That's good news. How does 4.1% increase compared to last year?

Transcription

1 Interview with Craig Johnson, CEO, Customer Growth Partners 12/13/16 Hello, I'm Jackie Doherty, a contributing editor with Yardeni Research. Today I'm interviewing Craig Johnson, who's started Customer Growth Partners, a retail research and consulting firm, in He's been involved with the retail industry for more than 30 years and we can't wait to hear how he thinks the important holiday shopping season is progressing. Before we start, please see the hedge clause on our website. In brief, Yardeni Research does not recommend individual securities. All views expressed by our guests, especially on stocks, are solely their own views without any explicit or implied endorsement by Yardeni Research. Let's begin. Craig, we're almost half way through December. You were expecting a 4.1% increase in holiday sales a couple of months ago. Does that figure still seem to be on track? It is on track and, if anything, retail sales overall may even top 4.1% by a little bit. We saw a slow start to the season, which has been happening for any number of years now, in the first week or two of November. That was perhaps exacerbated by the election uncertainty during the first eight days of November. Then, ever since the election, holiday sales have been slowly gathering momentum. It was a good, if not great, Black Friday weekend and things have been improving as December rolls along. That's good news. How does 4.1% increase compared to last year? Last year was about 3.5%, which was a tepid increase. It was okay, not terrible, but tepid. In the good days of the mid-2000's, the last time we really had robust growth, year-over-year total sales growth for the November/December holiday period were often up 5% and 6%, or more. For a number of years now, we've been seeing very slow growth, 2-3%. This year, we're anticipating growth just above 4%. Does 4.1% include both old-fashioned brick-and-mortar retailers and Internet retailers? Oh, yes. Absolutely. You have to include Internet sales. Our forecast expects Internet sales will account for about 17.5% of total retail sales. So, you can't very well leave out over a sixth of total sales. That's definitely part of the mix. Of course, the sales growth of online sales will be about 13.5%, maybe 14% year-over-year, delta in terms of the growth. What that means is, is that of the overall retail sales growth, our forecast was $632 billion for the two-month period, up from $607 billion. Again, that's the 4.1% that we came into the season with our forecast, which we issued in mid-october.

2 Online alone, that delta between $607 billion and $632 billion, that $25 billion growth we're seeing this year, $13 billion of that, in other words, just over half, is accounted for by online sales. Wow. Even though online sales are only about a little over 17% of the total sales, which gives you a sense of the growth and strength we've seen in the online part of the economy. If you back out Internet sales, how much would traditional bricks-and-mortal sales be increasing? They would be increasing by approximately $12 billion. Traditional retail sales are only up about 2%, 2% and change. Most retailers--not all--but most retailers samestore-only comps are in fact, negative. Flat at best, if not negative. Most of them. There are exceptions like TJ Maxx and Burlington. The off-price sector happens to be very fast-growing. But most of the rest of store-only comps, same-store-sales, are still quite sluggish. So, sales growth online continues to be much faster than at brick-and-mortar stores. Absolutely. Retailers that are mall-centric and located heavily in malls, which not all, but many retailers are, are hurting because traffic to traditional malls has been very stagnant. It's flat at best, if not down by several percentage points. Anywhere from 3%-7% in raw traffic declines in most malls. If people aren't crossing your lease line into your store, it's difficult to get them as customers. If they cross the lease line, at least you have a shot at getting them to buy something. But if they're not even in the mall to begin with, that makes it a tough go. Why aren't consumers going to the malls? Are they're just spending more online instead? That's a good part of it. Again, 14% growth online versus 2% and change for storebased retail sales--that delta certainly reflects the fact that spending is rotating and continues to rotate over to online. But it's not simply that. One of the other things we've seen is that (off-mall retailers continue to do well). Ross, Burlington and TJ Maxx, the three big off-price retailers, don't have online divisions at all. TJ has a very, very small online presence. It's modest, but Ross and Burlington don't. Those stores are doing exceptionally well and they're seeing very strong growth despite their virtual absence of an online presence.

3 So, it's not simply that people are exiting the mall to jump online. The growth of off-mall retailers continues to grow and accelerate. Is there anything else that you see taking consumers out of the mall besides those two major themes? I guess the third factor is that the concept of traditional, enclosed mall, anchored by two, three, four or five department stores, has been around since the mid- 1950's. Many malls have added different bells and whistles, ranging from food courts to abutting movie theaters, et cetera, but the basic concept has not changed in decades. And, like anything else in retail, retail is all about newness. If you're offering a concept that isn't new, even the concept of the venue that you're in, if that isn't new, you're going to lose customers. You're going to lose share of wallet over time. That's what happened. That's why there have been very few new malls developed in over the last decade. There are some outlet malls, like Woodbury Commons, that are still expanding but most mall development is focused on redevelopment. Some of the more interesting things that we're seeing is malls are getting themselves freshened up, not just with the traditional movieplexes and food courts, but they re adding fullservice dining and other kinds of entertainment, like climbing walls for the kids, et cetera. One of the most important things is bringing in grocery. I was just in the Natick mall outside Boston the other day and the old JCPenney that had been there, is being replaced by a Wegmans, which is a very hot, privately-held grocery store retailer. One of the issues with malls is that the foot traffic declines is mostly concentrated during the midweek period, the Monday through Friday period. Weekend traffic is still okay. Not great, but okay, at least. The addition of a supermarket to a mall, whether it's a Wegmans or a Costco, which is 75% supermarket, provides weekday traffic as well as weekend traffic. It's a draw that gets people into the mall much more than just adding another department store or another specialty store. That's one of the things we're seeing. The second trend we're starting to see is the addition of ambulatory health care centers. When there's been a vacancy at the mall, you put in the health care center, which is the one part of the economy that's actually growing these days, or at least growing robustly. What that does, is it provides seven days a week of traffic. Again, it gets people in the mall. That's another trend that we're just beginning to see. The supermarkets, there are a few more of those that are happening. We're cautiously optimistic that this will reinvent a shopping venue concept that's

4 basically been around for over half a century. Do you think retailers will give these malls the time it takes to do the reinvention needed to boost the foot traffic? In a sense, yes, because the developers--whether it's Simon, or General Growth Partners, or Macerich, or whomever--they have leases obviously, with the tenants. The anchor tenants typically have 25 year leases with five, five-year kickers. Then, the inline stores are typically five-year leases with a five-year option. They're in there. Some are exiting if the mall traffic is not continuing to be generated. Natick happens to be a General Growth mall, a TTP. The other tenants there, whether they're anchor stores or whether they're the inline specialty stores, they are delighted to see a company like a Wegmans. It's mostly in the Northeast part of the country, but the shoppers love it and it has very high customer loyalty. It's a little bit up-market. Everybody loves the fact that Wegmans is going to come. This is great, we're going to have some midweek traffic, because otherwise Natick, like most other malls in the country, you go there on a Tuesday or Wednesday afternoon and the employees in the stores outnumber the customers. That's not a healthy sign. Let's jump back to the retailers. Where do you think people are going to spend their holiday dollars this year? What kind of retailers are going to benefit the most? The single hottest sector right now among merchandise categories is actually health and beauty, health and personal care stores. Really? Yes. We forecast about 7.5% year-over-year growth. Don't just think of CVS or Walgreens. They're doing okay, but a lot of their sales are driven by whether it's a big flu season or not, which it has not been, so far at least. Think of places like Ulta and Sephora. The beauty destinations are on fire right now. Ulta, which has selfstanding stores, is seeing very rapid growth. They're opening new stores all of the time. We have 18 people across the country vising about 90 retail venues every week. Our team visits the Danbury Fair Mall pretty frequently. It used to have a UNIQLO there. Then, a Primark went in, which is a whole other story in its own right. It caused the UNIQLO next door, to essentially to die, along with crimping Forever 21 and the Macy's at the far end. Ulta took the space that was vacated by UNIQLO. It's packed. Its been only open a couple of odd months or so and it's packed. Wherever Ulta goes, its been performing very, very strongly, as has Sephora. Sephora is a self-standing concept and there also are Sephoras inside many JCPenneys. Sephora is the strongest part of any JCPenney. The Sephora square footage is the most productive of any space within a JCP. The beauty section in

5 particularly, inside traditional department stores continues to be very strong. The apparel side of stores like Anthropologie and its sister Urban Outfitters, have been doing okay, but the strongest part has actually been the beauty sections, which they've both expanded dramatically over the last year or so. We're seeing that pattern of stores adding in beauty because it s a hot category. That is the single hottest merchandise category. Are people shifting money from somewhere else to beauty or this incremental new money coming into this sector? It's some incremental into the beauty sector in the health and personal care stores, which includes places like GNC and Vitamin World, all of which are continuing to expand. It's some new money, but it's also a migration from elsewhere because you have two or three sectors within retail where there's very significant price deflation. One is food, of course and the other is apparel. Apparel is a sector that, on a unitdemand basis, is growing about 4% or 5%, very strong unit growth. The problem is, there's about 3% deflation at both ends of the value chain. When you have deflation above 3% and change, that 4% or 5% nominal unit volume growth, turns into dollar growth of only 1% to 1.5%. The savings that people are realizing either on the food side, the grocery side, or on the apparel side from deflation, is providing a source of the migration into the beauty and personal care stores. Interesting. In apparel, is there any area that is hot right now? Apparel, as a general rule, has been struggling this fall and now into holiday. There are portions that are hot. The sector that's been most challenged is outerwear because until the last week or so, it has been a very mild fall. Most of the outerwear sales normally occur in maybe late September, October and early November. But it has been exceptionally mild. That has turned in the last week or so in many parts of the country. North of the Mason-Dix line some places have already had some record lows for December. Things are getting sold. The problem is, because retailers plan to sell through their outerwear sales--i'm talking the bigger parkas, the heavier jackets, et cetera, heaviest sweaters--they like to have sold most of those by this time year, which is the peak of the holiday season. That way they have new, fresh holiday merchandise, rather than stuff that's been on the shelves for two and a half months. Non-newness doesn't work well in retail. You need newness. They'd like to have cleared through that. The problem is, to clear through the stuff on the floor they had to go to sales. Not just 30-40% off, but 50% sometimes 60% off to clear through the merchandise.

6 So, that sector has generated many fewer gross margin dollars than we normally would have liked to have achieved. This is whether you're an apparel specialty retailer or whether you're a department store. Apparel is the single biggest weak area. There are some individual styles that are hot this year. Bomber jackets are big this year and off-shoulder or cold-shoulder sweaters and tops are big. Footwear is also generally a strong area, particularly boots both short boots as well as long boots. Even some of the over-the-knee styles are hot. This is actually the third strong year for boots. That's something that was not really affected so much by the warm weather. It s no surprise that women wear long boots, not because they're walking through two feet of snow everyday, but more as a matter of style. At any rate, boots are hot. Those are a couple of the hot areas that we are seeing in apparel. Otherwise, the sector has been pretty well challenged. When everything gets wrapped up, what do you think the big surprise will be this season? We've also had significant price deflation in consumer electronics, yet we think that consumer electronics are actually having a pretty good year. Despite the price deflation, we're seeing very, very strong--double-digit strong--unit volume growth in TV's. This is the large, big TV's, 60-inch plus. That's very, very strong. So places like Best Buy, we think, are having an excellent season despite price deflation because of the literally double-digit unit volume growth, along with newness. We're seeing newness, not just in the extra big TV's but in things like virtual reality technology, which (brings newness to what has been) a languishing, huge gift category in consumer electronics. We've been between generations of new video game consoles for several years. I'm talking the PlayStation 4. There's been no PlayStation 5 now for several years. There's no Xbox Two coming out for several years. We're between generations of new technology. Video games and the consoles have always been a big gifting category for kids or people in their 20 s or even 30 s. There are a tremendous number of gamers. You strap on the VR technology headsets and it's a transformative experience. This is particularly true for the shoot-em-up games, Call of Duty and all of that stuff. Have you tried it out? No. I let my son do that for me. He reports back assiduously. Did he like it?

7 Actually, I have tried it out. I went down to Soho (in New York City) the other day and I went to the Google store. A lot of the online entities, whether Amazon or Google or so-forth, are all opening their initial bricks-and-mortar stores. I went down to the Google store and tried on their VR technology and they couldn't get it to work. The sales people couldn't get it to work. They brought out three different units. So I said, "Oh. Maybe this technology's not quite there." But the Oculus (owned by Facebook) and Sony s VR, which just came out to go with the PlayStation 4, seem to work okay. My son says, "Yeah, they seem to work okay." Do you think VR sets will be a big hit this holiday? Yes, I think they will be a big a big hit. They are already very strong sellers. Not that that's the only thing going on at places like Best Buy. The Apple iphone 7 is charging right along. The iphone 7 Plus, the larger size version, is still in relatively short supply. It took two months for the supply to catch up with demand, but it's finally just about there. It's not a game changer like a couple of generations ago, like the 5 was. But It's a solid seller. It gets a lot of traffic and so-forth. It does fine. The other thing that's doing strongly this year at a place like best Buy is major appliances. It was a little bit soft earlier in the summer but it has come on stronger because the housing recovery seems to be bubbling along. It's a little choppy but still bubbling along. So, major appliances are selling. Are TV's are selling well because of the housing recovery? I would say maybe partly. The other thing continues to be audio. It s correlated with big TV sales. You never used to be able to pick up big TVs by yourself, but now you can pick up a 70 incher by yourself because it's so thin and light. The problem with a thin TV is there's no room for a decent woofer and sub-woofer, so you need to get a sound bar or the sound theater to go with it, to provide the audio experience because the big TV's sound is not that great. So, audio has been related to the growth of TVs. The single biggest driver--and we've been doing this for 20 years--in terms of looking at holiday sales and then retail sales in the rest of the year, is growth in real disposable income. It s the single biggest driver of retail sales and the thing that's most correlated. People talk about consumer confidence and this and that and the other thing. It's growth of real income (that drives retail spending) and we have had decent real income growth over the last year. It is mostly concentrated in the upper half of the household income spectrum. The lower two quintiles have not really participated in

8 things that much. Things are very, very tight there. But If you are in the upper half of the income spectrum, that is where most of the spending impetus is coming from this year and that's where we seeing the growth of real incomes, in median incomes, coming from. That's the single biggest driver. Let's hit, maybe two more categories. How is sportswear doing? Sports gear or sportswear? Things that you would buy at, let's say, at Dick's. Let's divvy that up into a couple of different categories. Apparel and footwear are strong. Performance wear is still a growing category. It's maybe not growing quite as fast as it was a year ago. I'm including sales, whether they are at Dick's, or lululemon, or the Athleta stores of Gap. The growth rate may have peaked out a year or so ago, but the category of performance wear is still growing. Dick's, whether it's selling Nike, or Under Armor or adidas, is doing fine. Athletic footwear is doing fine. This is whether you're spending merely $200 on Nike's or you're paying $700 for the self-tying of your knots. You've seen those things. The self-lacing shoes for $728. Hey, I'll save the 500 bucks and take two seconds tying my own shoes, thank you, and spend the 500 bucks somewhere else. But people are buying these things. That sector, the athletic footwear sector, is doing good. This is shaping up as a good season for winter sports because, although until recently it's been mild in most of the rest of the country, the snow areas, particularly out West, the Rockies and Sierra's, it has been a good snow season so far. It looks like the winter sports gear, whether boards or skis, that sector's going well. The weak area at a Dick's is team sports and they've been weak for some time. It's going on for a couple of years, whether it's football, baseball, even soccer. Team sports have been challenged. The participation rate is not as high. People are getting more into yoga or some of the other individual sports. But the team sports area is weak. Golf remains weak. That s not new. Golf's been weak for several years now. Maybe it will have a comeback with the new generation of younger players coming. The Ryder Cup was tremendous but again, it's not providing the legs of growth we saw from some years ago. Shall we end with jewelry? Will we have a big jewelry season this holiday season? Interesting enough, we believe yes. We haven't talked about luxury in general but

9 luxury retail has been in the ditcher for a year or so. This is whether soft luxury or hard luxury. Hard luxury meaning jewelry. The luxury department stores have been very challenged. This is whether it's Neiman's, or Saks, or whatever. The jewelry component of luxury, we think, is going to have a good season. It's already started to have a good season. Hard luxury is doing well. Luxury is a little different. This is a little bit of a late holiday season because the election had things kind of frozen and people were holding off on big ticket purchases. We forecasted a 4.1% increase in holiday sales no matter who won. We said that the uncertainty of getting the damn election campaign over with, everybody was going to feel better no matter who won. Now, we've had this additional Trump rally. The stock market's up tremendously and that means portfolios are better. The translation of that, is that luxury is always late in holiday, in particularly hard luxury, jewelry, because guys, who will buy most of the jewelry, will typically wait until about December 15th to buy it. If you wait until after the 15th, that means it goes onto your January bill for your credit card bill. You push it out another month and by then, by the time you have to actually pay it, which may not be until February, you'll have your bonus and everything by then. Jewelry always comes late and now, with the rebound in the stock market, we think it's going to be a very solid year for places like Tiffany, Cartier, et cetera. It s even starting to bleed over into some of the better soft luxury players, whether they're Hermes, Gucci, et cetera, which after a very, very slow November, are starting to see some better results. A good year for hard luxury. Craig, I can't thank you enough for all of this wisdom. We look forward to talking to you again soon. Glad to be with you Jackie. Take care.