PJ SOLOMON Presents

EP 12: Our Developing Optimism for Retail: A Look at the Holiday Season and Beyond

December 18, 2020 PJ SOLOMON Season 1 Episode 12
PJ SOLOMON Presents
EP 12: Our Developing Optimism for Retail: A Look at the Holiday Season and Beyond
Chapters
2:16
A Different Kind of Holiday Season
4:10
Early Start to Holiday Season
6:10
Digital's Growing Importance
8:15
Shipping and Logistics Concerns
10:07
Weak In-Store Traffic
11:36
Digital an Integral Component of the Future
12:26
Retail Vacancies
13:51
Stronger Than Expected Holiday Season Due to Digital
15:33
Winners and Losers
PJ SOLOMON Presents
EP 12: Our Developing Optimism for Retail: A Look at the Holiday Season and Beyond
Dec 18, 2020 Season 1 Episode 12
PJ SOLOMON

In this episode, Cathy Leonhardt, Co-Head of Global Consumer Retail, and Senior Advisor Steve Sadove discuss their outlook for retailers for the 2020 holiday shopping season and beyond.

Despite the rocky start to the year and the dismal outlook brought on by COVID-19, many retailers are experiencing a better than expected holiday shopping season and the outlook for 2021 is supported by the strength of the consumer and pent up demand.

Steve Sadove brings a unique perspective to the conversation given his extensive experience as a retail executive and investor.  Chairman and CEO of Saks, Inc. from 2007 to 2013, he is a founding partner at JW Levin, a management and investment firm focused on consumer and retail companies.  In addition, he is former Chair of the National Retail Federation, serves on the Boards of Colgate-Palmolive, Aramark, Movado and Park Hotels and Resorts, and is an advisor to Mastercard.

Show Notes Transcript Chapter Markers

In this episode, Cathy Leonhardt, Co-Head of Global Consumer Retail, and Senior Advisor Steve Sadove discuss their outlook for retailers for the 2020 holiday shopping season and beyond.

Despite the rocky start to the year and the dismal outlook brought on by COVID-19, many retailers are experiencing a better than expected holiday shopping season and the outlook for 2021 is supported by the strength of the consumer and pent up demand.

Steve Sadove brings a unique perspective to the conversation given his extensive experience as a retail executive and investor.  Chairman and CEO of Saks, Inc. from 2007 to 2013, he is a founding partner at JW Levin, a management and investment firm focused on consumer and retail companies.  In addition, he is former Chair of the National Retail Federation, serves on the Boards of Colgate-Palmolive, Aramark, Movado and Park Hotels and Resorts, and is an advisor to Mastercard.

Steve Sadove:

Despite the calls that retail is dead, retailers are having a good holiday season and the outlook for retail in 2021 is quite bright.

Cathy Leonhardt:

The consumer's in good shape and there's pent up demand. And I think when we compare how we started this year and the dismal outlook from COVID, I think we're ending the year in a very positive way. Hello, I'm Cathy Leonhardt, co-head of the Global Consumer Retail group at PJ SOLOMON. Thank you for joining us for this episode of PJ SOLOMON Presents. In this podcast series, PJ SOLOMON bankers and advisors share their latest thinking and insights across a broad range of sectors with a focus on sector trends, financing, and deal-making. Today our podcast will focus on the topic of the retail sector and the 2020 holiday selling season. Obviously very relevant. Joining me to share his thoughts and perspectives is our Senior Advisor. Steve Sadove. Given his impressive background, Steve is uniquely suited to address this topic. He served as Chairman and CEO of Saks , Inc.from 2007 to 2013. He's a founding partner of JW Levin partners, a private equity firm that invests in consumer and retail. He's a former chair of the NRF, that is the National Retail Federation, and he serves as advisor to MasterCard, sits on the boards of Colgate, Aramark, Movado and Park Hotels. Thank you, Steve, for joining us today,

Steve Sadove:

Thanks Cath, it's a pleasure to be on the call with you.

Cathy Leonhardt:

We're all following this holiday season very closely. We are seeing shopping trends shift dramatically as COVID continues to impact consumer spending and consumer behavior. In store traffic is down, e-commerce sales are up as virus cases have increased and we see things like major freight carriers, such as UPS and FedEx capacity constrained. How is this holiday season playing out and how have promotions played out?

Steve Sadove:

I think this is a different retail holiday season than any of us have ever seen. And because of that, it's extremely difficult to forecast and understand, and its had a lot more volatility than anyone would have thought. If I had to characterize it, it was an early season, meaning that the consumer came early, the promotion started early. It's clearly a digital season and the overall forecasts were hard to project. If you looked at the Mastercard numbers for the holiday season, and I define the holiday season as essentially early October until through Christmas. And it kicked off probably around the 11th of October. You had the Amazon Prime Day and they had forecass through their spending post data sales in the 2.4% growth type of range. And if you look at the NRF, they were forecasting growth in the 4 to 5% range and one or two points in overall retail sales is a big difference and I'll get into a little bit of how that's played out. But in context, when we were back in March, April, we were looking at retail sales down 11, 12%. And if anyone had told me that we were going to be seeing growth in the two to 5% range for the holiday season, I would have said they were smoking something because I didn't really think the consumer was going to come back as quickly as they have. And it was relatively rapid. If when you got to the May, June period, it was down say somewhere in the four or 5% range. By mid summer it was flat and starting around August you started to see growth in the four to 5% overall retail sales growth. Now having said that there were clearly winners and losers in retail, and it's very relevant for the holiday season. It started off being the winners were in the needs versus wants. So it was the big box retailers. The Walmart, Targets, Home Depot. And you saw that because they were open early in the season, they were big, they were safer. And a lot of stores were forced to be closed up either by government regulation or for safety reasons. And small retailers had a difficult time and what's happened as we've come i nto the holiday season, much more retail has been open, although we're getting into situations of lockdowns right. But the consumer behavior has shown that the categories that they gravitated to e arly, because of whether it was the nesting or staying at home type categories - grocery, home, h ardware - these were the winning categories early on. And they've continued to be the winning categories through the season. So specifically to your comment an d q uestion about the holiday season, I'm looking at holiday sales probably in the 3% type of range, but they all came early. So if you look at the month of October, you saw growth close to 6%. In the November period, similar four or five, 6% type of growth. But then if you looked at the first half of November, saw growth of close to 6% yet when you looked at the overall growth for the month of November, it was only in the three to 4% growth area. So what happened was all of it came early in the month of November. And again, because of the Prime Day and the promotions on the part of the competitors to Amazon, you got big spikes in the month of October and started giving it back during that Thanksgiving period. So it used to be in the old days, Black Friday was the big kickoff to the holiday season. Well , Black Friday essentially became irrelevant this year. And in fact stores wanted the consumer to stay away because you didn't want to clog up the stores .

Speaker 1:

So digital became much more important. Cyber Monday became bigger in some ways than Black Friday. And the overall e-commerce component of retail has jumped from about 12% to 20%. So you have this big growth of digital. You have an earlier season and in some ways you're limping out of the season. So I think that, and we don't have the hard data yet, but I think you clearly saw that the Thanksgiving weekend was weak. Anecdotally, I think the first couple of weeks of December have been mixed. I've heard some decent numbers out of some retailers, digital continuing to perform well. But the store traffic, especially as the virus has run rampant around the country, store volume and traffic has been quite weak. So in aggregate, you're going to have a pretty good holiday season, again, a three percent type, two and a half, 3% growth. Maybe it'll be better, will be an okay holiday season, but it's much more digital. It's more of the categories that I talked about. And even in categories that have been weak, like apparel, there's a bifurcation between the athleisure and the stay at home comfy type of clothing versus more traditional fashion. So let's just start there as a summary of where things are.

Cathy Leonhardt:

That's really helpful. When you think about how this holiday season is playing out, and you talk about how it's elongated, I think it's a couple of factors. It's the fear of the virus, promotions going early to get customers in early and not be so crowded. Two online, think about what's happening there. You do have this notion of there's so much more volume that shifted to online that FedEx and UPS and all these freight guys cannot keep up with the volume . So you even have to shop online earlier. Third, I think the retailers a re scared and they don't want to be stuck with all this inventory. So they're promoting earlier to de-risk the season. Any comments and thoughts?

Steve Sadove:

I think your thoughts on all of those are right. You know, as we're taping this, we're basically getting close to Christmas and the shipping companies are past their windows essentially. And , you have a real clog in the system. And I don't think that, we'll get into some of the forecast for 2021. I don't know that that's going to go away so quickly. So you do have a shipping issue. The retailers did want to get the promotions earlier, but you also had another phenomenon, which is that the retailers' inventory levels were very low coming into this holiday season. Remember back in March, April was when they were ordering for the fall holiday season and the world was falling apart. E veryone w as conserving cash and looking at a very weak consumer. So the amount of product that was ordered for the holiday season was much lower than you normally would see. So not only are they selling earlier in the season, there isn't that much product going around. So as you come to the end of the season, you're looking at relatively bare shelves of any of the hotter items. So part of the reason you're seeing some of the lighter sales as we finish the season, is there just isn't that much inventory. You have this , a shipping problem again, because you can't ship the amount of product from the digital side. You don't have as much volume and storage. The consumers are staying away. So you're seeing a relatively muted end of the holiday season, but it's actually a good thing from a margin perspective, I'm expecting that you're going to see some very healthy gross margins coming out of the retailers.

Cathy Leonhardt:

Well, that would be good news. Let's talk about traffic this season. The data says half the people visited stores on Black Friday this year. What do you think generally of in store traffic and conversion, as we go into this holiday season?

Steve Sadove:

You have a very weak traffic pattern. You know , I've seen numbers that are down in the minus 20 to 30%, and I would anticipate that that's going to continue for some period of time. They have done their research. And that's one of the reasons I'm hesitant to talk about digital sales versus in store sales, because everything is merging with buy online pickup in store, pickup curbside. It's a digital transaction yet it has a store component to it as well. So people are looking for safe, contact-less types of transactions, but the store is an integral part of it. So when, even when we talk about traffic being down, 80% of commerce is still being done in a physical store. So you've got to recognize that it's both a store transaction, as well as a digital transaction.

Cathy Leonhardt:

I take your point on, you know , the fact that it's hard to separate digital from store, but so much of store purchasing has migrated online. But as you look at companies like Target, who sees digital demand from already available in stores, that's a significant portion of their sales because their stores are enabling this digital fulfillment. Talk about what the landscape looks like now and going forward, if you can, to what digital sales mean and how are we going to measure them.

Steve Sadove:

I think digital is an integral component of the future. So mobile, digital , the online experience has to be fully integrated with the store experience and the winners are going to be the ones that do it well,.I would think that most retailers, not all, are going to need a smaller footprint because the digital online piece is going to be so much bigger a portion of the total. Yet it's saying that stores are still important. So there are a lot of implications for real estate. I would anticipate that you're going to see a lot of mall closures. We probably have 1200 malls in the United States. I would expect over the next number of years, maybe a third of them will go away. You're going to have different kinds of mall formats. I'm a big believer in some of these mixed use, open air types of malls, where you have work, live and play all together. So there's implications on rents on the high street. When you have vacancies of 30, 40% in places like Soho or Madison Avenue in New York, that's going to have to change the rent structures. Restaurants are going to have to reinvent themselves, but you're also going to see a renaissance of these DTC companies that are going to be opening up stores. And I see pop-up stores up all over the place. I see small what I call local retailers and it's clear from attitudinal data that even though the big boxes are doing remarkably well, consumers still want to shop local. They want to shop with companies and brands that they can affiliate with. And I see these local stores taking advantage of the Shopify's of the world and the technology to be able to start doing DTC and digital experiences, even among a store of a one or two shops. So I see the digital becoming critical and integral to the entire experience,

Cathy Leonhardt:

The democratization that Shopify and some of these other vendors have offered these smaller retail concepts I think has given them a new lifeblood and has been very important to continue to drive their retail sales in a time when consumers are less than interested in going into stores. What do you see e-commerce growth and penetration this holiday season? Can you put numbers around it for us?

Steve Sadove:

Well, if I look at this holiday season, it's probably going to be, if you look at it from total commerce, probably 20% of all retail sales will be done e-commerce, but it's going to vary dramatically. Categories like grocery, which were in the mid to low single digits, are now going to be in the higher single digits. But some, a category like electronics may be 60, 60% plus on digital. Apparel, very high percentages are going to be digital. If you look at the growth of digital , you know as I said earlier, it's gone from about 12 to 20 early in the pandemic. Digital had doubled from where it was when everything was shut. Now, as stores have opened to some degree, you're looking at growth over the last three, four months, probably in the 55 to 60% growth range, year on year. Over the holiday season, I would expect it's probably going to be in the 30, 40, 50% growth rate. Again, varying by category. It's beyond just the percentages. It's how consumers think. The consumer thinks digital first. And they go, they research. Whoever is going to research and buy a car without going online? Who's going to research an electronic item without going online and studying it? So it's no longer, I'll just walk into a store and browse and see what Best Buy has on the TVs . They're going to do their homework before they go in.

Cathy Leonhardt:

I think as we look at the retailing landscape, COVID has accelerated the winners in this environment. And I think the winners have continued to be the mega corporate retailers, such as Walmart and Home Depot. But stepping back from that, who are the winners this holiday season?

Steve Sadove:

Retailers that focused on the at home or the experience of a COVID-related environment. So the hardware, the home, people are nesting. They want to fix their home up. All of those have been winning. So you look at some of the stocks, you mentioned a few of them, or things like a Wayfair or a Restoration Hardware. I mean , these have been massive home runs. Inthe apparel space it's been the athleisure or the Lululemon's of the world, or the Crocs have done exceptionally well. But you're also starting to see some other trends during the holiday season, which are perhaps more surprising. So the high-end luxury players are starting to see,high -end jewelry for example, high-end handbags have started to emerge, and these are early indicators of what you're going to probably see as we talk about going into 2021. Grocery has done well during the season. The ones that haven't done well are more of the experiential - going out, restaurants, travel, lodging. These are the categories that just nobody's doing right now. It will change and we'll get back to different behaviors. But during this holiday season, it's followed the pattern that you saw earlier in the pandemic. The one thing that's interesting, there was a lot of skepticism that well maybe as you went into the fall or the holiday season, people wouldn't go to the Targets and the Walmarts as much. But what's happened is that the consumer became very comfortable going in these stores. And they found that because they had the groceries there, for example, over time, they started saying, Hey, Walmart or Target, they have decent apparel offerings. And so you've seen growth in the categories beyond the basics that have really helped accelerate the growth of Target, showing numbers in the 20% growth rate over the third quarter. And similarly with a Home Depot,

Cathy Leonhardt:

Let's talk about how this can impact M&A going forward. There is going to be opportunity in the M&A market.The equity markets have been very strong and sources of exit for businesses and private equity owned businesses. SPACs have been particularly active as there is significant liquidity. The equity markets, the IPO markets are open. How do you see M&A playing out the next 24 months?

Steve Sadove:

Because we now start to see coming out of the other side of the pandemic and the consumer being out there and responsive, it's going to create opportunities for companies to accelerate their growth. And a number of the DTC companies are going to need growth capital. I do think it's going to lead to acquisitions by strategics and private equity opportunities. And I think that's on the growth side. But when you also have a lot of the losers in a sense , with the real estate consolidation, a lot of the in mall types of stores are consolidating or closing. I think that you're going to see a high transactional environment, and it's going to be driven by a lot of these winners versus the losers and the need to redo the business model for a number of companies. So I would expect it to be a heady market. I'm not great on valuations, but I think that for those growth DTC markets , businesses that really are going to converge. What's happening in the world in a sense is that the brick and mortar companies have become more digital. And these digital DTC brands are finding that they have to open up more stores because that's where the consumer wants to shop. As you have that occurring, it's going to lead you to more M&A.

Cathy Leonhardt:

Okay . That's really helpful context .As an outtake of this environment. I do think we're going to see transaction activity. I think it will be partly consolidation. And you know, when you think about what's driving businesses today, it's direct consumer global brands are winning where they're not dependent on particular market . And it's also brands that are modern, relevant, and retailers that are modern, relevant, and embrace the values of their consumers. I think we're all cheering for a very positive rest of the holiday season and lead into 2021. Thank you for listening to this episode of PJ SOLOMON Presents for more information on our firm and our capabilities, please visit our website at pjsolomons .com .

A Different Kind of Holiday Season
Early Start to Holiday Season
Digital's Growing Importance
Shipping and Logistics Concerns
Weak In-Store Traffic
Digital an Integral Component of the Future
Retail Vacancies
Stronger Than Expected Holiday Season Due to Digital
Winners and Losers