Top 10 Takeaways from Day 2 of the Goldman Sachs 24th Annual Global Retailing Conference

Top-10-Takeaways-from-Day-2-of-the-Goldman-Sachs-24th-Annual-Global-Retailing-Conference_2nd_image_1280x500

KEY POINTS

The FGRT team attended the Goldman Sachs 24th Annual Global Retailing Conference in New York City this week. Here, we highlight our top takeaways from the second and final day of the conference.

  • Retailers are focusing on private labels to offer value and differentiation.
  • Wage headwinds will continue and efficiencies will have to be found elsewhere.
  • Home improvement stores are resilient in an age of retail disruption.
  • Digital shoppers are increasingly choosing to buy online and pick up in-store when they shop.
  • Retailers are increasingly looking at international expansion opportunities. China, Europe and Canada appear to be the geographies retailers are most interested in with regard to international expansion.
  • The home and beauty categories are outperforming apparel.
  • Supply chain speed Is crucial in driving growth.
  • Store closures still outpace store openings and real estate owners face rent pressure.
  • Smart retailers are pivoting and rebranding to meet opportunities.
  • Consumers are seeking out products that are differentiated and unique, and when products are in demand, price is not an issue.

The FGRT team attended the Goldman Sachs 24th Annual Global Retailing Conference in New York City this week. Below, we highlight our top 10 takeaways from the second and final day of the conference.

 

1) Retailers Are Focusing on Private Labels to Offer Value and Differentiation

Retailers discussed the importance of incorporating private-label brands into the product mix. Presenters noted that private-label collections enable retailers to capture higher margins and offer differentiated products, which can ultimately drive loyalty.

Edward Stack, CEO of Dick’s Sporting Goods, said that although the company’s second-quarter comps were relatively flat, private-label comps were up by mid-single digits. Stack said that, given the current promotional environment, exclusives can help the company alleviate some of the margin pressure that it is experiencing.

Urban Outfitters CFO Frank Conforti discussed how product exclusives continue to drive engagement and topline sales for Urban Outfitters. The company offers exclusivity through collaborations with brands such as Champion and Adidas, Conforti said, noting that private-label brands are growing and represent “20-ish percent” of Urban Outfitters’ sales.

Retail Crossing Borders_550_01

Tractor Supply CFO Kurt Barton noted the success of his own company’s exclusive brands and said that Tractor Supply will continue to introduce new brands across product lines. Tractor Supply recently launched a new line of exclusive dog food called 4health Untamed.

Retail Crossing Borders_550_02

 

2) Wage Headwinds Will Continue and Efficiencies Will Have to Be Found Elsewhere

Several of the conference presenters discussed the impact of wage inflation on their businesses. To combat rising wages, retailers are finding ways to drive efficiencies elsewhere in their operations, the speakers said, noting that they are undertaking various initiatives to create leverage in their businesses and grow the bottom line.

According to Home Depot CEO Craig Menear, Home Depot drives productivity through supply chain initiatives. “We’ve just really begun working at the end of ’16 into this year on productivity in the back end of our stores as it relates to freight handling,” Menear said. Scott Goldenberg, CFO of TJX Companies, said rising wages had had a negative impact on HomeGoods margins, which negatively impacted EPS growth by 2% in the company’s fiscal second quarter. Driving sales in TJX Companies’ strong international business has helped partially offset wage increases, Goldenberg noted.

 

3) Home Improvement Stores Are Resilient in an Age of Retail Disruption

The ongoing US housing recovery is making the home improvement space one of the best retail segments to be in. The macro environment has benefited this sector: home values are rising, existing home sales are increasing, wages are rising and interest rates are at historical lows.

Home Depot has benefited from continued demand for building materials from contractors and from demand for appliances on the part of consumers. Meanwhile, the construction of new homes amid tight supply continues to fuel contractor demand for building materials such as plywood and shingles, Menear said. Meanwhile, Lowe’s has expanded its network of vendors in order to ensure it has the right global market coverage in the right markets, said the company’s CEO, Robert Niblock. Lowe’s has also experienced strong growth in big-ticket transactions, as rising home values have made consumers feel better about investing in their homes.

Retail Crossing Borders_550_03

Executives from Home Depot and Lowe’s discussed the importance of localizing product offerings to meet the market-specific needs of customers. Executives at both companies believe that the housing recovery still has quite a bit of room left to run, but Home Depot and Lowe’s might have already proven themselves to be somewhat “Amazon-proof.”

 

4) Omnichannel Capabilities: Click-and-Collect Is Here to Stay

Consumers are increasingly choosing the buy-online, pick-up-in-store option when they shop. Many retailers at the conference noted that click-and-collect strategies had been successful parts of their omnichannel initiatives. Customers enjoy the convenience of being able to pick up an order the same day that they make a purchase. They benefit retailers by enabling them to save on direct shipping costs and by encouraging incremental sales in brick-and-mortar locations.

Home Depot’s e-commerce business has grown consistently for a long period of time, and much of the channel’s success can be attributed to the company’s buy-online, pick-up-in-store offering. More than 40% of orders purchased on HomeDepot.com in the second quarter were picked up by customers from a Home Depot store.

Tractor Supply rolled out its buy-online, pick-up-in-store program in May this year, and the offering now represents 55% of its online business, according to CEO Gregory Sandfort. Carter’s CEO Michael Casey discussed the incremental revenue that buy-online, pick-up-in-store service has driven to the company’s outlet stores. According to Casey, about 30% of Carter’s customers who come into a store make an additional purchase, which has increased the company’s average transaction value.

 

5) Retailers Are Increasingly Looking at International Expansion Opportunities

There was much discussion of international expansion opportunities at the conference. China, Europe and Canada appear to be the geographies that retailers are most interested in for international expansion. Macy’s CEO Jeff Gennette commented on the initial success of the company’s partnership with Alibaba’s Tmall e-commerce platform and said that Macy’s plans to launch a stand-alone website, Macys.cn, in China. Urban Outfitters CFO Frank Conforti emphasized the stellar performance of his company’s stores in Vienna, Austria, and said that there is significant opportunity in Europe for all three of the company’s brands. Executives from several companies mentioned Canada as their first choice to test international markets, given its proximity and cultural similarity to the US. Eyewear startup Warby Parker now ships to Canada and has opened an office in Toronto. An executive from the company said that the team considers entering the Canadian market as the logical first step when testing an international operation.

 

6) Store Closures Still Outpace Store Openings and Real Estate Owners Face Rent Pressure

On balance, the retail industry is seeing more store closures than store openings. Recent closures have been concentrated in the department store and specialty retail sectors, where business has been challenging. Gap Inc. plans to close about 200 specialty stores (including Gap and Banana Republic stores) in the next three years in an effort to reposition itself to be a more value-driven retailer. Urban Outfitters’ management team said that it is willing to close profitable stores in anticipation of a faster channel shift as online penetration continues to increase.

There was also discussion of retail rents trending down as retailers reevaluate their store bases. Real estate owners have been offering lower rents when retailers negotiate for renewals, and the downward rent trend is more pronounced at shopping malls and strip malls, speakers noted.

 

7) Supply Chain Speed Is Crucial in Driving Growth

On the second day of the conference, we heard more about the need to improve supply chain speed in order to drive topline growth. This represents a change from a few years ago, when retailers focused on optimizing their supply chains based on cost at the expense of lead time. Urban Outfitters’ Conforti shared his company’s initiative to drastically increase the proportion of items it sources with a shorter lead time. He noted that this had significantly improved the company’s ability to offer on-trend items, as it is much easier to predict a trend when speed to market is faster. Executives from TJX Companies and Signet Jewelers highlighted supply chain speed as a priority area for their companies, too. A representative from PVH Corp. noted that the company is expecting some margin enhancements in the next 18 months from supply chain improvements.

Global supply chain manager Li & Fung is actively working with retailers to help them improve their supply chain agility. The company is testing virtual sampling technologies and plans to digitize the end-to-end retail supply chain by 2019.

 

8) Smart Retailers Are Pivoting and Rebranding to Meet Opportunities

Dani Reiss, CEO of Canada Goose, a 60-year-old luxury outerwear company, said that the company launched a new capsule knitwear collection just two weeks ago. He said that although Canada Goose intends to maintain its strength as an outerwear company, it saw a growing opportunity in the knitwear category and that company research showed consumers were open to a Canada Goose knitwear offering. Reiss said that the company has received great initial feedback in stores and that it plans to grow its knitwear offering over time.
Retail Crossing Borders_550_04

Philip Krim, CEO and Cofounder of Casper, said that his company originally launched as a mattress company, but that it has expanded into the entire sleep category and now offers luxury sheets, duvet covers and even bed frames. Krim said that the company is studying many aspects of sleep, and that research has helped Casper offer the best new products.

Lastly, Dennis Weber, Head of Investor Relations at Hugo Boss, reported that the company has rebranded to better align with the market trend that sees consumers moving from formalwear to casualwear. Hugo Boss was hearing that “the suit is dead,” and Weber noted that, although suits still account for 20% of the company’s sales, the company realized that today’s customer is looking for smarter casual alternatives to wear to the office. Sales are up at both of the company’s rebranded brands; they are up 2% at Boss, driven by athleisure, and up 6% at Hugo, Weber said.

Retail Crossing Borders_550_05

 

9) Home and Beauty Categories Are Outperforming Apparel

We heard from several retailers that the home and beauty categories are outperforming apparel. While apparel specialty retailers are reporting comps in the low to mid-single digits, home and beauty retailers are experiencing higher comps—and opening stores.

Michael Hartshorn, CFO of Ross Stores, reported that the home category is an area of strength for the company and that it accounts for nearly a quarter of Ross Stores’ business. The retailer’s home items include nontraditional goods such as pet and garden items, and this area continues to expand, Hartshorn said. He expects the category to continue to grow, and noted that 25% is not a ceiling, in the company’s view.

The apparel category is growing much more slowly than home, as apparel is larger and more fragmented. John Ricciuti, President of HomeGoods (which is owned by TJX Companies), also reported that the home category is thriving. Ricciuti said that more than 30% of the company’s business is in home and that the category resonates with millennial consumers, who are at the life stage where they are starting to buy their own homes. He said that return rates are also lower for the home category, at approximately 16%–17%. HomeGoods plans to open 100 stores this year, Ricciuti said.

Beauty is another growth category. Ulta Beauty reported comparable sales of 11.7% for the quarter ended July 29. According to Ulta CFO Scott Settersten, the company currently has about 1,010 stores and “is comfortable with” opening 100 stores a year, with a long-term goal of 1,400–1,700 stores in the US.

An executive from Dollar General reported that the company currently holds 1.2% of the health and beauty market and that it expects to increase that share to 3% over time. The executive noted that beauty drives traffic, so the company is reducing the number of “fashion items” it offers and replacing some of them with beauty products.

 

10) Consumers Want Differentiated Products

Consumers are seeking out products that are differentiated and unique, and when products are in demand, price is not an issue. Canada Goose CEO Dani Reiss said that the company manufactures all of its products onshore, and sells them at the prices at which they were meant to be sold. The company is “function first,” he said, and its goal is to make the best product in every category in which it has an offering. Canada Goose outerwear retails for nearly $1,000, and the company reports that some of its styles are sold out regularly. The company is currently seeing demand in both its online and offline channels, and plans to open 15–20 stores through 2020. It is carefully considering where to locate stores, depending on consumer retail traffic, both online and in-store. Reiss said that the company’s research has shown there is consumer demand for outerwear exceeding $1,000 with additional functional features.

An executive from TJX Companies reported that its customers come back frequently because they like its product differentiation and fear that they will miss something. He said that the best customers know the truck schedules, and that they are excited and entertained by the idea that there may be only one of a particular item available. That idea keeps them coming back, he said. In terms of brand differentiation, he said that there are many things that can make a product unique, including product quality and country of origin (as indicated by a “Made in Italy” or “Made in Germany” label). He said that the company has thousands of buyers who source all over the world, looking for unique, differentiated products.