Forget Retail’s New Normal. It’s Now Retail’s ‘New Complexities’

Retailer Q4 earnings are out, and the news has not been good. Retailers missed expectations, while aggressive promotions to clear inventory came at high cost to margins and bottom line. Nordstrom announced this past week that they are pulling out of Canada and will lay off 2,400 employees.

“Many retailers just weren’t prepared for this,” said Michael Appel, Managing Director and Head of the Retail Practice at Getzler Henrich & Associates, a New York-based middle market corporate turnaround and restructuring firm.

No one should be surprised at the lackluster earnings results, as retailers have been facing operating headwinds throughout 2022. Yet most retailers are loathe to take the actions needed with the sense of urgency required to stabilize and turn around performance.

Investing in technology to manage complexities

It is also crucial to focus on operating expenses, as increased operating costs have slammed retailers across sectors. When Target’s CEO Brian Cornell tells Wall Street that “This is the most expensive operating environment we’ve seen in decades,” it is not business as usual. Retailers who didn’t look ahead and take measures to fix their businesses are now suffering.

Even TJX, which is continuing to perform well and has announced plans to ramp up store openings based on their confidence in future performance, was blindsided by the performance of its Home Goods division, not only in sales but in a huge increase in shrink.

On the other hand, Abercrombie & Fitch has been executing a long-term, disciplined repositioning and turnaround strategy that management started years ago and is bearing fruit, while other retailers who didn’t look ahead and take measures to fix their businesses are now suffering. Another teen retailer, American Eagle Outfitters, also seems to be bucking the negative retail trend.

There are many digital tools at retailers’ disposal to improve operations and better predict consumer behavior, especially vital as omnichannel gets more multifaceted with DTC, e-commerce, third-party marketplaces, social shopping, brick and mortar, in-store shop-in-shops, resale, and more, but not all retailers are utilizing them.

Why the hesitation? It often comes down to mindset. “Maybe these retailers don’t think their legacy platforms will work with the latest technology, or maybe they just have a legacy mindset,” said Appel. “But retailers need to invest in the technology to manage the industry’s growing complexities, otherwise they’re not open to change, and then they’re not nimble.”

Right-sizing inventory

It was a painful process to right-size 2022’s inventory glut, including off-the-charts holiday promotions to clear through excess merchandise and order cuts that rippled through supply chains. Retailers fared differently depending on their preparation.

Kohl’s, which lost $302 million during Q4 with sales down 6.6 percent during the holiday quarter, admitted its inventory-related markdowns put a 7.5 percent dent on margins. Macy’s, on the other hand, was more disciplined with holiday ordering and thus had less inventory to unload. They had also invested in analytic tools to help them react faster to consumer shifts.

“I’m actually worried that many retailers might be under inventoried now,” said Appel. “There was such a knee-jerk reaction to cut forward orders, but the issue now is, do they have the right inventory mix? Just cutting back to cut back doesn’t work.”

Retailers must make sure they have a balanced mix and didn’t over-reduce certain categories. Companies will be in trouble if they played it too safe and don’t have the newness and fashion that customers now demand to open their wallets.

Traditional career dressing is going to remain challenging, because while people have been returning to work, they are not doing so in full force. From a fashion standpoint, the whole category is also being redefined. “The spectrum of what’s acceptable in the workplace has broadened, which has accounted for growth in sneaker and comfort footwear,” said Appel. “Career dressing is no longer highly predictable, and retailers need to figure this out.”

Special occasion is a shining example of a category that is performing well, as people are still traveling and going to events and weddings. Dresses, which run the gamut from casual to more structured, are offering comfort and choice.

“But while occasion dressing is a definite bright spot, it’s still a segment and not going to save the day,” said Appel. “The right balanced assortment is essential.”

Looking ahead

What can retailers expect for 2023? The convergence of inflation, higher interest rates, tight labor availability and sourcing uncertainties means that revenue growth will be challenging, and profitability will be under stress. Household needs come first, and high grocery prices will continue to impact discretionary spending. Big box retailers like Target and Walmart could benefit from their grocery departments, but not all retailers have that luxury.

“That doesn’t mean that there aren’t levers retailers can pull to improve gross margin, drive operational efficiencies and make better use of working capital,” said Appel.

Getzler Henrich works side by side with management teams, boards and lenders to drive operational improvement by helping identify opportunities to optimize cash, institute full-fledged cost transformations, streamline organizations, identify key suppliers, bolster sourcing and procurement capabilities, optimize logistics, identify needed investments in technology and automation and help build a framework for sustainable agility across the entire organization

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