By Keith Jelinek, Rick Maicki, Darren Morrison, David Simon, and Mike Casey, BRG
We noted last year, in our review of operating results from the 2017 holiday season, that retailers were “walking a tightrope” in maintaining gross margins in the retail business environment.
Things did not improve much in 2018!
After a good start to the 2018 holiday selling season, December sales fell flat. Year-over-year (YOY) sales improved just 1.1 percent from December 2017, and overall holiday sales finished just 2.6 percent above 2017. Retailers felt the impact to their gross-margin line, and the lower-than-expected December sales also may have created inventory issues for retailers as they started the new year.
Store closures thus far in 2019 have already exceeded 2018 totals, and several major retailers have filed for bankruptcy. Is this the continuation of a retail apocalypse, or could it be a thinning of the herd that will see retail emerge stronger and better able to tackle the challenges of an ever-changing landscape?
2018 Operating Results — A Reason For Concern?
Headwinds persisted for companies as they entered 2019. Few retail segments showed comparable store sales that met or exceeded the 3.1 percent YOY sales increase in total U.S. retail sales. Several retail segments ended the quarter with negative same-store sales overall: Office Supply, Sporting Goods, Jewelry, Home Furnishings, and Men’s Apparel.
Promotional activity had its impact in Q4-2018. Sales increased 3.1 percent, and gross margin dollars increased 1.9 percent; but gross margin rate declined by 30 basis points and EBITDA by nearly 500 basis points.
The sharp drop-off in December sales may have created additional problems. Unexpected sales dips from month to month are never welcome, but the impact is magnified when the sales “surprise” occurs during the holiday season. One is left to consider how much markdowns may impact Q1-2019 operating results.
2019 Store Closures And Bankruptcies
Bankruptcies have played a big part in the significant rise in store closures, but many companies are taking steps to optimize their store portfolios—and this is a positive move. A key part of the process of continuous self-renewal in retail is understanding the dynamics of store performance. In today’s omni-channel environment, C-level executives have to prioritize rigorous analysis of the store portfolio.
The Continuing Evolution Of Retail — A Call To Action
“Retail apocalypse” is a term tossed around with some frequency, and it is apropos certainly from the perspective of companies that have liquidated and vanished from the landscape. There will be more fallout in the months and years to come.
But one constant in the sea-change is that consumers still spend. YOY retail sales have increased about 4 percent per year, and while certain retail operations may shut down, those sales dollars will go somewhere else. The looming question is: Which retailers will take the steps necessary to ensure survival?
To offer our “call to action” for retailers in 2019, these are the salient and critical themes on the minds of the retail C-suite:
Most critically, retailers must make the investments to serve mobile consumers and shopping. Some retailers have been hesitant — and many have paid the price. Retailers that have made a strategic commitment have seen fruitful returns and are well positioned for the future.
Companies that can solve the retail puzzle have a survival opportunity. Stronger operating capabilities can support companies as they exercise dynamic capabilities that allow them to create new business model(s) and channels needed for long-term evolutionary fitness.
Let’s see what the rest of 2019 brings!
About The Authors
Keith Jelinek has held management positions and led and advised Fortune 100 retail companies to drive transformational improvements for more than thirty years. Before joining BRG, he was a senior managing director in the Retail Performance Improvement practice of a global business advisory firm. Prior to that, he assisted the launch of the Retail Performance Improvement team at an international business management consulting firm, where he twice received the Achievements in Excellence Award for delivering results far exceeding client expectations. firstname.lastname@example.org
Richard (Rick) Maicki is a managing director in BRG Corporate Finance specializing in performance improvement. He has more than twenty-five years of business experience, with approximately fifteen years of consulting experience plus direct management roles within industry. He has extensive experience leading and advising Fortune 100 companies, with a focus on retail and consumer products companies. email@example.com
Darren Morrison is a director in BRG Corporate Finance and focuses on financial and operational performance improvement. He has over twenty years of experience leading public and private clients through major business transformations, transactions, and cost-reduction strategies. His broad industry experience includes retail, consumer products, and technology expertise, as well as healthcare, pharmaceuticals, education, airline, aerospace, automotive, manufacturing, financial services, media, sports agency, oil and gas, and chemicals. firstname.lastname@example.org
David Simon is a director in BRG’s Corporate Finance practice. He is an experienced executive advisor and has over twenty years of industry and consulting experience ranging from manufacturing and operations-intensive companies to retail and consumer products email@example.com
Michael Casey advises clients in the retail and consumer products industries on store operations, supply chain management, decision support analytics, and merchandise strategy, planning, and operations. He also has a background in computer programming and can bridge the gap between IT and the business side of organizations. firstname.lastname@example.org
Berkeley Research Group, LLC (BRG) is a global consulting firm that helps leading organizations advance in three key areas: disputes and investigations, corporate finance, and strategy and operations. Headquartered in California with offices around the world, we are an integrated group of experts, industry leaders, academics, data scientists, and professionals working beyond borders and disciplines. We harness our collective expertise to deliver the inspired insights and practical strategies our clients need to stay ahead of what's next.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions, position, or policy of Berkeley Research Group, LLC or its other employees and affiliates.
 Keith Jelinek, Rick Maicki, Jennifer Murphy, Chris Ventry, and Rich Vitaro, Retail’s Hollow Victory: The Higher-Sales/Lower-Profitability Conundrum from Recent Sales Growth, BRG Retail paper, Emeryville, CA: Berkeley Research Group (July 2018), available at: https://www.thinkbrg.com/newsroom-publications-retail-hollow-victory.html.
 US Census Bureau monthly retail sales, totals exclude food services/dining, autos/parts, and gas stations.
 Coresight Research (April 12, 2019), available at: https://coresight.com/research/weekly-us-and-uk-store-openings-and-closures-tracker-2019-week-15-freds-to-shut-159-stores-in-the-uk-debenhams-enters-administration/.