Insight

Retail viewpoint: Your lack of activist appeal might be telling you something

June 25, 2018

Core US retail sales improved by 0.7% last month, the biggest advance since November 2017.¹ Meanwhile, clothing stores saw sales rise 1.3%, the largest gain since March 2017.¹ The picture wasn't all sunshine though, with stores selling sporting goods, books, music, and home furnishings seeing sales decrease.¹

As the numbers below the surface suggest, it's a tricky time for retail, and lately one that activist investors see as an opportunity.

In spite of some notable and high-profile challenges, retail has been a hot industry for activist investors for the past decade. Activity has ramped up significantly, with 23 activist campaigns against retailers since the beginning of 2017.²

As you would imagine, a few trends draw activist attention. Typically, an activist target will exhibit:

A declining share price
Steep drops in margins and profitability
Real estate holdings; or
A portfolio of businesses or brands that could be valuable.

While some see activist involvement as an attack, when looked at another way these investors actually think there's hope for the companies in which they invest. They put their money to work to try to prove it – and they generally do. Across just these 23 campaigns, target retailers' stock prices have increased an average of 41% from the activist campaign date through June of this year.³

So why do so many underperforming retailers congratulate themselves for NOT being sought after by activists? The point is, many retailers, and especially their boards, should actually be worried if they don't have activists circling. Are you one?

If so, the most important question to ask yourself is why your company is being overlooked.

For many, the harsh reality is that activists have judged you a "lost cause." Without fundamental value tied to hard assets like real estate, the market could simply be expecting you to fail – maybe not this year, maybe not next, but over time, your underlying business model offers sufficient reason for doubt.

Nobody likes to look at themselves that way, of course, but when viewed through that lens, it's time to galvanize and figure out what to do about it.

The choice is yours: You could view this situation as either disheartening or liberating. Liberating, how? Certainly avoiding activist pressure can be a relief; activist situations can, and often do, take contentious turns. But that does not mean you should be complacent, avoiding more decisive action and bigger risks than perhaps you would otherwise take.

In other words, think like an activist.

There are lots of options out there – virtually no retailer is truly a lost cause if you start thinking like an activist early enough. Consider adopting non-traditional approaches. Kohl's did, and since announcing a deal with Amazon to accept the online giant's returns in store, Kohl's stock price is up more than 70%.

Or make a bold acquisition. Target's stock price increased 25% since it acquired Shipt in December 2017, enabling ship-from-store for same-day delivery.

What other radical steps might you embrace to take advantage of this newfound freedom?

Re-orient around the customer experience. From product design to marketing, every decision should be taken through the lens of how it makes the customer experience better.
Re-organize around a "digital first" mindset. Jettison the separate stores and e-commerce teams and P&Ls in favor of a fully-integrated operation – with incentives aligned to ensure it sticks.
Shift as much cost as possible from fixed to variable. The future is uncertain; don't let fixed costs be a liability.
Focus and simplify. Non-core functions and businesses should be out-sourced, sold, or closed. Point all your firepower at what makes your brand or company different.

You've heard of being your own best friend in life... in retail, you might want to consider being your own best activist. In the end, they might just be the same thing.

DATA PACK

For our complete data pack of retailer and macroeconomic data including many of the key economic indicators discussed above, please contact retail@alixpartners.com.

¹ Seasonally adjusted May retail sales exclude motor vehicles, gas, food services, and drinking places. census.gov/retail/marts/www/marts_current.pdf.

² Source: Activist Insight; Retailers and activists: 1) Burberry (activist: Livermore partners), 2) Rent-A-Center (activist: Engaged Capital), 3) Tiffany (activist: JANA), 4) Tesco (activist: Artisan Partners), 5) Rent-A-Center (activist: Marcato Capital), 6) Etsy (activist: TPG), 7) Avon (activist: Barrington Capital), 8) Whole Foods (activist: Jana), 9) HBC (activist: Land and Buildings Investment Management), 10) Deckers (activist: Marcato Capital ), 11) Burberry (activist: Royal London Asset Management), 12) Abercrombie & Fitch (activist: SLS Asset Management), 13) Dillard's (activist: Snow Park Capital Partners), 14) Barnes & Noble (activist: Sandell Asset Management), 15) Cars.com (activist: Catalus Capital Management), 16) Supervalue (activist: Blackwells Capital), 17) Ingles Markets (activist: GAMCO), 18) Casey's general stores (activist: JCP Investment Management), 19) Cars.com (activist: Starboard Value), 20) Lowe's (activist: DE Shaw), 21) Dufry (activist: Elliott), 22) Destination Maternity (activist: NGM Asset Management), 23) Lowe's (activist: Pershing Square Capital)

³ Sources: Activist Insight for activist campaign dates and stock quotes sourced from publicly available data