Retailers are facing a puzzle.
Theoretically consumers should have more money in their pockets from low gas prices, low unemployment, and increasing (slowly) wages.
Despite all of these tailwinds, retail sales have been reporting generally disappointing earnings.
So why are many traditional retailers flailing given favourable economic trends?
According to Michael Kors CEO John Idol it comes down to one thing: online sales.
“[U]nfortunately today, e-commerce generates a lower operating profit for us than four-wall brick-and-mortar,” he said during his company’s quarterly earnings call Tuesday.
Idol added, “We think over time, that will reverse itself, but, as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there’s a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us.”
It’s pretty simple: there is a systemic shift from buying in-store to online shopping. And for retailers, online shopping is a money-losing hassle for retailers that customers love. And customers expectations — consider the “order four sizes, try them on, and send three back” plan Idol lays out — are only getting higher.
Amazon, the giant of online retail, has always had razor-thin margins. Additionally, the margins at many retailers are facing pressure for a variety of reasons, but not the least of which is the difficulty of online order fulfillment.
Michael Kors’ operating margins, for example, decreased 2.5% from their third quarter last year. Idol, and other CEOs, have said that this shift is necessary to preserve their business, but there are obviously growing pains. And for investors, lower profits.
Overall, however, investors cheered Michael Kors’ quarter as the company beat expectations and the stock jumped 24% on Tuesday.
Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.
Business Insider Emails & Alerts
Site highlights each day to your inbox.