One paragraph nails everything wrong with big-box retailers like Gap and Macy's
On Wednesday, Macy's reported dismal earnings and the entire industry is sinking in the markets.
As if there needed to be anything else, Fitch Ratings cut the grade on mega-retailer Gap's debt into junk territory at BB+.
In the decision, the rating agency did an impressively succinct job at describing the massive amounts of problems facing big-box retailers right now.
Gap operates in a challenging mid-market apparel sector, which has been characterized by lack of a strong product cycle and sales bifurcation to higher-end aspirational brands and lower-end fast fashion and off-price channels. Gap and its peers have seen volatile sales results and have needed to use significant omnichannel investments and higher-than-expected markdowns to drive sales.
Let's break that down.
First, there's product problems. Consumers have been increasingly spurning the product mix offered at large department stores like Macy's and mid-market retailers such as Gap. Tastes, and wallets, have instead shifted to cheaper fast fashion products and high-end stores.
In turn, this has hurt Gap and others bottom lines and spurred costly investments in stores in order to attract more customers. In fact, stores such as Macy's, Nordstrom, and others have all attempted to attract customers at different, more popular price points by creating fast fashion-type stores such as Nordstrom Rack and Macy's Backstage.
Additionally, these retailers are also being forced to invest in growing their online segment as more shoppers are shifting online. The problem is, online sales have a lower profit margin and the technology investments needed are costly.
Basically, one solution to slower sales has been to spend more on capital investments to chase where customers are actually shopping, whether it be destination or price point.
The other solution that Fitch hits on is markdowns. In order to move the large back-up of inventory many of these companies have built up, they've been forced to mark down prices to move the products. This leads to lower margins and worse results.
Fitch hits all of these issues in one paragraph: changing tastes, costly investments, and necessary markdowns. Thus, the carnage in retail stocks.