Retail Numbers

Some interesting retail numbers from my archives:

Highest Single Store Revenues

Store City Year Sales (2010 $mm)
A. T. Stewart NYC 1873 217
Wanamaker Philadelphia 1902 442
Macy’s NYC 1906 403
Field’s Chicago 1906 610
Bon Marché Paris 1906 962
Macy’s NYC 1930 1,280
Hudson’s Detroit 1953 1,242
Field’s Chicago 1962 969
Hudson’s Northland 1962 538
Japanese stores Tokyo 1990s-2000s 2,500-3,000

(Data from Gary Hoover) Continue reading “Retail Numbers”

JCPenney: A Transformation

jcpenney

This is a selection from my Q2 letter to the partners of Braewick Holdings. Braewick currently has a position in JCPenney (JCP).

We first purchased shares in JCPenney for $27½ in 2011. But as the difficult transformation has progressed, just as short-term optimism drove the price above $40, short-term worries have knocked the share price down below $22. This gave us the welcome opportunity to increase our ownership at bargain prices.

Worries stem from the inevitable bumpy road to fundamentally changing the business. The first quarter saw sales declines of 20%, and I wouldn’t be surprised if Q2 wasn’t pretty either. But despite what the market believes, the turnaround at JCP is on track.

The first step of the transformation is to decide who your customer base is, and in tandem, what products and services you want to sell them. JCP wants to sell brand-name, fashionable merchandise at affordable prices (similar to Ron Johnson’s previous employer, Target). The second step is to create a unique and outstanding experience within the stores to give customers something they can’t find anywhere else.

The problem with step one is that the desired customer base is different than the current customer base (although there is large overlap). Even with a crystal ball that told management the exact changes needed to attract the new customer base, the “customer replacement” wouldn’t occur on a 1-for-1 basis. It is inevitable that unwanted customers would leave quickly and new customers would take longer to attract.

Let’s take a (very) extreme example: say the management of RadioShack decides the business they’re in is going nowhere and will continually lose economic profit in the future. After some research, they decide the best business to be in is motorcycle repair for hardcore bikers. Imagine a parking lot full of Harleys and a store full of leather-wearing biker gangs. These two customer bases are very different, with little overlap. It would be difficult to engineer a “slow” transition. Now, even if they are correct about the potential of this new business, once they make the change sales will fall off a cliff. Old customers would hate it, and it would take some time for new customers to find out about it. I’m stretching the example a bit, but you get the point.

The following table compares retail statistics in 2011 for JCP and two competitors:

jcp-comps

Rent is estimated based on proportion of stores owned vs. leased. The figures in this table make things look dismal for JCPenney… but therein lays the opportunity. Management has stated their intention to lower expenses by $900 million, or $8 a square foot. JCP and Kohl’s both have the same number of employees per same-sized store, so it seems possible to lower overhead by at least $5 a square foot without getting rid of associates and impacting customer experience. Reduced advertising is another possibility with the new pricing strategy.

But the biggest potential future gains come from sales increases. With the operating leverage inherent in the business, a 10% increase in 2011 sales translates into cash earnings over seven times the current amount.

The Progression of Innovation

It’s good for any investor or business person to know where their company fits when it comes to the progression of innovation. Even if a certain company or product isn’t new, at some point in time the business it’s in was. Throughout history, innovations (whether they be technological inventions or innovations in business model) came about that performed a certain “job” better than the status quo. Most of these innovations didn’t arrive spontaneously — they were built upon or evolved from their predecessors.

The following is a simplified chart/timeline of innovations in the computer industry:

Consumers purchase computer systems, with new innovations or shifts in one component (processors or operating systems) driving innovation in computer design and vice versa. Other components like storage and display also drove innovation but were less important in this context. Most of the above innovations are technical, with the exception of the commodity PC makers (Dell, Compaq, etc.) which were an innovation in business model.

After money was transferred from consumers to computer makers, it went primarily to chip makers and OS developers. Because suppliers like Intel and Microsoft had strong competitive advantages, they had strong bargaining power, and therefore received and kept most of the value.

Retail Industry

The progression of innovation doesn’t just apply to industries as technical and complex as computers. Below is another timeline (dates are approximate) of the progression of the retail industry: Continue reading “The Progression of Innovation”