This week we go deep on the future of department stores with Simeon Siegel, senior retail & ecommerce analyst at BMO Capital Markets and Ethan Chernovsky, VP of marketing at Placer.ai. Our fast-paced discussion covers a lot of territory, from how department stores have evolved, to what we mean when we talk about "department stores" today, to whether recent positive news suggests a renaissance or more of a dead count bounce. We also separate the optimists from the pessimists by dissecting the prospects for malls and particular well known retailers.
This week we go deep on the future of department stores with Simeon Siegel, senior retail & ecommerce analyst at BMO Capital Markets and Ethan Chernovsky, VP of marketing at Placer.ai.
Our fast-paced discussion covers a lot of territory, from how department stores have evolved, to what we mean when we talk about "department stores" today, to whether recent positive news suggests a renaissance or more of a dead count bounce. We also separate the optimists from the pessimists by dissecting the prospects for malls and particular well known retailers.
But first we open up the episode with our quick takes on recent retail news that caught out attention, including Allbirds IPO filing, more proof that the retail apocalypse narrative is just silly, Amazon's and Walmart's robust hiring plans and whether Chewy's earnings have more bark than bite.
NOTE: We're now back to regular weekly episodes.
Be sure to join us for Part 2, where Michael and Steve weigh in with their personal takes on whether department stores can escape "death in the middle."
Also check out our newish YouTube channel.
Simeon Siegel, CFA
Simeon Siegel is a Managing Director and Senior Analyst at BMO Capital Markets specializing in Retail and E-commerce. Simeon started his career at Goldman Sachs and his since worked on the #1 ranked Retail franchise at JPMorgan and Nomura | Instinet.
Simeon has been named a Rising Star of Wall Street by Institutional Investor, a Rising Star of Equity Research by Business Insider, a Top Stock Picker by StarMine and a Top Earnings Estimator by Thomson Reuters and Refinitiv. He has worked on the Institutional Investor #1 ranked All America Research Team for Specialty Retail and the Wall Street Journal's "Best on the Street" list of top analysts. He is in constant dialogue with investors and C-Level Management across the industry, analyzing and advising on the ever-evolving retail landscape. He is a regular guest on CNBC and frequently quoted across the media including The Wall Street Journal, The New York Times, Women's Wear Daily, The Business of Fashion, Barron's and Bloomberg, among others.
Simeon received a BA in Economics and Philosophy from Columbia University and is a CFA charterholder. He serves on the Boards of Read Ahead and the Hebrew Free Loan Society and is Vice Chair of the UJA Luxury Division.
Steve Dennis is an advisor, keynote speaker and author on strategic growth and business innovation. You can learn more about Steve on his website. The expanded and revised edition of his bestselling book Remarkable Retail: How To Win & Keep Customers in the Age of Disruption is now available at Amazon or just about anywhere else books are sold. Steve regularly shares his insights in his role as a Forbes senior contributor and on Twitter and LinkedIn. You can also check out his speaker "sizzle" reel here.
Michael LeBlanc is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice. He brings 25+ years of brand/retail/marketing & eCommerce leadership experience, and has been on the front lines of retail industry change for his entire career. Michael is the producer and host of a network of leading podcasts including Canada’s top retail industry podcast, The Voice of Retail, plus Global E-Commerce Tech Talks and The Food Professor with Dr. Sylvain Charlebois. You can learn more about Michael here or on LinkedIn.
Michael LeBlanc 00:04
Welcome to the Remarkable Retail podcast, season three, episode six. I'm Michael LeBlanc.
Steve Dennis 00:10
And I'm Steve Dennis.
Michael LeBlanc 00:11
Steve, great to be back on the microphone. We've got a great episode today, focusing on department stores, because you worked for a department store, I worked for a department store, and we brought some experts to talk about it. We had a great, wide-ranging conversation. Simeon Siegel, from BMO, Bank of Montreal, based out of New York, top, top retail analyst, and Ethan Chernofsky, from Placer.ai. And they've got, you know, just such great data on who's going where. I wish they had it in Canada, we're a bit envious, but it's wonderful.
Steve Dennis 00:41
Some information to check out.
Michael LeBlanc 00:43
You know, you started your career in, you know, department stores and Sears, and they've really changed, and morphed, and, I guess, the center of the discussion, and we'll, we'll get to the discussion with our guests in a bit, is really what is a department store, what's its function, what does it do in the modern world?
Steve Dennis 00:58
Yeah.
Michael LeBlanc 00:58
How is it connected to an ecosystem? So, it's a really great discussion, but let's jump right into the news of the past week, and to our listeners now. We're now going weekly, we were doing it bi-weekly over the summer, and we're now going weekly post, as our first, first post Labor Day episode. So, let's talk about IPOs. Last episode, we were talking about the one IPO, let's now talk about the Allbirds IPO. What, what were your thoughts around their documentation?
Steve Dennis 01:26
Well, it's a real rush to get a lot of these ecommerce, dominant companies into the public markets. Whether that'll turn out to be a bubble or not, I guess remains to be seen, but Allbirds, kind of in the same vein as Warby Parker, not around quite as much. But a brand that's really focused on a narrow set of products, originally launched online only, has been getting into stores, just really over the last couple of years, I think, I think they're up to about 20 stores.
Steve Dennis 01:55
But, just like Warby Parker, business looks smaller than, I think, a lot of folks thought. It's a couple 100 million dollars US losing money, I think about a negative 15% operating margin. Something like that, again, like we talked about Warby Parker, doesn't mean they can't build this into a much more successful company. But I think Allbirds is a little bit more challenging, it's kind of a niche product. I've got my one pair of Allbirds, which I hardly ever wear, sample of one but—
Michael LeBlanc 02:24
What do you think of them? I've never, I've tried them on but I've never actually, like, bought a pair and worn them. You, they're light but—
Steve Dennis 02:30
Very light, very comfortable. They've expanded their product line a bit over the last couple of years, so. And a big part of what they sell is the sustainability of their products, so, which is very much on trend. But for them to get the kind of valuation that's been talked about, which, I think, is north of $2 billion, they've already raised a couple 100 million, you know, they have a lot of work to do, to make this more than a niche apparel brand. They're talking about getting into athleisure, which is certainly a hot category, but a pretty big leap.
Michael LeBlanc 03:04
Them and everybody else.
Steve Dennis 03:05
Right, and plenty, plenty of competition. They're talking also about opening a couple 100 stores, and that seems also very aggressive to me. If we, kind of, back into the numbers, it looks like the stores they've got so far are maybe doing a million dollars apiece, in some really expensive real estate. Interesting brand, very much a niche brand, they’ve got a long way to go to really prove themselves to be a successful brand on any scale.
Michael LeBlanc 03:32
So, I also, I also saw the news, stores not dead. Who is it, Ace Hardware opening up like—
Steve Dennis 03:39
Turns out, yeah.
Michael LeBlanc 03:39
170 stores right, and there is, what's going on here, then they're not dead, Steve?
Steve Dennis 03:44
I mean, no one's more surprised than me that physical retail isn't, isn't dead. But, yeah, I mean, I was, I really happened, I used to pay a lot more attention to the hardware and home improvement business because I worked in that business, many, many, years ago. And hardware stores, not so much because of the retail apocalypse narrative, but more because of the growth of Home Depot, Lowe's, and a lot of the big box, Kingfisher, in outside the US.
Steve Dennis 04:09
And, you know, that was really thought to be, kind of, the death of neighborhood hardware stores, but, I guess, with the growth of all the home categories, and perhaps Home Depot and Lowe's creating some space for getting a little bit closer to the customer with the neighborhood stores. Yeah, Ace Hardware are going to open 170 store openings, from digitally native brands, old timers, like—
Michael LeBlanc 04:31
Yeah.
Steve Dennis 04:31
Like, Ace just saw the court, courtside research that said that store openings are predicted to be up to 60%, year-over-year. So yeah, guess physical retail not dead.
Michael LeBlanc 04:43
And, so, I was looking at some results. There's a company in the doghouse, Chewy, the results, yeah, not so great. I mean, what happened to the pandemic puppy, did that, is, run out, run out of kibble or something. What's going on?
Steve Dennis 04:56
Well, it's hard to be too disappointed about 27% sales growth. But yeah, here's, here's a company that is essentially online only. So, leaning into all the shift to ecommerce, and in a category that has just been exploding. So, their sales results were pretty good, though apparently a bit disappointing, to Wall Street.
Steve Dennis 05:01
But here's another company that in, kind of, a perfect storm, really can't turn a profit. If you back out their shareholder compensation bid, they basically broke even. And with a 27% sales increase, they improved their EBITDA margin by 20 basis points, which is pretty poor flow through to the bottom line. So yeah, very, very interesting.
Steve Dennis 05:42
But still a company that gets a lot of attention, it's got a massive valuation. But I think some of these mostly online-only companies are, at some point, going to have to demonstrate that they can actually make a decent amount of money, with all the capital they've put into the business. But whether this will turn out to be the, the dot com bust for next year, maybe the dot com bust, the return of the dot com bust, I guess, we could say, or not, remains to be seen, but—
Michael LeBlanc 06:07
2.0, dot com bust, 2.0.
Steve Dennis 06:09
Yeah, I would really think that, with some of the factors that have really created, kind of, this perfect storm, we'd see better performance.
Michael LeBlanc 06:17
Well, I guess the good news for Chewy, as the, as a category, is the pandemic puppy thing is real. And it also basically builds an annuity for 5, 7, 8, 10 years, for those. Kind of like ourselves, we got our, we got our dog, Ziggy, before the pandemic, but, you know, if all goes well, he's going to be around a bunch of years, right.
Michael LeBlanc 06:35
So, now we're, alright, last thing, and we always seem to talk about Amazon, because they're always doing something interesting. But Amazon has joined with Walmart, they're staffing up huge. Now, that's not unusual, what'd they announce, 50,000, they're going to hire 50,000 people. Not, not unusual, given their scale, and scope, and turnover.
Michael LeBlanc 06:52
Remember, we talked to Brad Stone about how they actually like some turnover, particularly at the frontline warehouse. But when you peel it back, it looked like they weren't, this wasn't just about frontline, in the warehouse, staff. What were your thoughts on that?
Steve Dennis 07:04
Walmart's announcement seemed to be much more about staffing up for fulfillment, for the holidays, whereas Amazon's announcement seemed to be much more about tech workers, headquarter staff, those sorts of people. So, hard to get my head around 55,000 SG&A types that aren't, that aren't in the fulfillment arena.
Steve Dennis 07:26
But I, again, I think it's, just speaks to, to their growth that speaks to, what appears to be pretty strong consumer demand. And, and, of course, just the diversity of things that Amazon's in again, because we talk retail, most of the time, the thought process is, this is all the support for ecommerce growth. But it's advertising, it's the studio business, it's Amazon Web Services—
Michael LeBlanc 07:48
AWL—
Steve Dennis 07:48
Right. So, there's a lot, there's a lot.
Michael LeBlanc 07:51
Well, it's, it, kind of, reminded me as I was re-, re-listening to the great interview that we did with Brad, and if anyone's listening hadn't listened to that because he, he actually was thinking about, in his first book, is, do I even call them a retailer anymore. And we had that discussion, I mean, who knows, maybe 25,000 of these folks are going to space and working with Blue Origin. I mean, it's a very broad, you know, who knows, right. I mean, maybe they're starting an outpost on the moon, for goodness sakes, I don't know where they're going to put them all.
Steve Dennis 08:15
It's where we're going to send the returns.
Michael LeBlanc 08:19
All right, well, listen. Great introduction, we got a great episode coming up, all about department stores. Wanted to remind everyone who's listening on the podcast that we have a YouTube channel, with some extended content on there, so be sure and check that out. That is usually posted a day, or two, after our episode, but always be sure and check that out. Because it's a lot of fun, you get to see Steve and I, in our morning discussion here, which is always a pile of fun.
Steve Dennis 08:41
And the great, and the great void behind me.
Michael LeBlanc 08:43
It is a little spartan, it's true. Little spartan back there.
Steve Dennis 08:47
Minimalist.
Michael LeBlanc 08:48
The most important book. Minimalist, there you go, it's minimalist, mine's maximalist.
Steve Dennis 08:51
As long as I drop my shoulder, to get the, get the book in the shot. I don't get nasty (inaudible).
Michael LeBlanc 08:59
Yeah, yeah. Without further ado, let's jump right into our, our interview with Simeon and Ethan.
Steve Dennis 09:05
Well, today we're going to delve into the future of the department store. And we've got two guests to help us make sense of what's going on. Ethan Chernofsky, from Placer.ai, who is rejoining us, he was on us, on with us last year. And we finally got Simeon Siegel, expert on many things retail, to join us as well. So, thanks for joining us. Why don't we start off by having you two guys just tell us a little bit about yourself, and your professional journey. So, Ethan, would you mind kicking things off?
Ethan Chernofsky 09:35
Sure. So, Ethan Chernofsky, I lead marketing for Placer.ai. We're a location data company that, kind of, you think, you know, people vote with their feet, we're showing you how people vote across the US every day. I come from a background of high-tech startups and market intelligence data. So, I worked for a company called Similarweb before here and, just, kind of, had fallen in love with the world of offline retail.
Michael LeBlanc 09:59
How do you follow that?
Simeon Siegel 10:05
Hey guys, glad to be here, I feel like the line to get on to this podcast is more exclusive than most Meatpacking clubs, so I'm really happy to be here.
Steve Dennis 10:15
As payment for getting on, just in case you were wondering.
Simeon Siegel 10:18
And, and, yeah, and so I'm, my name is Simeon Siegel, my goal in life is to live in Ethan's shadow, so, I, this is a special treat to be able to follow. So, I'm crossing off many bucket list items, by, by today, so thank you. I'm a retail analyst at a firm called BMO. I've been at several different banks. My goal in life, though, is to watch, and chronicle, and whenever I can, maybe advise a little bit, on this evolution, evolving, perpetually evolving, world of retail, that we all know and love so much.
Simeon Siegel 10:51
And I just, I think what is fascinating, what I'm really looking forward to having this conversation with you guys, because I know it's going to go there, is, what's beautiful about retail is everyone knows it. Which means there's always going to be platitudes, and the best part of platitudes are they're always wrong. So, looking forward to, kind of, jumping into this conversation and seeing where it goes.
Steve Dennis 11:11
All right, well, there is certainly plenty to talk about. So, why don't we just jump in. I'm going to be, I guess, kind of, a fundamentalist to start things off. Which is, when we talk about department stores, what exactly do we mean, because it seems like it's evolving. So, let's just level-set, in terms of what you think, you each think, the definition of a department store is, and then we'll go from there.
Simeon Siegel 11:35
So, I'll jump in here, because Ethan and I disagree on what counts as a department store, versus a non-pricier. We've had this argument many times, it's amazing. So, hopefully, we can go there. I think, when I think about a department store, it was the model of a business that owned a location, and owned curation.
Simeon Siegel 11:53
And that was historically the way that I viewed it. And Steve, I know what, we'll get into the notion of the middle, and I think they, unfortunately, for better or worse, many of them epitomize your, your middle, which you've so eloquently discussed. But I think that, if I were to just take one slight qualification, the way that I think about it is that these were companies whose reason for being was being somewhere and offering curated assortment of product.
Simeon Siegel 12:17
And I think what will be very interesting, thinking through going forward, is which of those two aspects are still relevant, and how do you hone them best. But with that, I will, I'll pass the torch to hear Ethan's description, which sometimes ventures into the imaginative.
Ethan Chernofsky 12:34
He jokes, but I, kind of, I take that, I take that label, and I wear it proudly. Because, I think, when we talk about department stores, we have a very, for most people, when we start talking about department stores, we have this very clear image of what we're referring to. And yet, that group is not a single homogenous unit. And instead, I think we have to start classifying it a little differently.
Ethan Chernofsky 12:58
So, I, the definition that Simeon gave is great, but putting Macy's and JCPenney in the same category as Target, in theory, fit in that, in that same kind of classification, has challenges to it, that don't always make sense. And I think there's this element of, are you outdoor-oriented, are you a mall oriented, are you considered more high-end or lower-end.
Ethan Chernofsky 13:22
All of these elements really play in, and we need to be, I think, as we become more sophisticated, in how we define what belongs in which elements of the department store landscape, we're able to have a much more interesting conversation of how we expect it to evolve, and how we think it should evolve.
Steve Dennis 13:37
A question I would have, so my, I would say my historical, not that anybody asked me, but I'll volunteer it anyway, my historical definition of department stores, not to be too cute about it, was that they had departments. The consumer understood that certain stores had, not only very structured departments, but they also had pretty wide assortments, they were serving a pretty wide, at least in apparel, pretty wide mix of style, points of view and, and price points.
Steve Dennis 14:04
Whether you're talking about Penney's, or Nordstrom, or Macy's, I don't know that it matters, you know, whether that definition is historically accurate, or is useful. I guess the question is, going forward, what, what really matters.
Steve Dennis 14:18
So, so would you say, when you hear that Amazon is talking about a department store, or that Neighborhood Goods, which some people will be familiar with, is a new kind of department store. Is that, are we just getting into semantic arguments, or is that an important distinction as we look at how things are going to move ahead. Ethan, you want to start off on that.
Ethan Chernofsky 14:36
I think it's, I think it's, you know, Neighborhood Goods is a great example, because Neighborhood Goods, to me, feels like Macy's 2.0. And like this, they've taken that concept where, I trust the Macy's brand to do the discovery for me, and then therefore that's the big draw.
Ethan Chernofsky 14:55
I think they really emphasize that angle, in a really exciting and powerful way, so I do see them as, kind of, the next step forward, whereas I wouldn't put them in the same category as, you know, again, Target or another, you know, Kohl's even.
Michael LeBlanc 15:13
Let me ask you guys a question, so Steve if I can ask, based on that, would REVOLVE, and would Stitch Fix, like, would these be department stores too? And I know that sounds like such an obviously dumb question. But, I think, that if the notion, this is why I defined, or at least try to adopt, the definition that I started with, where if what departments used to offer you was this curated assortment, you knew you were going to be able to trust the merchant on the other end, and it was location based.
Michael LeBlanc 15:40
Well, then the reality is, that's what the benefit of eComm was, location becomes your living room. If you trust the curation, whether it's, if you trust the bot that's delivering you an algorithm, or whether it's an assortment of other brands, I think that the interesting part is, we've seen this, kind of, race to create the new box.
Michael LeBlanc 16:00
And whether it was Groupon, whether it was an actual box, whether it's just a new form of online service, I think that's where, and it gets to the conversations you've done a lot of work on, you have to make.
Michael LeBlanc 16:11
I'm a huge proponent of stores, but to your point it's, what are those stores offering me. And I think they can no longer simply offer a location and product, because other things can do that as well. So, I think that's this interesting dynamic that I would throw in as well, when thinking about the future of the department store.
Steve Dennis 16:26
I mean, for purposes of this conversation, perhaps we should land on at least a common definition. But I do think that it was a lot easier to understand what department stores meant 30, or 40 years ago, because you didn't have all this competition. For the most part, the general apparel, accessory, home merchants were either department stores, or discount mass merchants, there wasn't this variety.
Steve Dennis 16:48
And, aside from ecommerce, there just wasn't this variety of Off-price, and Kohl's, and, and these sorts of players. I think it was easier to understand, historically, and I think, in general, people are probably still anchored on that. But, but maybe we, for purposes of the conversation, we can maybe talk a little bit more about the kind of historical definition, and get into the, maybe why that's, that's not so useful.
Michael LeBlanc 17:12
Yeah, I thought the discussion was a great segue into, you know, I spent seven years in a department store with Hudson's Bay. And they had the unique element of having both traditional department store, which was The Bay, and if you're in Canada, now it's called Hudson's Bay. They also had a mass merchant, Zellers, which is like Target, and then they had some specialty stores.
Michael LeBlanc 17:32
So, we often talked about what is, and what is the role of the department store. One thing we haven't talked about, really, is, you know, aside from location and curation, there's also the one-stop-shop element of department stores. Which we would lean on pretty heavily, as in you can get the one place where you can find everything you need.
Michael LeBlanc 17:53
And it felt like there’s a bit of a renaissance, during the COVID-era where, you know, consumer behaviors changed quite dramatically, right, less trips, bigger baskets, and the cross-sell, up-sell religion became, you know, something self-fulfilling. So, it's like a prophecy, this to happen. Simeon, as you, as you sit and observe results, and think about the department store category, is this new? Is this a new tailwind behind them that, that you might think of, is it, is it a second life?
Simeon Siegel 18:26
Michael, renaissance is such a better word than accelerant. I feel like accelerant was the word of COVID, renaissance is perfect. And so, we actually, so my team did a lot of work around this, we published a report last year, titled "Did COVID Actually Save Retail?". And it was this fascinating thing that everyone is inclined, the first sign of weakness, you shut your stores, right. That has been where we've gone.
Simeon Siegel 18:48
And the notion of retail being over-stored across the US, has just been played off on that per capita table that everyone has seen, over and over again. I think more than the over-stored problem across the US, has been the over-saturation of discounts.
Simeon Siegel 19:02
And so, I think that, to your point, what the renaissance of retail has allowed us to do, and I'll give you credit every time I say that, from now on, which will probably be a lot, maybe it'll be a chapter in the, in the segue, this, the sequel to Steve's book, is, I think that you now have people that have realized growth at all costs, and growth for the sake of growth sake, is not a good thing.
Simeon Siegel 19:26
And I think ensuring whether it's the focus on the customer, the focus on the product, the focus on the experience, whatever the focus is going to be, whatever triggered the reason the first customer walked into a store, I think companies can now revisit that.
Simeon Siegel 19:38
And one thing that we found that was so interesting in this analysis, we did a price elasticity of demand analysis, and we showed that last year, if companies were willing to commit to raising prices 25% on average, companies could actually give up 40% of their units. Four zero, crazy amount, and still walk out profitable.
Michael LeBlanc 19:56
Thin that assortment, out right, right.
Simeon Siegel 19:59
Exactly. And just, and essentially recognizing you don't have to be everything to everyone, but you can give your specific customers everything they want. And I think that's your point of, being the one-stop-shop, doesn't mean being a one-stop-shop for the world, it means being the one-stop-shop for the people that are giving you permission to outfit their lives.
Michael LeBlanc 20:21
Well, I love your orientation, because, you know, we, we and, I often think about it from a consumer lens. And, like, consumers are like, I don't want to go to a bunch of different places. And I, I have to think that after this experience, this big circuit breaker of consumer behavior, what has changed, and, and what doesn't seem to have changed is the gamification of department store pricing. Which is still that same game of high-low pricing, that seems for many, not all formats, in particular, the luxury seems to work.
Michael LeBlanc 20:52
Ethan, what are you observing about traffic in and out of, is it back, was it just a, you know, Simeon I take this from your line of work, was it a dead cat bounce? Was it just, you know, people suddenly rushed in, and then the, it's not going to sustain? Like, what, what's the data telling you?
Ethan Chernofsky 21:07
So, I think there's, there's two things, before, kind of, I answer the question, I was sitting here, just nodding in a silly way as Simeon spoke. Because you, you saw something really fascinating in the last few months, where if you look at the brands that are expanding their retail presence, and it's everyone from Nike to, you know, we heard the Allbirds CEO talk about the potential for hundreds of stores.
Ethan Chernofsky 21:30
It's brands that understand the importance of brand, and, you know, to call back Neighborhood Goods, we had spoken to Matt on one of our webinars, he talked about the brand centered around discovery. So, I have to trust Neighborhood Goods that they can find cool things, on an ongoing basis, and solve that problem for me. And it created an interesting experience, but one that not everyone is going to love. And that's probably how you know you're doing it, right.
Ethan Chernofsky 21:57
So, I think that, that idea that you don't have to be everything for everyone, is so unbelievably important as a wider message. In terms of what we're seeing in the, in the data itself, we saw a really strong uptick throughout the holiday season, throughout the back-to-school season, excuse me, you know, from mid-July through mid-August. Really strong bounce backs, in terms of comping the numbers to 2019, which was a strong back-to-school season, in and of itself.
Ethan Chernofsky 22:27
The only, the really interesting thing is going to be, what happens in the next few weeks. So, if you look at the week that began, August 23, which was a, was a Monday, there was actually a setback. But part of that is because you're comparing to a week in 2019 that has Labor Day in it. So, it's a difficult comparison to make. The really interesting thing is going to, is going to be, does this recovery, kind of, sustain through September, when that, you don't have the same mix of pent-up demand, retail reopening, and a reason to buy, because we're all going back to school and work.
Michael LeBlanc 22:58
And, and, government economic stimulus. Let's, let's throw that in the pot, right. I mean, consumers have been getting checks in the mail to go spend, and as I've often said, the US consumer, and the Canadian one as well, they're like the Timex watch that keeps ticking, they just keep shopping. You know, it's funny, I want to follow one thread of something you said about the idea of this curation and thinning out assortment, you know, as more and more DTC brands come to the floor, and this is the second time in my career, I've been through this in a major way.
Michael LeBlanc 23:25
You all remember the late 90s, I launched hbc.com, in the late 90s, early 2000s, it was all about the disintermed-, disintermediation of retailers, right. But it, does it fob-off on to the consumers, the discovery, like I got to go discover this stuff myself. It used to be, I could go to a department store, and this is what we used to think of department stores, you're going to find new and interesting things walking around our store. You don't have to just go site-by-site, store-by-store, walk-by-walk, to go discover them. Is there, is there still a role in that? And then, and that's for you, Ethan. And then Simeon, I got one follow up question, then I'll pass the mic back to, back to Steve.
Ethan Chernofsky 24:02
So, the answer, for me, is that the brand around curation and discovery still exists, it just changed. So, the fact is, I can, I can discover brands, while I'm, kind of, scrolling through Facebook, and I can discover brands online. And I discover it when I'm playing on social media and looking at my Instagram, which I don't have, but just assuming I did. So, a lot of the discovery happens, that doesn't mean that if there's a brand, you know, if I walk into a Macy's tomorrow, and I find something that I hadn't seen before, that I'm not going to be delighted by that experience.
Ethan Chernofsky 24:38
So, I think there, it's become more complex, and a little bit more sophisticated, because of the channels to discovery that I have, that are simpler than they were in the late 90s, early 2000s. It doesn't mean that it's any less important for those department stores to make sure they can deliver on that promise when I actually come to the location.
Michael LeBlanc 24:58
And Simeon, my follow up question to you is, and I can't have you on the mic without asking you your thoughts on this separation of business operating units that we've seen from Hudson's Bay, right. So, I guess, the math there is, if we take the physical stores, physical department stores, and we separate that on paper, from the digital, that there's more, it's a one-plus-one equals four, when we go to raise money. Is there, is there any other justification you can see that, that makes that make sense? And yeah, raising new funds and access to bigger lines of credits, not a terrible justification. But what are your, what are your thoughts on that?
Simeon Siegel 25:36
So just to be clear, you throw Ethan a question about Instagram, you give me a question about breaking apart financial engineer, I see how it is.
Michael LeBlanc 25:45
BMO. B-M-O. BMO.
Simeon Siegel 25:49
No, listen, it's very, it's very fair and an important question. I think that, and I look at the clock and say, how long do we have, because, I think, it's another podcast in and of itself. But I think what's important, and this is, you alluded to it, right. There's financial conversations here, there's market conversations here. I think that there are operating aspects, and operating decisions for businesses, and then there's the stock market.
Simeon Siegel 26:11
And I think that if you look at companies, I didn't mean to, but if you think about some of the companies I mentioned earlier, REVOLVE, Stitch Fix, you think about who they want to be if they are. If we're, if we're going full circle and saying these are the new department store. And they want to be a Nordstrom, when they grow up, maybe they do, maybe they don't, but, but ultimately, that type of a shared revenue, third party, go to market brands, private label, distributed throughout.
Simeon Siegel 26:36
But telling you what you want, being that for their target customer, and then you look at their market caps. And you think about the fact that these businesses, drastically earlier on in their revenue basis, have larger market caps, then the companies that they might arguably be expanding to become when they grow up. And you think, what's the mitigating factor?
Simeon Siegel 26:56
Well, I guess, one they're, they're recently public companies, all things considered. So maybe there's, there's a level of that, but at the end of the day, is that they don't have stores. So, it's funny, it's because, the four of us, I think, all agree that blanketly closing stores doesn't make sense. Part of that report that my team did, we showed that no company has ever benefited, has ever seen an EBIT, profit, raise, whether operating profit dollars, or operating profit margin, with a mass store closure. It's a defensive move, it shrinks your business, it might be important, but it doesn't grow your business.
Simeon Siegel 27:28
And yet, the market sometimes, oftentimes, you mentioned the 90s, so up until a certain time, rewards the companies without this perceived baggage, even though it may very well be an asset. So, I think that process is helping a lot of companies trying to decide, hey, if I'm Urban Outfitters, and I didn't have these stores, what would my market gap be then. Obviously, that's not the right operating decision for Urban Outfitters, but it just, as you think about looking at the public market, it raises questions.
Steve Dennis 27:58
Hey, listen. I, I'm a little mindful of our time, and I want to just make sure that we spend a little bit of time, and I am going to force a bit of a definition, but if we think about the moderate department store space, and, a largely mall base, but we can maybe put Kohl's in there. We have seen, I think, not only a little bit from your data, Ethan, Placers.ai's data, but also kind of this narrative, that maybe these moderate department stores are on a rebound, and maybe malls are looking more positive.
Steve Dennis 28:31
I personally think that's nonsense, so I'll just put that out there, and I can tell you why. But what, what's your, well, and I'll say the reason I think it's nonsense, is some of the things that we've, we've talked about, which is, we've seen this contraction of these retailers that have massive store footprints and are trying to be a little bit of everything.
Steve Dennis 28:50
The department store sector's lost share for 20 straight years, approximately, and, you know, it's nice to see some return to traffic, certainly, and it's nice to see, you know, maybe the dead cat bounce, that Michael referenced. But what is fundamentally changed in Macy's, Kohl's, Penney's, Dillard's, ability to acquire and grow customers. So, I would say if, if there isn't anything dramatic that's changed, nothing dramatic is going to be different over the longer term. So come at me, yes, yes, no, maybe, caveats.
Simeon Siegel 29:27
I agree. But Ethan, you go first.
Ethan Chernofsky 29:28
Kind of. So, and I'll say this—
Steve Dennis 29:31
Try to work Instagram in your answer, if you can.
Ethan Chernofsky 29:35
Please, what's great is, I don't have Instagram, I stopped at Facebook. And I say this—
Simeon Siegel 29:40
Blatant lie.
Ethan Chernofsky 29:41
As a, as a deep, and happy optimist. I think, they're, they're, if you look at Kohl's as an example, and their decision to have the Sephora locations within their stores. I think that is a really smart, intelligent move, of how do you, kind of, take your offering to the next level. And what it shows, to me at least, and then watching the rebound and visits, which, I think, is more sustainable there than in some other places. It's that most of these brands are not that many good decisions away from a much stronger rebound.
Ethan Chernofsky 30:15
Now, that doesn't mean it's going to be easy. And I agree with you completely, that kind of shallow shifts are not going to move the needle in the long term. And you're going to see that continued slow struggle. But it also does show that they have such brand recognition, they have such a powerful foundation, that if they can make a handful of smart decisions that are exciting to the customer, they can drive a really significant turnaround, and push themselves into a much more positive direction.
Steve Dennis 30:44
Such an optimist.
Ethan Chernofsky 30:48
So, I'm the, I'm the angel on your, on your shoulder, Steve.
Simeon Siegel 30:55
You're the angel on my shoulder, too. That's the problem. So, I, Steve I totally agree, right. And I think that, what we've talked about throughout this podcast, has been stimulus-driven, desire to spend, or capacity to spend, pent up demand driven boost to desire to spend. We haven't mentioned the supply chain raising price, because retailers simply don't have inventory for the first time in a decade. And you're just in this perfect trifecta.
Simeon Siegel 31:22
So, I think that I started my conversation, originally, by saying I love platitudes, because they're wrong. Retail is alive, retails dead, like, like none of its ever true. There's always nuance, and the question is whether we choose to look at it. And so, I think, when we isolate how many brands are seeing a pickup in price, because we're seeing revenues, it's much harder to drill down into units, especially when people are giving both a version of, versus 2020, versus 19.
Simeon Siegel 31:46
What's happening is there's a massive lift in price, because people are willing to spend it, because they have more money from stimulus. And they really want to buy something, because they want to get out of their house, right, if we're putting it simply.
Simeon Siegel 31:56
So, the companies that actually affected change, and Michael, you brought up Target earlier, you talked about, so pulling out of Canada, when I talked about a broad scale store closure, I'm talking about just closing stores, anything that seems to be underperforming. That's different than cutting off limbs of a business that aren't working, right, that's different than pruning defensive.
Simeon Siegel 32:13
One of the best, if not, I don't remember if it was the best stock in the S&P last year, ELLE brands, owns Victoria's Secret, Bath and Body Works. They actually effected change, they came out, they cut their inventory bias by 50%. Before it was cool to do so, right before, before the supply chain prevented people from getting inventory.
Simeon Siegel 32:29
They completely refashioned how they were running their UK business, by actually putting it, essentially into bankruptcy, and then figuring it out. They rearranged their Hong Kong, like they, Under Armor is another example, these companies came and took drastic multi-100-million-dollar admissions of defeat, but structural changes for the future.
Simeon Siegel 32:47
Those are the brands, to Steve's point, that made a change. Companies that took advantage of COVID, that, I call it the COVID cover, where just, if everyone's revenues imploded, and everyone's expenses became optional, then the largest companies in the world became startups. So, who pivoted, right, companies that pivoted, and actually did so effectively, I think we're in a much better spot.
Simeon Siegel 33:07
Companies that are simply benefiting from that trifecta of spend, we're going to walk out next year and all of a sudden that goes away, that subsides, that normalizes. So, 100% on your, I guess we're the devil, Steve, over here, versus Ethan's angel. But I think for those that took it, there was opportunity. But that doesn't mean everyone is better off.
Michael LeBlanc 33:26
Let me, let me segue to one of our couple last questions. And let's connect department stores as a format, however we define them, to the shopping mall, because they're intimately connected. Is there a future to shopping malls, as we see the future ebb and flow to formats, they typically have been tied to the hip. I mean, they really get you to think of traditional anchors.
Michael LeBlanc 33:46
Now we're seeing shopping, shopping malls, you think of Hudson Yards, for example, expanding, and the bespoke food courts, and putting live-in, you know, condos and offices together, and trying to re-, rediscover themselves. Is, is if, as-go department stores, do as-go shopping malls? Simeon, what do you think?
Simeon Siegel 34:05
I think one of my mantras in life is, don't drink your own Kool Aid. And by the way, I drink plenty of my own Kool Aid, so I'm totally guilty of it, I just try to remind myself. The question is, who's building this, who's, who's telling the story? Like, are there opportunities for gyms to enter spaces they wouldn't have entered before? Are there opportunities for residential to enter, sure, right, we've seen college campuses find their ways into malls. So, I think there is definitely opportunity to fill vacancies. I guess, the question is, is that the optimal solution, or is it filling a vacancy?
Simeon Siegel 34:33
And the, if the mall did not have, I love the analysis that often gets done around real estate for retailers and the value behind it. And it seems like an existential question, because if the real, if, if you lose enough retailers that want these big boxes, how much is that real estate really worth? And if it becomes a bunch of warehouses, then what does that do?
Simeon Siegel 34:54
So, to me, I think this is the beginning of a very long story. But I think that the people that own the boxes are very incentivized to find a compelling story, as to what they can do with them. And that presumably puts them at a lower end of the leverage spectrum. So, I think that we will see this constant evolution of them all. But if a mall didn't have a reason for being, because it's location, and because of all the different components, create, recreating another form and convincing people they want to live in a mall, but they didn't want to shop in, harder than it seems on paper.
Michael LeBlanc 35:26
Well Ethan, and just last question, I'm just looking through your deep dive report, you put out. It looks like things like the median visit time, is almost back to where it was, a little shy of, in January 2019, like in the before-time. So, it does seem people are heading back to the malls, again, is this a, you know, my God, I just want to get back to a normal life for now, but maybe readjust later, kind of thing? Or what's your thoughts on that?
Ethan Chernofsky 35:50
So, I think, I think it depends on what you look at. There's a very large number of malls in the US. And so, what we're looking at in our index is top tier, you know, Class A malls. And yeah, those have a really bright future because they're the, they are regional hubs for retail and entertainment. And they can make these interesting pivots, and adjustments, and evolutions. I think what Simeon is totally right about is, there are a lot of malls that don't have anything real and tangible to offer.
Ethan Chernofsky 36:21
And so, when you break the whole space down into groups, you have this, kind of, upper-tier, that is likely going to be even more significant moving forward, you have a bottom-tier that is likely going to go away, and there's no real opportunity for them. And then you have this middle-tier where it's, okay, how do you pivot and adjust in a new environment, where the retail hubs, those major malls, are attracting a lot of visits, and from a very, much larger, true trade area than they had in the past.
Ethan Chernofsky 36:52
And that's where you get these concepts like, okay, does a school work in a mall, but then you also have a Costco in that space. And that's, I think that middle-tier is where it's interesting, that bottom-tier is, is likely going to be challenged to the point that it's, a recovery is, is unlikely. That top-tier, I don't think there's any challenge. I think the middle is where things get interesting.
Steve Dennis 37:12
Yeah, I definitely agree with that. I think for the bottom-tier, you know, you want to be in the bulldozer business, as opposed to the retail. I just want to lean into being, being the devil and the cynic in the group, very on branding, for me.
Michael LeBlanc 37:27
Thank you, Beelzebub, for making that appearance.
Steve Dennis 37:30
Exactly, well.
Ethan Chernofsky 37:31
The retail bulldozer, though, it's a nice little title.
Steve Dennis 37:34
I know, I'm calling podcast ideas, creative destruction, creative construction. I mean, we've got so many ideas. So, while we only, I think, touched the tip of the iceberg here, in terms of all the different aspects of malls and department stores, and so forth. So, thanks for giving a perspective, maybe we'll have to have you guys back on to do a deep dive into other categories.
Steve Dennis 37:58
I would encourage, and we'll put this in the show notes, but Pacer.ai has got all sorts of really fascinating traffic, dwell time, etc., etc., crush up data. I would definitely encourage you to go check that out, regardless of what part of retail you're interested in. And, Simeon and his firm have all sorts of great analysis, as well, to take a look at, so we'll put those links in there as well. Any, any parting words from Ethan or, and/or Simeon about what we should be looking for as we head into the holidays?
Ethan Chernofsky 38:28
I'm really fascinated to see, because I, my expectation is September, October not going to be amazing. I think, if November and December are strong for retail, we have, we are seeing the full power of brick and mortar. And a lot of this positivity is here to stay.
Simeon Siegel 38:45
Watch the price point. Because I think that, holiday doing well, is going to be more a function of supply chain still being backlogged at this point. I think as soon as the ever-given product makes our way here, and I'm saying that hyperbolically, because I hope it actually is here by now. But the, all these, the reason as we go further, and further away from the initial pent-up demand. The reason the promotions stay low is going to be, in my opinion, is going to be a supply chain conversation rather than a demand. And I think that, as soon as that starts slowing, then consumers can start getting some discounts again.
Steve Dennis 39:16
Well, thanks very much. It's been a great conversation, and we look forward to checking in with you guys later in the year. And, well, I, as much as I'm a, I'm a cynic, and a little bit of Dr. Retail Doom here, I am hoping that we'll be pleasantly surprised by supply chain and consumer demand going forward, but we shall see.
Michael LeBlanc 39:36
Amen. If you like what you heard, please follow us on Apple, Spotify, Amazon Music, your favorite podcast platforms, so you can catch up with all our great interviews. Subscribe, so that just automatically shows up. Tell your friends, and also new insights and new episodes will show up every week. So, tell your friends, because that will help us share the word, the good, the wood, the good wisdom. Now, share and checkout, be sure to check us out on our new YouTube channel. Not so new anymore, we got a couple episodes up there, and just look for Remarkable Retail.
SUMMARY KEYWORDS
department store, simeon, retail, brands, stores, ethan, companies, malls, question, kohl, people, steve, category, consumers, macy, bit, talk, guess, shopping malls, conversation