Retail earnings misses back to levels last seen in Great Recession

Key Points
  • The percentage of retailers that beat their earnings estimates dropped roughly 20 percent since 2010 on a rolling 12-month basis.
  • Retailers are having a hard time making projections because the business model is changing so rapidly.
  • Poor projections complicate financial planning.
A shopper makes a purchase at JC Penney in North Riverside, Illinois.
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Traditional retailers are struggling to predict their own fortunes.

The percentage of retailers that beat their earnings estimates dropped roughly 20 percent since 2010 on a rolling 12-month basis, according to Bespoke Investment. They reached a 15-year low in 2015 and are seeing miss rates last seen at the beginning of the Great Recession.

Retailers' off-base forecasts demonstrate just how quickly the sector is changing and how little ability executives have to plan for it, let alone manage it. The misses are important because executives need to be able to understand their business if they want to make the investments necessary to save it.

Retailers are closing hundreds of locations, but they don't know the impact that store closings and liquidations will have on their revenues. They are investing in e-commerce, but they don't know how many people will buy online and what that means for their in-store purchases. They are promoting in-store pickup, but they don't know whether shoppers will take them up on it and save them from expensive shipping costs.

These themes reverberated throughout the latest rounds of earnings calls. They will be tested in the upcoming circuit.

"Quite candidly, it was very difficult to forecast [the liquidation of] 127 stores and the financial impact when we had no history to really lean on," J.C. Penney's CEO Marvin Ellison said on the company's second-quarter earnings call.

"It is almost impossible to truly break out digital from store. ... If somebody is using a mobile phone in store, having just worked with a sales associate, is that store or digital? Or the returns [and so forth]," Macy's CFO Karen Hoguet said in the company's first-quarter earnings call.

"It's actually a pretty complex model that we are getting our arms around," said former CEO of Hudson's Bay, Gerald Storch.

Scale no more 

In the new environment, retailers must gauge the value of their investments in digital, partnerships and "experiences" they are creating to draw customers in.

The retail business model is no longer predicting how many more sales a single store will do this year compared with last year, the language its current club of executives is used to speaking. Retailer leaders largely came up through the ranks when the solution to most problems was building more stores or reinvesting in old ones.

"For many years it's been about scaling and optimizing — they all know each other and they really haven't had to look outside their industry as much as they probably should have to navigate the changing tides," said Margot McShane, a partner at executive recruiting firm Russell Reynolds.

Retail companies, by and large, do not force executives who rise through the ranks to work in different departments — like operations or finance — as other industries do. That means those who have risen to the top may have done so only working in areas like merchandise, the job of picking out goods for shoppers months in advance.

That planning skill set is likewise being challenged as shoppers' wants now change on a whim. Today, celebrities and Instagram influencers can drive trends in the time it takes to post a photo of a Reformation dress. Fast fashion has trained shoppers to view trends by the week, not the season. Subscription services like Stitch Fix ship clothing boxes monthly, through data-driven personal shopping.

J.C. Penney saw shares drop to an all-time low last month, when it slashed 2017 profit and comparable-sales forecasts, partially because it had to slice prices of inventory — primarily women's apparel — to move items that were proving unpopular with shoppers.

"It's like playing a different pool table, but it's a completely new table and all the angles are different, and everybody is having to adapt to that," said Josh Chernoff, a managing director in the Parthenon-EY practice of Ernst & Young.