A few years ago, if you had predicted that by the beginning of 2002, Amazon.com would be showing a profit and Kmart would be operating under bankruptcy protection, you would have been articulating something close to the conventional wisdom about the future of retail. Of course, if you'd said the same thing a year ago, you would have been laughed off the stage: Not that Kmart had attracted any particular legion of boosters, but no one was predicting the demise of "big box" retailing anymore, and Amazon was routinely described as a company whose "viability" was "uncertain."
But here we are at the beginning of 2002, and those things have come to pass. Does it tell us anything about the future of retailing? Well, it certainly tells us a few things about predictions about the future of retailing. Actually, as recently as Christmas day, the experts who follow and report on this sector pronounced that crucial retail season a total bust. As it turned out, many stores did quite well, including Wal-Mart and Target, among others. Apparently, Amazon.com did well, too. Kmart, however, did not.
I'll get back to Kmart in a minute, but first let's take a look at Amazon's recent performance, which was by far the bigger surprise in this week's retailing news. The surprise, specifically, was the reporting of a profit. It even did so if you use regular old accounting principles. Nevertheless, this good news came with a lot of asterisks.
Amazon had been promising for a while that it would show an operating profit in the fourth quarter using its own pro forma definition. Speaking broadly, "pro forma results" generally amount to an earnings number that leaves out "special" expenses like debt costs and so on. A story in the Journal yesterday referred to this as "earnings before all that bad stuff." I love that, so let's boil it down to EBBS, Earnings Before Bad Stuff, or if you prefer, Earnings By way of B.S. (Here's an earlier column discussing Yahoo!'s version of pro forma results, for more context.)
On an EBBS basis, then, Amazon was widely expected to report its first profit, although there was enough B.S. in the figure to make skepticism about its real meaning almost as widespread. One analyst was predicting that by standard accounting measures, the firm would post an $80 million loss for the quarter, whatever its EBBS showed. As it turns out, Amazon reported a net profit of $5.1 million by standard measures (and $35 million by EBBS measures). Both figures were a big surprise, and AMZN shares popped up by more than 20 percent.
But this all falls a bit short of a watershed moment in the history of retail. For one thing, Amazon's standard-rules profit depended in part on the weakening of the euro, which had a positive effect on its overseas debt payments to the tune of $16 million. Moreover, the company offered no standard-rules guidance and instead is encouraging analysts to continue focusing on its EBBS measures, as well as cash flow.
Despite those caveats, Amazon's surprising quarter is certainly the latest piece of evidence that the doom-and-gloom evaluations of this post-Sept. 11 holiday season were overdone—instead it was a season of winners and losers, and Kmart's losses stood out.
It was no secret that the chain was in trouble already. The consensus was that it either needed to be more like Wal-Mart or more like Target. In November, when analysts were still surmising that the slowed economy would have an across-the-board effect on retail, Kmart's credit rating came under review. The December numbers trickled in: Not just favorites like Wal-Mart and Target but even some underwhelming retailers like J.C. Penny saw same-store sales increases. Kmart didn't, coming in below its own modest sales target.
The interesting wrinkle at Kmart is that in early January it got hit with a sell rating by a Wall Street analyst who said the firm might well be headed for Chapter 11. The company was soon scrambling to arrange new lines of credit, and of course the fact that its stock was taking a beating on rumors of a pending bankruptcy didn't help. You could argue that the sell call was prescient, or you could argue that it was an example of releasing rumors into the market that, in this case, became a self-fulfilling promise—sort of a reverse of Henry Blodget's famous bullish call on Amazon.com shares back in 1998, when he set a high price target and AMZN promptly blew right through it, largely because of the call itself.
That incident, actually, was exactly the sort of thing that had people predicting that Amazon was the future of retail, period. But if the latest round of news about Kmart should teach us something, it's not whether that prediction was right or wrong, but that it was always misguided. The soothsayers always talk as though there is One True Answer to the question of how to make a retail company work. It's selection! It's discounts! It's specialization! It's image! Etc. Does this really make sense? Wal-Mart has found a way to succeed, and Target has found a different one. It's even possible that Amazon has done it, too. Maybe the lesson there isn't that there's One True Way to succeed, but rather that there are many. What matters to Kmart isn't finding the secret to the future of retailing—it's finding the secret to the future of Kmart.