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These Companies Are Succeeding Despite Amazon Or A Slowing Economy (#GotBitcoin?)

How Kohl’s Is Succeeding Where Other Chains Haven’t

For starters, CEO Michelle Gass says she doesn’t think of the company as a department store.  These Companies Are Succeeding Despite Amazon Or A Slowing Economy

Department stores, once the go-to destination for the shopping needs of the entire family, have been under assault as buying has shifted online and to more value-oriented chains such as Walmart Inc. and T.J. Maxx.

While other types of retailers, including Best Buy Co. and Target Corp. , have pivoted enough to survive the retail crisis of recent years, in which dozens of chains went under and hundreds of stores closed, department stores have been slower to change.

Sears Holdings Corp. and Bon-Ton Stores Inc., two venerable department stores that dominated their markets for much of the past century, filed for bankruptcy protection this year. Others are struggling to stay relevant, including J.C. Penney Co. , which is on its third chief executive in seven years as it has careened from one strategy to another.

Kohl’s Corp. , by contrast, is surviving the onslaught better than many of its peers. It has tried to do things differently, including striking a controversial partnership with Amazon.com Inc. and teaming with social-media platform PopSugar Inc. to design a line of clothes. The result has been a string of strong sales.

Chief Executive Michelle Gass, a 50-year-old former Starbucks Corp. executive who took the helm of Kohl’s in May after joining the company in 2013, spoke about about the changing retail market and what Kohl’s is doing to stay ahead of the competition. Edited excerpts follow.

Q: Why do you think Kohl’s is having success when so many other retailers, especially department stores, are struggling?

MS. GASS: We don’t think of ourselves as a department store. We aren’t in malls. Our stores have a racetrack design, which makes them easy to navigate. The cash registers are at the front of the store, rather than dispersed in departments, which makes checkout easy to locate. From the early days, we created a model that is easier and more convenient for shoppers than a typical department store.

Q: You have more than 1,100 stores. Unlike other retailers, you haven’t had mass closings. Why is that?

MS. GASS: We haven’t faced the same pressure to close stores as other retailers have. The moves we are making to use our stores differently are helping us to keep them relevant. We are making our stores smaller. We are looking at opportunities to lease out extra space. In Milwaukee, we are leasing space to Aldi [the supermarket chain]. We put up a wall. We’re reducing the inventory by double digits and assorting as a smaller store.

Embracing Amazon

Q: Last year, you launched a partnership with Amazon.com. You’ve created dedicated departments to showcase some Amazon electronic products such as Echo. And you are allowing shoppers to return purchases from Amazon at Kohl’s stores. Weren’t you nervous about getting in bed with a company that is upending the retail industry?

MS. GASS: There is a lot of space for both of us. In thinking about the partnership, it was how do we take Amazon’s dramatic customer base and combine it with Kohl’s physical stores to create value for both of us.

Q: How is it going so far?

MS. GASS: We now accept Amazon returns in 100 stores and have dedicated Amazon departments in 30 stores. Based on the volume of returns we are getting, people are using the service. What we are trying to determine is, of the people coming in and returning something from Amazon, how many are crossing the aisle and buying something from Kohl’s?

‘Mindset of Experimentation’

Q: Department stores tend to have an older customer base. What are you doing to reach younger shoppers?

MS. GASS: That’s where PopSugar comes into play. It’s one of the most wide-reaching social-media properties for millennial females. We were already advertising some of our brands on PopSugar. That told us they are reaching the customers we want to reach.

We designed and produced a clothing collection with them. The first line is in stores now.

Q: How can you tell whether it’s resonating with younger shoppers?

MS. GASS: Thirty-five percent of the sales are online, which is much higher than our overall average.

Q: Another way department stores tend to get younger shoppers is through their gift registry business. Yet, you chose to exit that business. Why?

MS. GASS: We weren’t creating a great customer experience, so I’d rather not be in the business. We’ll probably bring it back someday, but it will look a lot different. When you do things like that, it forces you to think about making a sea change versus an incremental change.

Q: Change can be hard for people in big organizations. How have you tried to get your team to embrace it?

MS. GASS: I tell them the most important thing is around innovation and speed. Those that are too slow will be left behind. You aren’t always going to get it right, but you’ve got to be out there trying things and really have a mind-set of experimentation.

Q: With so many retailers disappearing—Toys “R” Us Inc. recently closed all its stores—where do you see opportunity to pick up market share this holiday season?

MS. GASS: We’re getting into the toy business in a bigger way. We added the Lego and FAO Schwarz brands. With Bon-Ton not around, that store had a lot of overlap with Kohl’s. We plan to go after those customers.

How To “Amazon-Proof” Your Business

A sales slowdown at department-store giants like Macy’s and Nordstrom has scared investors away from retail stocks. Williams-Sonoma has fallen along with its larger rivals, and its shares trade at a discount to the broader market—opening up a rare opportunity to buy a healthy retailer whose business model should shelter it from the worst of the storm.

Williams-Sonoma owns several well-known brands that should benefit from an improving housing market. Tasteful Americans, and those who aspire to tastefulness, outfit their homes with Williams-Sonoma cookware, West Elm sofas, and Pottery Barn napkins. Their customers tend to spend a bit more than they would at Bed Bath & Beyond but quite a bit less than at Restoration Hardware Holdings (RH). Williams-Sonoma had 618 company-owned stores at the end of fiscal 2015, with more than 90% located in the U.S.

Williams-Sonoma shares have fallen 33% in the past year, less than competitors like Bed Bath and Restoration Hardware, which plunged 21% last Thursday alone on a reduced profit outlook. But the broad SPDR S&P Retail exchange-traded fund (XRT) is down just 14% over the past year. At $52.14, the stock trades at 14.3 times forward four-quarter earnings estimates, well below the market and the company’s five-year average of 17.5.

Williams-Sonoma has differentiated itself from the sector with one of the most robust Internet operations in retail, a crucial advantage as brick-and-mortar stores struggle with an existential crisis. The company garners just over half its revenue online and has built a customer database of nearly 60 million households. It calls the stores “billboards for our brands” that inspire customers to shop online. Internet sales also carry higher margins than in-store sales and are growing faster—8.2% versus 4.7% in the most recent quarter.

Bullish analysts like Oppenheimer’s Brian Nagel think shares could hit $65 in the next year to 18 months if the earnings multiple rises to 16 times 2017 estimates, more in line with its growth prospects. Add the 2.8% dividend yield, and the stock could return more than 25%.

“Williams-Sonoma is very Amazon-proof,” says Cody Wheaton, an analyst and assistant portfolio manager at Janus Capital, which boosted its stake in the company in the most recent quarter. “Because Williams-Sonoma controls its own inventory—it’s exclusive to their channel and their brand—and it has a very strong e-commerce business, the company is more immune than most to the lurking Amazon threat.”

Williams-Sonoma’s head start in online sales, which grew out of its decades-long experience as a catalog retailer, should help it gain market share in a fragmented industry. It has a 5% share of the furniture and home furnishings markets in an industry that has been slow to adapt to the Internet age; the company estimates that about 90% of home-furnishings sales still come from physical stores. That leaves plenty of room for the company to gain market share and expand profits. The company earned $310 million on $5 billion in sales last year, and is expected to earn $320 million on $5.2 billion this year. Earnings per share are seen rising 6%, to $3.58 from $3.37.

Analysts expect Williams-Sonoma’s earnings to grow at 10% a year over the long term, slightly below the company’s own target of low-double-digit to mid-teen growth.

Beyond Internet Sales, several trends should help spur that growth. Home-goods stores have contended with a depressed housing market for eight years, but home construction and sales appear to be picking up. Over the first four months of the year, housing starts rose 10% above the same period in 2015. The annualized rate of home sales eclipsed six million in April for the first time in nine years.

Williams-Sonoma, which got its start in 1956 as a cookware store in Sonoma, Calif., has expanded slowly and strategically, adding West Elm stores while closing outlets of its slower-growing namesake brand. In total, the store base is growing about 3% a year.

Morningstar analyst Jaime Katz expects Williams-Sonoma to allow leases to expire in malls with weak traffic, while opening new stores in spots with higher growth potential. Among the most promising growth avenues is the company’s international franchise business, which sports higher operating profit margins than the rest of the company. Williams-Sonoma’s partners plan to open at least 20 franchise locations in Mexico, the Middle East, and the Philippines this year. A similar strategy at L Brands (LB) paid off handsomely, according to Katz. Its franchised stores have operating margins that are more than five percentage points above the overall company.

Williams-Sonoma also has a strong balance sheet, with negligible net debt and a substantial dividend and buyback program. The company could return more than $1.4 billion—over a quarter of its market value—to shareholders over the next five years, says Katz. And the payout has grown at a 19% annual clip over the past five years.

In retail, a bargain like this doesn’t come around very often.

When Amazon Spots A Hot-Seller

Thousands of small merchants depend on Amazon.com Inc. to reach customers who otherwise wouldn’t know they exist. A few of them complain, though, that Amazon sometimes eats their lunch.

According to some small retailers, the Seattle-based giant appears to be increasingly using its Marketplace—where third-party retailers sell their wares on the Amazon.com site—as a vast laboratory to spot new products to sell, test sales of potential new goods, and exert more control over pricing.

Jeff Peterson, owner of Collectible Supplies Inc., a Garden Grove, Calif., retailer of sports merchandise, last summer began selling $29.99 Pillow Pets—stuffed-animal pillows modeled after NFL mascots—through Amazon’s site. For several months, sales were relatively robust, with as many as 100 of the Pillow Pets a day.

Then just ahead of the holiday season late last year, Mr. Peterson noticed Amazon had itself begun offering the same Pillow Pets for the same price while giving the products featured placement on the site.

Kathy Wojtczak, owner of a jewelry boutique in Seattle, appears in an Amazon ad as one of many ‘thriving’ small businesses on the site. She says she hasn’t had to compete with Amazon on products she carries.

Sales of Collectible Supplies’ Pillow Pets soon fell to 20 a day “because Amazon was offering it,” Mr. Peterson said. “I tried lowering the prices, but Amazon would always match my price or go lower until I eventually gave up” and set it at the manufacturer’s suggested price, he added. Prices fluctuate, but Amazon was recently selling a Baltimore Ravens Pillow Pet for $12 with free shipping, while Mr. Peterson is again offering the product for $29.99.

“Amazon is a double-edged sword,” said Thomas Frenchu, chief operating officer of Tabcom LLC, owner of dog.com, garden.com and others. “You have to deal with them, you have to be on their site, but we also have to fight harder and harder every day to compete with them.”

For certain, small retailers are drawn to Amazon Marketplace by the promise of tapping into the Internet company’s roughly 85 million unique monthly visitors, 45% greater than eBay Inc. and nearly 7-fold more than Sears Holding Corp., both of which host their own third-party marketplaces, according to comScore data.

Amazon executives declined to discuss pricing or purchasing strategies. “All of our focus is on helping making sellers successful,” said Peter Faricy, Amazon Marketplace vice president, who added the company has more than two million third-party sellers world-wide. “If we can identify hot products and make suggestions to them, we do that.”

Sellers report an average 50% increase in sales when they join Amazon’s marketplace and use its storage and shipping service, added Tom Taylor, vice president of fulfillment by Amazon, in an interview. He attributed that to lower-cost delivery and the quality of Amazon’s customer service.

Hadi Irvani, director of e-commerce for Okabashi Brands Inc., a producer of flip-flops and other sandals, said he saw sales grow immediately after joining Amazon’s marketplace in May 2010. The Buford, Ga., company now gets about 10% of its $3 million in online sales annually from Amazon and Mr. Irvani said he would likely use Amazon’s fulfillment to help save as much as $100,000 in annual shipping costs. “It transformed our business to be on Amazon,” said Mr. Irvani.

Amazon takes a commission for every marketplace sale—a 6% cut for personal computers, for instance, to as high as 15% for mobile phones and musical instruments—and charges larger sellers a monthly membership fee. Overall, the marketplace generates 9% to 12% of Amazon’s total $48.1 billion in annual revenue, according to analyst estimates.

Third-party sellers increased their unit sales by 60% in the first quarter, compared with a year earlier, and such sales now represent 39% of Amazon’s total, the company said.

Yet some sellers say they suspect Amazon uses sales data from outside merchants to make purchasing decisions in order to undercut them on price and give items featured placement under a given search, a prominent position on the page known as the “buy box.”

“There are countless items that they (Amazon) didn’t sell before that they sell now because of Marketplace,” said Brad Howard, president of Las Vegas-based CuffCrazy.com, which sells about $2 million annually of specialty men’s items like Darth Vader cufflinks.

Amazon declined to comment beyond its earlier statement.

Mr. Howard said Amazon recently began selling a Rick Steves brand travel bag that he believed it identified as a strong seller through its marketplace retailers. “It happens fairly regularly that Amazon finds a new product to sell themselves and when they do it’s pretty much impossible to compete,” Mr. Howard said.

Amazon will often list in the buy box the cheapest item under a given search, unless the company offers it itself within 1% of the lowest offered price, sellers said. Mr. Howard estimates 90% of customers purchase what’s in the buy box, rather than searching deeper within Amazon’s site.

Amazon is willing to lose money on the sale of some products and can drive down prices by buying items in larger quantities than many competitors, says Piper Jaffray analyst Gene Munster. That, in turn, can force third-party retailers to lower their own prices.

Some of these issues are set to grow as third-party sellers become an increasing part of the Internet retailer’s business. Within five years, third-party vendors could make up 55% of all Amazon unit sales, said Mr. Munster, up from 36% in 2011.

Some third-party sellers are already scaling back from selling on Amazon’s marketplace. Melissa Van Flandern, co-founder of Seattle-based Tottini, said she’s discouraged by Amazon’s constant price changes and is putting less inventory on the marketplace.

“It was great in the beginning, we got our brand out there,” said Ms. Van Flandern, whose baby products store generates about $500,000 in annual sales. But she pointed to a giraffe-shaped teething toy dubbed Sophie as one product Amazon capitalized on in the wake of third-party retailers. “We used to sell a ton of Sophies on Amazon,” she said. “Not anymore.” Tottini no longer lists the Sophie teething toy on Amazon.

Five Below, the Amazon-Proof Store

Retailer of items for $5 or less has nearly quadrupled its locations, including a new one in Manhattan.

Many retailers are closing stores. Five Below Inc. FIVE +1.69% can’t seem to open them fast enough.

The chain, which sells everything from Spalding basketballs to Bluetooth headphones and yoga mats for $5 or less, might be the most successful retailer you’ve never heard of.

By the end of this year, Five Below’s store count will have nearly quadrupled to 750 locations since its 2012 initial public offering, with its latest location opening Friday in Manhattan—the chain’s first in the New York City borough.

All that growth hasn’t cannibalized existing locations, which have posted sales increases in all but one of Five Below’s 25 quarters as a public company. Total sales over that period have nearly tripled to $1.28 billion. Profits are up roughly sixfold, and its stock has climbed 608% to $120.31 through Thursday’s close since the IPO.

Five Below uses a formula that has largely insulated it from competition from Amazon.com Inc. The chain keeps prices low by creating products from scratch with hundreds of suppliers around the world and sells them in an environment where children want to hang out. Its own e-commerce sales are so negligible the company doesn’t break them out; shipping often costs more than the entire purchase.

“Online is great when you know what you want,” Five Below Chief Executive Joel Anderson said. “When you walk into one of our stores, you will discover things you didn’t know you wanted. It’s like a treasure hunt. We’re the T.J. Maxx for kids.”

At 8,000 square feet, its stores are relatively small, making it easy to wander the mazelike floor plan grouped around eight categories: sports, technology, party, candy, style, create, room and now—the latter filled with seasonal products such as Halloween costumes or Christmas decorations.

Shelving is no higher than 5 feet, creating a comfortable space for preteens and teenagers who have outgrown traditional toy stores and are Five Below’s core customers. They are encouraged to bounce the basketballs, test-drive radio-controlled cars and participate in slime-making contests—anything that will help them spend their allowance money.

Five Below also has items for grown-ups, including cucumber face-masks, yoga mats, storage bins, greeting cards and vintage candy from Mike and Ike fruit-flavored chews to Goetze’s Caramel Creams.

Unlike other bargain stores like Dollar Tree or Family Dollar that focus on necessities such as laundry detergent and toothpaste, Five Below is the place to come to find things you didn’t know you wanted, such as squeezable foam toys called “squishies” that have gone viral on YouTube.

“It’s like a dollar store—but more,” said Steve Luvender, a 28-year-old web designer, who recently visited a Five Below near his home in Allentown, Pa., for Halloween decorations, including a shark costume for himself. “I wouldn’t have searched Amazon for that, but it was fun to pick up something unexpected.”

A study last year by KeyBanc Capital Markets Inc. found that a basket of 67 items was 52.6% less expensive at Five Below than on Amazon.com.

“No retailer is truly Amazon-proof, but they are in a better position than most,” said Bradley Thomas, a KeyBanc managing director of equity research. “You will save money if you shop at Five Below rather than on Amazon. Most retailers can’t say that.”

An Amazon spokeswoman said the KeyBanc study was flawed and misleading. “We continue to offer our customers low prices and incredible deals on a vast selection of products, in addition to fast and free shipping options,” she added.

When Five Below was founded in 2002 by David Schlessinger and Tom Vellios, the pioneers of the now defunct Zany Brainy toy chain, they had to come up with creative ways to keep prices low. Mr. Schlessinger left the company in 2015. Mr. Vellios remains chairman.

One breakthrough was to ship basketballs deflated without boxes, allowing more to fit in each container, which lowered freight costs. The balls are inflated once they arrive at the store.

“The No. 1 thing we like is they don’t get greedy,” said Chuck Grom, an analyst with Gordon Haskett Research Advisors. “They could have better margins, but they take that money and put it into better products.”

Keeping prices low is getting harder, because most of what Five Below sells is made in China and many of the products are subject to U.S. tariffs. The company is looking at ways to alter items to make them tariff-free, and it is considering moving some production to other countries. Mr. Anderson, a former Toys “R” Us Inc. and Walmart Inc. executive, said raising prices is a last resort.

It also is testing “Ten Below” sections in four stores that offer items such as wireless home speakers and skateboards for $10 or less, though company executives said the move is unrelated to pricing pressure.

Mr. Anderson said he sees a huge opportunity to pick up toy sales with Toys “R” Us Inc. out of the picture this holiday season. Five Below has added 20 feet of space to the toy sections in each store and is working with major manufacturers such as Hasbro Inc. and Mattel Inc. to get fresh products.

Five Below was one of the first to spot the fidget spinners trend last year, and it was early to the make-your-own slime craze, after one of its buyers noticed that sales of Elmer’s glue had shot up. (It is a key ingredient in slime.)

“Slime has been hot all year,” Mr. Anderson said.

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4 responses to “These Companies Are Succeeding Despite Amazon Or A Slowing Economy (#GotBitcoin?)”

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