We’re renovating a basement office for my wife’s business. The south wall has a bank of windows that measure eight feet by four feet. We need blinds, or shades, or something, to block the glare on sunny days.
Cellular shades are the way to go for good-looking light-blocking and filtering. A few months ago I shopped at the designer home decor shop in town and priced two for our bedroom. The quote came in at over $400, so instead we spent $40 on two pull-down shades. I was expecting this bank of windows in the office to run at least $600, and probably more. Because it’s a space where Lynne will spend many hours a day, we wanted it to be comfortable — pulldown bedroom shades are a bit ugly, but you only use them when you’re sleeping so who cares. You can always hide them with curtains.
Lynne noticed an ad for JC Penny offering “50% + 30%” off a particular brand of cellular shades on Wednesday only. We went in and took a look. The helpful salesperson oriented us to the options, then told us that on Friday (yesterday) there would be a sale on ALL brands for “65% + 10%.” Further, there was a coupon in the mail to catalog shoppers for an additional 10% off, and if we opened a Penny’s charge that day we could take an additional 10%.
Wow, let’s do some math. If the shade costs $100, this Friday sale would mean that with all the discounts we’d pay $25.52. That’s a 75% discount. We liked the selection better on the Friday sale, so we waited and went in yesterday.
First of all, the original price for this 8′ by 4′ bank of windows was $590. Because the windows are so much bigger than our bedroom, it means that Penny’s is a LOT cheaper than the designer home decor shop. I’m sure there are quality differences, but this is an office, not a showroom. We’ll take the trade-off. Second, we never got the coupon in the mail, but the salesperson had one we could use. That’s pretty helpful, and I’m sure it happens all the time, and I wonder if Penny’s executives realize it, or perhaps even encourage it. In the end, our final price was $167.27. That’s simply a damn fine discount, and I’m wondering how they can make any money on the sale.
What’s going on is identified in an article in today’s NY Times: “Worried Merchants Throw Discounts at Shoppers.” Apparently post-Thanksgiving sales were dismal, and everyone is panicked, so the discounts are thick right now. A few quotes:
At the start of November, “everything was coming up roses,” he added, [John D. Morris, a retail analyst with Harris Nesbitt] “and suddenly there’s a foul smell in the air.”
[Michael J. editorial note: Hmm, I wonder what event in early November caused a change in mood? Perhaps the 55 million people left out of the Bush mandate are concerned about the future? If 48% of the country slows consumption, you’re going to notice it in a lot of painful ways.]
Mr. Flickinger said he thought there was still time, though not much, for the merchants to end up happy with their holiday receipts. “They only have 5 to 10 days to turn it around or it’ll be too late,” he said. The way to do this, he said, is to advertise, he said. “They should be advertising in four-color supplements and on drive-time radio.”
He added, “The ones that discount the deepest, the fastest will have the most success.”
Okay, so what is success? Here success is not losing your shirt, so to speak, on unsold inventory at the end of the holiday season. With 75% discounts, merchants are giving up any hope of profit on those sales in order to get people in the door and make it up on other products. Or, if they can really make money with 75% discounts, then consumer goods are vastly overpriced and once customers figure it out the entire retail landscape will change. Implied in the analyst’s statement is that receipts are more critical than profits. At this point, things are dire, and they better just get some revenue and deal with net earnings later.
In dramatic contrast, this week I received the annual report for Neiman Marcus. (Here’s the JC Penny annual report for comparison.)
Tangent: Regular readers may wonder how or why I’m an investor in Neiman Marcus. In 7th grade (mid-1970s), as part of a class project, I bought a share of stock in Warner Brothers and a share of General Cinema. My stock broker, the late Richard Mansel, was very kind to humor me in this educational exercise. By the end of the school year, General Cinema hadn’t moved much, but was still in the game. On the other hand, Warner had moved from around $7 a share to something like $53. I was a local stock-picking maven. Everyone asked me, “How did you know?” to which I replied, “I bought things I was interested in.” But I digress.
As I matured, I came to understand that GC was really a financial engineering vehicle. For instance, they bought a Pepsi bottler. Then they sold the Pepsi business, and used the profits to buy Harcourt Brace Javonovich, the textbook publisher. Eventually they sold that and bought Neiman Marcus. These guys made hundreds of millions of dollars at each turn; it was very interesting to watch. So today, due to splits and dividend re-investment, I own perhaps 3 shares of Neiman Marcus.
The point I’m getting at: Neiman Marcus is not JC Penny. Neiman Marcus is not offering 75% discounts on anything. If they can’t sell it at full price, they take it out of the store and unload it on the wholesale market where the customers don’t notice. To wit:
We have never been more focused on the needs of these customers or our commitment to enhancing shareholder value. We delivered on both of these goals last year, reinforcing our market leadership, while generating record sales and earnings in an improving, but still tentative, economic environment. Total revenues increased 14% to $3.55 billion, compared to $3.10 billion in fiscal 2003. Net earnings grew 87% to $205 million, or $4.19 per diluted share, compared to $109 million, or $2.29 per diluted share, the prior year.
Dig: “Generating record sales and earnings in an improving, but still tentative, economic environment.”
Through our team’s intense focus on full-price selling, disciplined inventory management and rigorous expense control, we achieved a record operating margin of 9.7%, far surpassing our previous high of 8.5% in fiscal 2000. SG&A (selling, general and administrative) expenses as a percentage of sales declined more than 120 basis points to 24.7%, our best performance in six years. Importantly, we also generated a return on equity of 16.3%, compared to 11.3% in fiscal 2003.
Dig: “Intense focus on full-price selling.”
Many factors contribute to our optimism, including the continued growth of the affluent consumer demographic and the increasing economic power this segment represents. We believe no one understands luxury customers better than The Neiman Marcus Group and we will continue to differentiate ourselves in the market by developing new ways to engage, inspire and delight them. In our view, the best is yet to come.
Dig: “The continued growth of the affluent consumer demographic and the increasing economic power this segment represents.”
There you have it. The bifurcation of retail success matches our societal makeup. If you are selling to people with money to spend, things are pretty rosy. If you’re going after middle-class consumers, you’re pretty nervous.
I haven’t shopped at Neiman Marcus since I lived in Dallas in 1987 — and even then I wasn’t their target customer. But I’m guessing that shopping there this weekend would be a very different experience from what happened yesterday at Penny’s.