In The Headlines

The Dark Side of e-Commerce for Department Stores

However much Amazon.com is pulling away from most of its brick-in-mortar rivals in the e-commerce wars, department stores have been able to increase their e-commerce revenue. According to an analysis by Credit Suisse published recently, some 14% of revenue at the major department stores that anchor U.S. malls came from e-commerce last year, double the rate from four years earlier. Not bad for companies that are viewed by many as dinosaurs in the digital age.

Nordstrom and Macy’s led the way with 19% and 21% of their sales coming from e-commerce, respectively. These results are the fruit of billions of dollars of investment in integrating stores and e-commerce and updating shopping apps. (Macy’s is now the No. 6 e-commerce company in the U.S.) Laggards like mid-tier chains Kohl’s and J.C. Penney are making up for lost time, and they are now getting 13% and 11% of their revenue from digital sales.

But all that comes at the cost of pressured profit margins. Because of the hefty cost of free shipping and, increasingly, free returns, profits are being squeezed at these chains, arguably making them victims of their own success. And that is just one kind of expense. Major retailers, from Walmart to Target to Macy’s, have all built huge infrastructure like new distribution facilities to support their digital sales operations. Credit Suisse used data from Kohl’s annual report, which is the most forthcoming on e-commerce costs, and found that the retailer’s e-commerce operating margin was 9% last year, well below the 14% rate its stores achieved last year—though it is worth noting that only four years ago, Kohl’s e-commerce operating margin was actually negative.

At the same time, the pressure on profits from store operations has grown. In the case of Kohl’s, total company sales have been flat for a few years, so e-commerce growth has simply meant a sales shift from one avenue to another, which offers lower profit rates. Indeed, in-store sales at Kohl’s have been falling 2% to 3% for the last few years, even as the company has closed only a few stores. Nordstrom has not been immune to that same phenomenon: its same-store sales have been falling at its department stores, with its best-in-class e-commerce business more than picking up the slack.

Still, rising hourly wages combined with declining store sales create a one-two punch because these retailers are loath to get rid of their stores. While it is true that Kohl’s and Macy’s have shuttered some stores (18 and 36, respectively, this year), a large fleet of stores is still necessary if traditional department store retailers want to keep up with Amazon. Brick-and-mortar locations allow shoppers to pick up orders placed online, and physical stores can also supplement e-commerce distribution centers to ensure faster delivery. Indeed, that is a key reason J.C. Penney said earlier this year it would not close many more stores, even as sales per square foot remain 35% or so below their peak for the 1,000-store chain.

Yet the high costs are prompting some retailers to think hard about what they are willing to spend on e-commerce. Nordstrom, for instance, said its e-commerce spending would stop growing this year as it looks forward to the payoff of years of investment. So more and more retailers are cutting back on things like virtual reality experiments and smart fitting room mirrors and just focusing on basics, the better to preserve shrinking margins.

“We think operating margin expectations need to be reset across the department stores group, both by management and investors,” Credit Suisse analyst Michael Exstein wrote in his research note. He added: “The ‘new normal’ remains unclear. For now, the mall anchor group needs to digest the secular changes that lie ahead.”

Citations

1. http://for.tn/1ToR0Bu – Fortune
2. https:// bit.ly/1RR7XPy – Harvard Business Review

Burt’s Bees Finds Sweet Profits by Going Upscale Overseas

Despite being sold through ‘big-box’ retailers in the US, Clorox-owned Burt’s Bees is considered a premium brand internationally, with popular products sold for almost three times the price they achieve in the U.S. and in South Korea. A best-selling item at the Burt’s Bees store in Seoul’s IFC Mall, a 0.6-ounce package of Res-Q ointment for cuts and scratches, sells for 18,000 won (about $15.47)—almost three times the U.S. retail price. A 113-gram tube of diaper cream goes for about $26; the average price in America is $10.

Located amid major retailers such as Armani Exchange, Jill Stuart, and Uniqlo, the store is one of 13 standalone boutiques the Clorox-owned brand operates outside the U.S. In Asia, where consumers place a premium on all-natural, gentle-on-the-skin beauty products, Burt’s Bees has great appeal. “They’re using less chemicals than some of the local brands here,” says Lee Jee Ha, who shops for her Burt’s Bees favorites, especially its baby oil, at any of several Seoul branches of South Korea’s Olive Young drugstore chain. Burt’s Bees is also found in upscale department stores such as the U.K.’s John Lewis and some drugstore chains in London.

At a time when large consumer-products companies are struggling with sluggish sales, Burt’s Bees and the premium prices it commands overseas represent growth potential for Clorox. “This is a very profitable business internationally,” says Chief Executive Officer Benno Dorer. The company, best known for its bleach and Hidden Valley ranch salad dressing, bought the small, Durham, North Carolina-based maker of lip balms and honey-infused creams and cosmetics for $925 million in 2007. At the time, the line was sold in five countries outside the U.S.; now it is in more than 40. It entered half of those markets in the last three years, Dorer says. The newest international outpost opened on March 9 in Tokyo’s Shinjuku neighborhood.

Initially, Burt’s Bees loyalists worried Clorox would strip it of its authenticity. But the brand has held on to its all-natural cachet and grown steadily. Its co-founder, Burt Shavitz, died in July 2015, but his likeness will remain on products, the company says.

Sales have increased at least twice as fast as those for the parent company overall. Today Burt’s Bees accounts for 4% of Clorox’s sales, which last year totaled $5.7 billion. In the last fiscal year, 82% of total sales came from the U.S.

Dorer is looking for 10 – 15% growth in Burt’s Bees’ sales, compared with 3 – 5% for Clorox overall. Oru Mohiuddin, a beauty analyst at Euromonitor International in London, says competition from such brands as L’Occitane and Weleda is strong, but having baby-care products and being priced in between mass and premium brands gives Burt’s Bees a niche. And there is a lot of unmet potential, she says. In the U.S., where its largest distributors are big-box retailers like Walmart and Target, “the positioning was not to its best interest,” Mohiuddin says. Given its natural ingredients, she says, the company could have marketed the brand as an upscale product early on. Clorox says selling through mass retailers has driven growth.

Whether U.S. customers would spend more for the balms and lotions is unclear. Candy Leung, in Hong Kong, is happy to pay a premium. She was introduced to the products while visiting family members in the U.S. “If I need it, I buy it.”

Citations

1. http:// bloom.bg/1SsGN2a – BusinessWeek
2. https:// bit.ly/1M763hM – Global Cosmetics News

The Good News Is . . .

• According to the Department of Housing and Urban Development, privately owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,167,000, 6.3% above the February 2015 estimate of 1,098,000. Privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,178,000, 5.2% above the revised January estimate of 1,120,000 and is 30.9% above the February 2015 rate of 900,000. Single-family housing starts in February were at a rate of 822,000, 7.2% above the revised January figure of 767,000.

• Nike, Inc., the world’s leading designer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories, reported earnings of $0.55 per share, an increase of 25.0% over year-earlier earnings of $0.44 per share. The firm’s earnings topped the consensus estimate of analysts by $0.07. The company reported revenues of $8.0 billion, an increase of 7.7%. Management attributed the company’s results to strong revenue growth in its core Nike line of athletic shoes and accessories.

• The data and analytics providers IHS and Markit have agreed to combine in an all-stock transaction. IHS’s shareholders will own 57% of the combined company—to be known as IHS Markit—and Markit’s shareholders will own the remaining 43%. IHS Markit will have more than 50,000 customers. This transformational merger brings together two information-rich companies that will provide business intelligence, data, and analytics to a broad and complementary customer base in industries such as energy, transportation, technology, media, and finance.

Citations

1. https://1.usa.gov/1pRnqsp – US Dept. of Housing & Urban Dev.
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1VNqXVc –Nike, Inc..
4. http://nyti.ms/22W5I8U – NY Times Dealbook

Planning Tips

Planning Tips Guidelines for Dividend Investing

Investing in stocks that pay out dividends is a strategic way to establish a reliable income stream and build wealth. While investors are taking on a higher degree of risk, there is also the potential for greater returns. Finding success with these investments is not necessarily rocket science, but it does require an understanding of some basic principles. Below are some useful rules every savvy investor should be aware of when investing in dividends. Every investment entails some degree of risk, so it is a good idea to consult your financial advisor before making any investing in any security to determine if it is appropriate for your situation.

Choose quality over quantity – One of the most important considerations for investors when choosing investments is the dividend yield. The higher the yield, the better the return but the numbers can be deceptive. If the stock’s current payout level is not sustainable over the long-term, those market-beating dividends can quickly dry up. Real estate investment trusts (REITs) are a good example of how fluctuations in the market can directly affect dividend payouts. Selecting an investment that offers more stability may mean sacrificing a certain amount of yield in the short-term, but the result may be more favorable, particularly for investors who prefer a buy and hold approach. The income generated by lower-risk dividend stocks may be less, but it’s likely to be more reliable over time.

Stick with established companies – The stock market moves in cycles, and it has a tendency to repeat itself now and then. When choosing dividend investments, there is no better measuring stick than a stock’s past performance. Specifically, investors should be targeting established companies that have increased their dividend payouts to investors consistently over the previous 25 years. Their brands are easily recognizable, and they generate a steady flow of cash with a high likelihood of continuing to do so in the future.

Look for growth potential – While newer companies can pay out some impressive dividends, investors should not be jumping on the bandwagon without doing their research. Aside from looking at past and present returns, it is also important to look at the company’s future potential to increase its dividend payouts. This is the primary difference between growth investing and value investing. With growth investing, rather than focusing on what the stock is trading for currently, you would look at the long-term outlook for growth to gauge how profitable it would be from a dividend standpoint.

Pay attention to the payout ratio – A company’s dividend payout ratio can reveal how safe the investment is. This ratio tells investors not only how much is being paid out to shareholders but also how much income the company can retain. If you come across a high-yield dividend stock, but the company is paying out a substantial percentage of its income to investors, which is a sign that you need to tread cautiously. If the company were to see its income stream reduced, the amount of dividends you are receiving would likely be cut.

Diversify – There is a strong argument to be made for concentrating assets on a handful of stocks or targeting a specific sector of the market. If the companies or industry you have zeroed in on have an exceptional track record that bodes well for your future dividend earnings. On the other hand, that can be problematic during a market downtown. Spreading assets out over multiple dividend-paying investments adds diversity to your holdings, and it allows you to minimize risk. When dividends are reduced in one area, the loss may not be felt as deeply when the rest of your portfolio continues to perform.

Citations

1. http://on.mktw.net/1QeAjo2 – MarketWatch.com
2. http://bit.ly/1UZnFPal – SureDividend.com
3. http://bit.ly/1ZBHPg3 – Investopedia
4. http://onforb.es/1RRyWdF – Forbes
5. http://bit.ly/1rauGxl – Dividend.com