What Recent Quarter 1 Retail Earnings Reports Actually Reveal

This is a big week (week of May 14, 2018) for quarterly earnings reports for some of the biggest brick-and-mortar retail companies in the U.S. These will report the sales and profit results for the first quarter of this year. Home Depot will report on Tuesday, Macy’s on Wednesday, and Walmart on Thursday.

In many ways, you could see these reports as the most important indicators of the health of the industry and predictor for the future—even more than fourth-quarter earnings reports. And I predict that they will be generally okay and even good depending on the company.

Why First Quarter Results Matter So Much

The first quarter is the lowest revenue volume of the entire year. Why are this quarter’s results so critical then?

If the profits are generally good, it is a reflection of a lot of things going right. It means that companies controlled their inventories through the previous holiday season, and thus did not start January “heavy,” which means deep discounts are needed to liquidate overstocks. In other words, they managed their turn, following The Second Law of Retail: Turn Is Magic.

If top line sales revenue results are good, it means that the company has adjusted to the many challenges confronting the industry (that is, Amazon), and is presenting an assortment of products that their customers want (The Third Laws of Retail: The Power of Product) and at prices that reflect an appropriate value (The Fourth Law of Retail: It’s All About the Retail Price, Not the Cost).

Examining the “Bleak Future” of Retail

Last year we heard a lot about the “retail apocalypse,” the death of brick-and-mortar stores. While it is true that a lot of stores closed and several big name retail brands actually went out of business entirely, the sector is amazingly resilient and fluid. Comings and goings, arrivals and departures of retail companies are entirely natural parts of the business evolutionary process.

Companies that tough it out, ride the storm, and come out stronger and better positioned for the future do so by following the basic Laws of Retail:

• The First Law: People First. Customers are not abstract statistics resulting in sales, nor are retail employees merely “associates.” They are real people, integral parts of the community created in any type of retail environment. To put “people first” is to actually care about them, listen to them, and serve them as the hub of the retail community.
• The Second Law: Turn Is Magic. The secret to getting the turn right draws in large part on one important understanding of the core 21^st-century value of honesty: company management must be honest with itself about evaluating inventory and sales.
• The Third Law: The Power of Product. If the product isn’t right, nothing else will make it succeed. This is where the Ford Motor Company went wrong back in the late 1950s with its much-touted brainchild, the Edsel. Despite a huge financial investment, teams of talented designers and marketers, massive distribution systems, and worldwide brand recognition second to none, this was not enough to make up for the fact that the product was not right.
• The Fourth Law: It’s About the Retail Price, Not the Cost. The only thing that matters is what the customer is willing to pay for a product; what it costs the company is immaterial.
• The Fifth Law: Protect Your Downside. Before a company takes a risk, they must take appropriate steps in case anything bad happens by (a) recognizing right at the outset of that failure is possible; and then (b) doing what they can, up front, to prepare against that possible outcome.

Filter your inspection of this week’s quarterly earnings reports through the lens of The Five Laws of Retail and you may gain some insight and perspective that even the investment community hasn’t considered.