April 13, 2014

Hillstrom's Retail Nightmares: Coldwater Creek


Maybe you can tell - I am ANGRY about this. ANGRY!

The story of Coldwater Creek is the story of an investment-based color-by-the-numbers "multichannel / omnichannel" strategy designed to achieve "scale". Well, "scale" was achieved ... there is no shame in a business that nearly generates a billion dollars.

The sadness, of course, is that scale was achieved, but in turn, the business was destroyed. Scale without profit is pointless. We've all learned that humble profits are lasting profits.

Let's walk through a series of graphs.

Here's the first graph. This graph shows us how retail net sales and direct (online + catalog) net sales evolved over time.


We've been taught that direct grows nicely in a retail environment. 

We've been taught incorrectly.

Coldwater Creek financials show us that the catalog investment was a big, fat, juicy line on the expense statement. Over time, retail growth was fueled by debt. And, by a reduction in catalog mailing strategy.


Compare this graph to the number of stores, by year. Tell me what you observe.


I'm not saying that catalogs should be mailed in perpetuity - heck, I spend a ton of time reducing catalog mailing expense for my clients (quite profitably, I might add).

But the shift to retail brings about two pressures.

  1. Reduced catalog expense to fuel retail.
  2. Reduced gross margin percentages to gain retail market share.
Gross margin means everything. It's the foundation for business. Gross margin dollars fund marketing, they fund corporate expenses, and gross margin dollars generate the profit that allows shareholders to either increase value or realize gains via dividends. The best managed businesses find a healthy equilibrium between gross margin rates and growth.

Here's what happened to gross margin percentage at Coldwater Creek.


By the way ... do you see the gross margin bubble in 2005, 2006, and 2007?

  • Feb02 - Feb04 Total After-Tax Profit = $23 million.
  • Feb05 - Feb07 Total After-Tax Profit = $126 million.
  • Feb08 - Feb10 Total After-Tax Profit = ($84) million (loss).

Gross margin means everything.

In the 1996, Coldwater Creek was a modestly-sized catalog brand with 57% gross margins and 10% pre-tax profit.

In 2014, Coldwater Creek evolved into an "omnichannel" brand with 31% gross margins, and is bankrupt.

You cannot blame this on the economy. Gross margin percentages were in free fall from the time of the IPO (early 1997) through current - you can fit a nice regression line through the relationship in the gross margin map, don't you think?

Do you understand how critical gross margin dollars are to a business? Let's say you are a $750,000,000 business generating 31% margins - and you have a 20% ad-to-sales ratio (marketing), and 10% of sales are required to cover fixed costs and administrative costs.

  • $750,000,000 sales.
  • $232,500,000 gross margin dollars.
  • $150,000,000 marketing costs.
  • $75,000,000 fixed costs.
  • $7,500,000 profit.
Now let's look at a business with the same marketing costs, same fixed costs, but a business generating just $500,000,000 net sales at a 57% gross margin.
  • $500,000,000 sales.
  • $285,000,000 gross margin dollars.
  • $150,000,000 marketing costs.
  • $75,000,000 fixed costs.
  • $60,000,000 profit.
The first business is a 1% pre-tax profit business that will die the minute a 5% shock hits the system.

The second business is a 12% pre-tax profit business that can withstand myriad challenges.

That's the power of gross margin.

I know, I know ... "your business is different" ... or ... "your customer is different" ... or ... "your competition is different" ... or ... "your pricing strategy is different" ... or ... "your customer buying cycle is different".

Stop it.

Just stop it.

We are trading fundamentals for fantasy.

Did Coldwater Creek not follow the MBA-inspired, research-brand advocated, Wall St. enabled multichannel / omnichannel playbook to the letter? Bricks 'n clicks! Multichannel customers are worth 9 times as much as single channel customers!

Coldwater Creek followed the playbook to the letter. And if multichannel/omnichannel customers were truly worth 9 times as much as single channel customers, then Coldwater Creek should be a three billion dollar monster generating three hundred million dollars of profit.

Right?

The playbook led them to bankruptcy.

Might it make sense to sell merchandise customers love, at healthy gross margins?