Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Disastrous Holiday Season Looming for Retailers

The 2016 holiday season might be a catastrophe for some of the biggest names in American retail. A perfect storm of falling sales, lost foot traffic, booming ecommerce and collapsing revenues may drive some historic retail brands into the death spiral.

The danger is holiday season 2016 will be a repeat of 2015 when several retailers; including Target (NYSE: TGT) and Macy’s (NYSE: M) actually saw their revenues drop over the quarter that contained the holidays. Target reported revenues of $73.91 billion in October 2015 and $73.78 billion in January 2016, ycharts data indicates. Macy’s reported revenues of $27.57 billion in October 2015 and $27.08 billion January 2016.

The revenue numbers indicate that the holidays did not help two of America’s highest profile retailers. Traditionally retailers are supposed to see a revenue bump over the Christmas season. Instead two of the biggest names experienced a small drop in revenues.

The Incredibly Shrinking Revenues

This phenomenon should be worrying to investors because both Target and Macy’s are experiencing major revenues declines. Since January 2015, Macy’s revenues have fallen by $1.98 billion and Target’s have dropped by $3.48 billion since January 2016.

Macy’s revenues peaked at $28.11 billion in January 2015 and fell to $26.13 billion in October 2016 making for seven straight quarters of revenue losses. Target’s revenue collapse has been quicker and more dramatic, the discounter’s revenues rose to $73.78 billion in January 2016 but fell to $70.43 billion in October 2016.

The effects of this revenue decline are already being felt at the two retailers. Macy’s announced plans to close 100 of its stores in August. Anne Dament, Target’s senior vice president for groceries announced her resignation in early November before the third quarter earnings report was released, The Minneapolis Star-Tribune reported.

Dament’s job was to boost Target’s sales by ramping up its grocery game. Instead foot traffic at the discount icon declined by 2.2% during the second quarter of 2016, and sales fell by 1.1% during the same period.

Dament followed two other members of Target’s management team; Chief Digital Officer Jason Goldberger and Chief Marketing Officer Jeff Jones, out the door. Jones quit in August and Goldberger left in September. Cynics will say that the crew is deserting a sinking ship, or a ship sailing into a mine field.

Is Amazon Threatening Retailers

The cause of these retailer’s woes can be hard to pinpoint because some of their direct; and in-direct, competitors are experiencing revenue gains.

Although popular wisdom blames Amazon (NASDAQ: AMZN) and other online retailers. The problem with that theory is that revenues at a variety of brick and mortar retailers re growing.

Dollar General (NYSE: DG)’s revenues increased slightly in the third quarter rising from $21.01 billion in July to $21.26 billion in October. Costco Whole (NASDAQ: COST) did slightly; better its revenues went from $118.72 billion in August to $119.6 billion in November 2016. Even Walmart (NYSE: WMT);which has been dismissed as a failure in some quarters, experienced slight revenue growth going from $483.83 billion in July to $484.6 billion October.

Where are the Customers Going?

The overall market for retail seems to be expanding, but Target and Macy’s share of it is falling. What is going on here, Target and Macy’s are not Sears Holdings (NASDAQ: SHLD), they’re fairly well-managed stores with strong brands.

There are some explanations for this which bode ill for the holiday season. These explanations include:

  • Some retailers are more exposed to Amazon and online than others. Target and Macy’s have a largely middle class clientele; the kind of soccer moms most likely to shop on Amazon. They also compete directly with Amazon in many categories such as clothing, small appliances, electronics, toys etc.

  • People are more likely to make larger purchases such as electronics and clothes online. This reduces the need to go to large brick and mortar stores like Target and Macy’s. It also increases the amount of quick shopping to smaller outlets like Dollar General. Note: the revenue growth at Costco and Walmart seems to disprove this.


  • Retailers like Walmart, Costco and Dollar General have figured out how to steal customers from Macy’s and Target. Walmart and Costco in particular are doing a better job of deep discounting than Target is.


  • Target is facing more direct competition from dollar stores and grocers like Kroger (NYSE: KR).


  • Shopping habits are simply changing. People are less likely to go to the mall and spend three or four hours on a shopping trip than they were 20 years ago.

  • The recession, income stagnation and fears about the future have dampened the incentive to shop.


  • Certain customers such as millennials who are squeezed by student loans and laid off retail workers simply have less money to shop. They’re staying home, shopping at the thrift store or going to Dollar General.


  • There are also lots of alternatives to shopping around; video games, hobbies, binge watching your favorite TV shows to name a few, that are cheaper and more fun.


Amazon profits directly from this, why should you go to the mall when you can stay home watch the last season of Game of Thrones and order everything you need through Prime?

A Trying Time for Target and Macy’s

All this means that Holiday Season 2016 is going to be an important test for Target and Macy’s. Will their extensive investments in online pay off and make up for losses in brick and mortar? Or more importantly, will customers come back at some point.

If last year is anything to go by that will not happen which is going to raise serious questions in executive suites. Should retailers accelerate the closing of stores, or make heavy investments in store floorplans, or store types?

Macy’s footprint shrinkage is potentially costly because it might cut into revenues. Target has embarked upon expensive testing of new store prototypes such as a small grocery concept called Quarry.

One interesting question that will arise at Target will be: should the company imitate Macy’s and shrink its footprint? Or should Target imitate JC Penney (NYSE: JCP), and try expanding into some of the markets being vacated by its dying rival Kmart. Sears is planning to close another 60 Kmart stores in December; which might provide an opening for Target.

Penney has had some success attracting older customers who are being abandoned by ailing rivals like Sears and Macy’s. It has even reentered the appliance business and developed marketing targeted to those individuals.

Investors should pay close attention to what happens at Target and Macy’s this holiday season. Their performance; or lack of it, might show us where American retail is going and what effect Amazon is really having on the market.