Last April, my RSR partner Paula Rosenblum and I authored our annual benchmark report on the state of retail pricing, and in that study we identified a paradoxical set of findings, particularly as relates to U.S. retailers: while “maximizing gross profits ” was considered the top objective for the pricing strategy, few retailers felt that their pricing strategies were “very effective “. Delving deeper into the survey responses in the study, it was easy to identify the source of the apparent disconnect: the number of price changes continued to rise as retailers strove to win sales. Our conclusion was that “Sooner or later, the industry must shift to fewer, more strategic price changes. “

Well, it’s an old truism that “anyone can give merchandise away “, or as my boss Longs Drugs CEO Bob Long once said to me, “being the low price leader is easy – you just have to be willing to take the hit. ” And there has been ample evidence over the last several years that retailers were taking a lot of hits to their profitability as they tried to respond to information-enabled, impatient and disloyal consumers. In our 2013 benchmark report on pricing strategies, my partners Paula and Nikki Baird noted that, “…the data tells us that while some retailers have succeeded at high stakes promotion wars driven by the self-fulfilling prophecy of consumer price sensitivity, others are failing – sometimes spectacularly – even as the shopper becomes more and more accustomed to ever more dramatic and frequent promotions. “

Well, we are now in the throes of the earnings report season after yet another tumultuous 4^th quarter of aggressive holiday promotions, and so we have an opportunity to see how retailers are doing in achieving their objective of “maximizing gross profits ” and winning sales. As a baseline for top line performance, the U.S. Department of Commerce reported in February that total retail sales in 4Q 2014 increased 3.2% overall, and all-2014 increased 3.8% over 2013 (with E-commerce sales continuing its march towards critical mass, accounting for 6.5 percent of total sales compared to 5.8% in 2013). A further breakdown of 4Q sales lift over the same prior year period by a sampling of verticals is as follows:

• Building material & garden eq. : 7.5%
• Clothing & clothing accessories: 3.6%
• General Merchandise stores: 1.9%

Retailers Are Adjusting

Here’s a sampling of some of the reported results. Generally, it should be noted that many retailers did achieve top line lift, although sometimes they were modest compared to the overall U.S. government numbers mentioned above. For my sampling, I took a look at 4Q revenue growth, cost of goods sold and gross margin percentage, and SG&A (sales, general, and administrative) numbers to get a sense of how the retailers are generating operating income. Of course, the bottom line is affected by all kinds of expenses such as interest, one-time writedowns, etc., but I’ll leave all of that to the professionals to mull over – what I was interested in are numbers that show how operations are doing.

Here’s the sampling:

Walmart

You can’t have a discussion about U.S. retail without mentioning Walmart. The company has been in the news a lot lately because of it’s announced pay raises for employees as well as recaps of CEO Doug McMillon’s first year at the helm. The company’s recently reported 4Q results compared to prior year 4Q are as follows:

• Top line sales: up 1.4%
• Gross margin percent of sales: up 0.84%, from 23.9% to 24.1%
• SG&A as a percent of sales: down 0.74%, from 18.9% to 18.8%

What it means: Walmart saw very modest increases in sales and raised its GM%, indicating “smarter ” pricing, while squeezing SG&A (as the company is famous for doing). The result was a healthy 8.2% increase in operating income. But one has to wonder how long the company can find bottom line earnings improvements through efficiencies instead of sales? Holy cow- I’m beginning to sound like Jim Cramer!

Macy’s

Macy’s has been the darling of omni-channel retailing ever since CEO Terry Lundgren’s endorsement of “anytime/anywhere ” shopping several years ago. And the company recently upped the ante by announcing a significant restructuring of its marketing and merchandising functions to better support its omni-channel agenda. So let’s see how it’s going! Its recently reported 4Q results compared to prior year 4Q are as follows:

• Top line sales: up 1.8%
• Gross margin percent of sales: down 0.74% from 40.6% to 40.3%
• SG&A as a percent of sales: down 0.8% from 25% to 24.8%

What it means: for all of its promotional activity in 4Q, Macy’s achieved only modest increases in top line sales, but eked out enough new money to cover impairment charges and some store closings. So essentially the company managed to maintain a “flat ” operating income.

Target

Walmart’s arch-rival Target has been in the news for all the wrong reasons, starting with the data 4Q13 data breach and all that followed. But the company is working hard to get back on the right footing. Its recently reported 4Q results compared to prior year 4Q are as follows:

• Top line sales: up 4.1%
• Gross margin percent of sales: up 2.9% from 27.6% to 28.4%
• SG&A as a percent of sales: down 1% from 18.8% to 18.7%

What it means: Target achieved a nice bump in sales and margin, beating out its rival in percentage improvements (but obviously not real dollars). Like Walmart, they continued to focus on SGA efficiencies. The battle rages on.

Nordstrom

Nordstrom is a retailer that epitomizes the terms “well managed ” and “service oriented “. The company’s successful implementation of an enterprise-wide retail ERP in the mid-2000’s positioned the company for future growth in the digital space, even if at the time the retail industry didn’t yet have a notion of the omni-channel shopper. The company very quietly ended its famous half-yearly sales in favor of six clearance events per year, with the first such sale occurring last September (this change essentially implements a more traditional markdown cycle at the retailer). So how is Nordstrom doing? It’s recently reported 4Q results compared to prior year 4Q are as follows:

• Top line sales: up 9%
• Gross margin percent of sales: up 2.1% from 37.2% to 38.3%
• SG&A as a percent of sales: up 1.1% from 26.4% to 27.5%

What it means: Now this is interesting! Nordstrom boomed in sales (and achieved an improved GM%) but spent more on SG&A as a percent of sales to get there, presumably in sales associates. These numbers tend to reinforce the feeling that Nordstrom focuses on service as the way to win customers’ loyalty.

JC Penney

Penney was given up for dead after CEO Ron Johnson’s departure in 2013. But the company re-plotted its course and has been working back to its historical reputation of affordable fashion and a bargain hunt. I was recently struck by their how “hip youth oriented ” their latest TV ads are – clearly they are ready to fight for their fair share. Penney’s recently reported 4Q results compared to prior year 4Q are as follows:

• Top line sales: up 2.9%
• Gross margin percent of sales: way up, 18.7% from 28.4% to 33.7%
• SG&A as a percent of sales: down 0.15% from 26.55% to 26.51%

What it means: JCP isn’t going away any time soon, all you doomsayers!

Home Depot

Home Depot has gotten its moxie back following the departure of CEO Bob Nardelli several years ago. One can’t help but to be struck by how service oriented the retailer has once again become, post Nardelli’s questionable attempts to implement GE-style efficiencies in what had once been a premier service-oriented retailer. So one would expect weekend warriors like me to once again feel welcomed there, and are rewarding the company with sales. Let’s see how “average ” I am. H-D’s recently reported 4Q results compared to prior year 4Q are as follows:

• Top line sales: up 8.3%
• Gross margin percent of sales: up 2.6% from 35.0% to 35.9%
• SG&A as a percent of sales: down 5.3% from 22.74% to 21.53%

What it means: Wow. Nice job! Where can I find the LED light bulbs?

What It All Means

There are still a lot of earnings reports left to sift through, with many retailers reporting in March and beyond. But when comparing our sample results to what we had been seeing in our Pricing reports for a few years, it does look like retailers are finding a new balance point between meeting the demands of today’s savvy consumers and making a decent profit. This new balance is aided by two trends: first and most obviously the Great Recession (in the U.S. at least) is fading from view; and secondly, retailers are figuring out how to effectively interact with today’s hyper-informed consumers and so they don’t have to “buy ” sales by giving merchandise away. That’s good news!