Companies from Walmart to Macy’s and Nordstrom have made heavy investments to keep pace in e-commerce with the likes of Amazon. It showed in the retailers’ bottom line last quarter, sending shares slumping despite strong sales.
For many U.S. retailers, sales growth is back. But it’s coming at a cost.
Companies from Walmart to Macy’s and Nordstrom have made heavy investments to keep pace in e-commerce with the likes of Amazon.com. It showed in the retailers’ bottom line last quarter, sending shares slumping despite strong sales.
“It’s short-term pain for long-term gain for these retailers. That’s the mantra,” said Neil Saunders, managing director of GlobalData Retail. “There’s a lot of cost pressure on retailers at the moment,” he said, pointing to the need for more labor, store refurbishments and, of course, the all-important shift to online.
Taking on Amazon — and its two-day delivery model — doesn’t come cheap. In order for old-school brick-and-mortar stores to go digital they have to build out logistics, determine warehousing, manage functions to cope with the online demand and figure out fulfillment plans.
Investors were willing to tolerate such expenses this year as long as they showed quick results amid robust consumer spending in an economic boom. Now shareholders of big retailers are beginning to wonder if the heavy investments will be sustainable when demand inevitably subsides.
“Online often isn’t as profitable as selling in the store. There is a massive battle to give free or discounted delivery to customers,” Saunders said. “So not only is the spending on fulfillment going up, but retailers are making a lot less money.”
Walmart, the world’s largest retailer, saw its third-quarter profit margin squeezed as it pumped money into building out its online unit, which is still in the red. The retailer’s 3.4 percent gain in comparable sales — a key performance metric — did beat Wall Street’s estimates. But it wasn’t enough for investors, who sent the shares lower after the results. With five consecutive declines, Walmart’s stock closed the week down 7.5 percent.
The stock decline echoed a similar reaction to Macy’s better-than-expected sales the day before. After an initial gain, the department-store chain sunk 5 percent over concerns over the gross margin, though it closed Friday up to end the week down nearly 12 percent.
Macy’s has been pushing promotions and in-store pop-up shops while delving into virtual reality and investing in its e-commerce business. It now expects to hit $1 billion in mobile sales this year.
Over at Nordstrom, digital sales now make up 30 percent of the total. In the third quarter, delivery and logistic expenses contributed to compressed margins at the chain.
The retailer has been one of the more creative department chains. Same-store sales rose for the fourth straight quarter, but the 2.3 percent gain fell short of estimates. Shoppers aren’t as interested in the company’s full-price chain, instead mostly flocking to the discount Nordstrom Rack chain, where sales rose a better-than-expected 5.8 percent. The stock sank 13 percent after the results, and RBC’s Tunick cut his price target by $2 to $60.
Nordstrom’s position relative to peers has historically been seen as enviable, according to Tunick, thanks to the variety of its store formats and ability to innovate. But recent quarters started to put into question its ability to ride industrywide challenges, he said.
That pessimism was reflected in the company’s share decline on Friday. The stock plunged as much as 16 percent, the most intraday in more than two years, ending the week down 22.2 percent.
Don’t expect the pressure to let up anytime soon. With holidays around the corner, stores have to ramp up staffing — and in the tight labor market, that talent comes at a price. The new year also may bring higher tariffs against China and added costs if supply chains need to be revamped.