI's goal remains: "Eradicate retail bankruptcies!"

Retailers: Have questions? Want answers? Join online TOPICAL TUESDAYS webinars - FREE

Success in retailing demands a competitive edge, and there are many ways to do that: product selection; pricing; customer service; location; instore "experience"; services; etcetera; etcetera.

But, retailers fail for only one reason: financial.

For eleven years, The Retail Owners Institute has been dedicated to providing any retailer, anywhere, with financial management know-how to avert financial failure. 

And now, that effort continues in yet another way. We are launching a series of TOPICAL TUESDAYS webinars for retailers. Led by Pat Johnson and Dick Outcalt, Co-Founders of The Retail Owners Institute, these are timely and interactive. And FREE!  

Free Registration is Now Open
Here are the upcoming topics. Register now for as many as you wish. Let your friends and colleagues know about them. And be sure to bring your questions!  

"Make More with Less! The Power of GMROI"
Tuesday, September 13 10 a.m. Pacific Time/ 1 p.m. Eastern Time/ 6 p.m. in London
click here for details &  free registration  

"Is My Store Failing, Or Am I Failing My Store?"
Tuesday, September 20 10 a.m. Pacific Time/ 1 p.m. Eastern Time/ 6 p.m. in London
click here for details & free registration  

"The BASICS of Open-to-Buy"
Tuesday, September 27 10 a.m. Pacific Time/ 1 p.m. Eastern Time/ 6 p.m. in London
click here for details & free registration  

"Will you have a profit…or a loss?! How to Know"
Tuesday, October 4 10 a.m. Pacific Time/ 1 p.m. Eastern Time/ 6 p.m. in London
click here for details & free registration

Creative Crisis Management Must "Pencil Out"!

Tale of the Tape: What Retail Benchmarks Show

The Retail Owners Institute(R) has updated the charts and graphs of performance benchmarks for 52 retail segments, and recently posted them on The ROI site. These are the ratios prepared for and used by virtually all lending personnel. We show charts and graphs of five year trends for 6 key ratios for retailers to monitor (Turnover, Gross Margin, Pre-Tax Profit, Debt-to-Worth Ratio, Current Ratio, Return on Assets).

Most users of the Store Benchmark numbers displayed at The ROI are focused on their specific retail segment. Depends on what kind of retail business they have: gift shop? apparel store? hardware store? pet store? However, we have spent some time reviewing all of the segments. What did we discover? Generally, they look awful!

While there are improvements vs LY (going against "soft numbers"), few retail segments are back to even with 2008 performance levels. That Recession, you remember.

Gross Margin and Pre-Tax Profit Trends
After topline sales, what do most retailers pay most attention to? You got it! Gross Margin, and "the bottom line". And sure enough, over half of the 52 segments showed increases in Gross Margins vs 2009; same with Pre-Tax Profit.

Of course, we are going against "soft numbers", since 2009 was so grim.... Comparing 2010 to 2008, a somewhat different picture emerges:

Margins up: for a whopping 2/3rds of the reported segments (35 out of 52), 2010 GM% exceeded 2008 Gross Margins

Profits down: On the other hand, for 34 of the 52 retail segments, Pre-Tax Profits are still below 2008 levels.

The Lenders & the Vendors
Meanwhile, what do the bankers watch? They keep an eagle eye on your Debt-to-Worth ratio. (Their focus is on getting any and all loans repaid.) There are some promising trends here to report!

2010 vs 2009, only 15 retail segments showed increases in the Debt-to-Worth ratio. And that's a good trend! It shows these businesses are getting financially stronger.

And 20 retail segments showed improvements in the Debt-to-Worth ratio vs 2008. (Might be something to that "survival of the fittest" idea. The retailers still here are in fact stronger.)

What ratio do the credit departments at your vendors pay most attention to? The current ratio. It measures your ability to pay your bills on time. The benchmarks on that measure show how tough the retail environment continues to be.

Comparing 2010 to either 2009 or 2008, a scant 23 retail segments (only 44%) showed improvements in the Current Ratio. In fact, as you look at the benchmark trends, note for yourself how many segments have Current Ratios below 2.0 (a C grade).

Inventory Turnover
What really drives these ratios? Inventory turnover. Here again, the overall indicators are not promising. Twenty-six of the retail segments showed declines in turnover. That means more cash is tied up in (old) inventory. And only 17 segments showed increases in turns for 2010 vs 2008.

As Michael Gould Bloomingdale's Chairman noted, "No retailer ever filed bankruptcy because their turns were too high!"

What's the "bottom line" of all this?
Opportunity abounds! Those retailers who can better manage these key metrics of retail financial strength can quickly separate themselves from the more mediocre performers.

"Why Be Open 7 Days When Only 4 Are Profitable?"

As we have all read and heard - repeatedly - it has been a VERY tough couple of years for independent retailers everywhere. Lack of willing customers, narrower margins, inability to get traditional bank loans, huge increase in on-line competition, etc., etc. has been brutal on thousands of retailers.

With all that doom and gloom around us, it's a special thrill to tell the remarkable turnaround story of one brave retailer. We've been asked by The National Retail Federation to present this case on January 11 at their 100th Anniversary EXPO in NYC at the Jacob Javits Center. (If you are going to be there, please come by to meet our client, John Whisler, one of the Co-Owners of Kitchen Kaboodle.)

Here's the copy that The NRF is using to describe our presentation:
"Why Be Open Seven Days when Only Four are Profitable?!"

This session will feature a real-life case study in creative crisis management, and how challenging conventional wisdom can help the independent retailer serve their best, most profitable customers with the products they want, at the prices they want, and the times they actually want to shop.
Speakers:
Patricia M. Johnson and Richard F. Outcalt
Co-Founders; The Retail Owners Institute®

And if you cannot be there, here's the gist of the story:

At the moment of steepest economic free-fall, their bank abruptly called their loans, their attorney described Chapters 7 and 11, the owners' respective homes were pledged, it was February and slowest time of the year, their vendors were anxious to get paid, and their 100+ employees were trembling with the uncertainty.

Yet, the owners kept their cool, created a never-been-done-before plan, disregarded the nay-sayers, and then executed it like the pros they are. (Eight months later their industry presented them with a "First-in-America Award for Innovation"!!!)

For 2011, we wish you the kind of strength, fortitude and vision that this retailer displayed. We all need to keep our eyes on the horizon and not be focused on the rough waters around us.

Passionate Preaching to Retailers

Some things we care about; some things we care about deeply. This is one of the latter.

Let's all assume that the economy is (finally!) gradually strengthening. There are many bona fide signs of that. Great, as far as it goes.

But we see that many independent retailers are rejoicing with the "Whew! Now we can can back to normal" attitude. And that is very troubling to us. What is sorely needed is a little parental discipline, namely, "Rejoice briefly and restore ratios fervently!"

We see low current ratios and margins along with troubling high Debt-to-Worth ratios. Our mantra - Priority #1 for retailers in an improving economy: Get those ratios restored!

Who knows when the next financial tsunami will come? Retailers must get stronger now! (Want to know what the benchmark ratios are for your retail segment? See the "Benchmarks: 50+ Retail Segments" at The ROI site.)

Get your ratios above the benchmarks for your industry. Then – and only then – should you celebrate being on the road to recovery. Be passionate about it!

Foolish Prediction? We'll See in Six Months

Last week (June 2) we had a catch-up lunch with a long-standing (high end) retail client of ours who, so far, has averted bankruptcy. Surprisingly, the next day we received the amazing, and accurate, note below. He copied us when he sent this note to vendors, an attorney, an accountant and key staff members. Other than getting a chuckle out of it, we thought you might find some of the thoughts quite useful...or hilarious in five months!

"Hi Ya’ll:

I had lunch with the Seattle retail consultants that I’ve used for years. Pat and Dick have consulted together for about 25 years and are nationally known and quoted in their field. Their business is to follow retail trends at a macro level as opposed to living it down in the trenches like we do.

Here are their two websites: http://www.outcaltjohnson.com/ and http://www.retailowner.com/

Pat & Dick say that, barring no huge negative event in the stock market over the summer (which, of course is possible), they predict that high end retail will bounce back in September and October and that we should expect to see 10-15% increases over the 4th quarter period of 1-2 years ago (as opposed to increases against last year’s decreases—make sense?).

They cite:

• improving consumer confidence;
• improving real estate markets;
• improving numbers and wealth generation of the stock market;
• pent up cash;
• pent up demand.

They see our (high end) customers as being psychologically affected by what’s happening rather than their pocketbooks being directly affected.

Moving forward, customers will be cautious and looking for reasons to buy “value”, which isn’t necessarily related to price. As retailers we need to do a better/excellent job of explaining why high end product is a value, ie: style, quality, longevity, uniqueness, etc.

American consumers, they believe, will not outgrow their “I deserve this” way of consuming.

They predict that in the next 18 months, there will be an unprecedented number of retail start ups and entrepreneurs who see openings in the market because of all the retail failures; one more reason we need to stay on top of our games.

Lastly, they acknowledge that there is little we can do to force our customers to buy. What we should do, however, is maintain the course so that our customers see that we are weathering the storm.

Generally, we should not be changing locations if it can at all be helped and that as small, independent retailers, we need to maintain our WOW factor which requires us to have compelling, exciting stores when customers start coming back in.

It’s all prediction, of course, though it’s educated/experienced prediction. It was a great pep talk for me so I hope it helps you feel a tiny bit better about treading water.

And to quote Pat & Dick: Halitosis is better than no breath at all!

Tim"

Bigger Is No Longer Better in Retailing

In our view, the current worldwide financial crisis is the final nail in the coffin of retail bigness. The age of "Bigger Is Better" in retailing is dead.  The issue here is "stores on steroids", the actual physical size of the store, not the total sales volume or the number of stores in a chain. Stores on steroids must go away!

• Retail spaces being over-sized is a leading indicator of failing retailers.  Just look at the falling sales per square foot of many chains and independents.
• Customers have been begging for more and better service, not less. But, the greater the square footage an associate must cover, the less service can be given. 
  
• Customers are insisting on newer, fresher merchandise, not piles of marked down goods. But, stores that are too big still must be filled. Malls and other developers have built spaces that independents must fill with product. This slows down turns, causing higher markdowns, thus lower margins. 

Mercifully, the use of technology in retailing has exploded in recent years. Now the urgency to cut down the lead times of supply chains can be realized with current, leading edge technology. Smaller stores can benefit the most! 

• All retailers can replenish inventories much quicker today than even a year ago. 
  
• Smaller stores can out-maneuver big stores day in and day out. 
  
• And they now can raise turns considerably and thus reduce markdowns. Maintained margins will climb! And the percentage of new, fresh merchandise on the shelves will rise!
  

But who will benefit the most with this "death to bigness"? Customers!  Especially those customers who increasingly are using the web for merchandise information and purchasing. They only want new merchandise, not old and marked down items. They seek knowledge about products and usually smaller stores can provide it best. Since online shopping is not the ultimate in service for hassle-free experiences, smaller stores will grow to be a fine alternative.

Our conclusion: The next ten years will witness the greatest growth in retailing coming from nimble, smaller stores that exploit high tech for their customer's advantage. And how refreshing THAT will be!