The Nightmare After Christmas


Image source: Giftware - Wayfair, Kunal Mehta, raksina, Robert Wei, Grzegorz Petrykowski, jax10289, ccpixx photography - Shutterstock

What's going on?

From Tesco to Marks & Spencer (M&S), Kohl’s to L Brands, the holiday season didn’t go so well – and their updates didn’t go as planned.

What does this mean?

On Thursday, department store chain Kohl’s and Victoria’s Secret parent L Brands reported worse-than-expected sales growth over the holidays, leading both to lower their profit forecasts for the year. Bed Bath & Beyond (BB&Y) couldn’t escape the malaise either: it reported weak results and jettisoned its earlier profit prediction late on Wednesday.

But the #retailfail extended beyond American shores. UK chain M&S saw a worse-than-expected decline in holiday sales, while grocer Tesco’s barely grew. The latter in particular will have hurt investors: Tesco represents 1% of the UK’s stock market and is globally significant too, with businesses across Europe and (for now) Asia.

Why should I care?

Zooming in: Costs, costs, everywhere.
Investors tend to focus on retailers’ sales growth because it’s the best indication of a company’s profitability. Since traditional retailers have high fixed costs – rent, electricity, store staff and so on – rising sales tend to boost profit directly. That does, however, make cutting costs more difficult, which means falling sales have a significant negative effect on profit. And that’s to say nothing of the additional warehousing costs that ecommerce wannabes take on…

For markets: Investors don’t pull any punches.
Investors added insult to injury by selling retailers’ shares: Kohl’s fell 9%, BB&Y 18%, and M&S 10%. There’s perhaps only one winner: Amazon. Investors in the ecommerce giant will be hoping its record holiday season – perhaps partly thanks to last year’s record US shopping mall vacancies – translates into a strong fourth-quarter earnings report later this month. And with more flexible costs than traditional retailers, it very well might.

Originally posted as part of the Finimize daily email.

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