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Where Will Retail Industry’s Next Layoffs Be?

Douglas A. McIntyre

Wal-Mart Stores Inc.'s (WMT) Sam's Club apparently laid off 2,300 workers. Walmart has more than one million workers in the United States, so the number is relatively small. However, there are indications, with holiday numbers in, that several other large retailers will have to cut stores and staff, and that some of these cuts will be large.

The most likely candidates for large numbers of layoffs are J.C. Penney Co. Inc. (JCP) and Sears Holdings Corp. (SHLD), because they are so badly ruined. J.C. Penney still has more than 1,000 stores, many of which must lose money. Sears has over twice that many. Based on current sales trends, these numbers of locations are not sustainable.

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But the two retailers are not alone -- not even close. The CEO of American Eagle Outfitters Inc. (AEO) left recently. That is almost certainly a sign that holiday sales were weak. Lululemon Athletica Inc. (LULU) released numbers that show that it may have too many locations. Best Buy Co. Inc. (BBY) also surprised investors who have driven the stock up sharply, which showed its progress over the past year is a mirage.

The fact of the matter is that even store chains that held their own in late 2013 become less likely to hold their own each year. This observation is old, but worth repeating. Brick-and-mortar stores face two ruinous trends. The first is e-commerce, which has lifted Amazon.com Inc. (AMZN). The second may be more threatening. American consumers have not jumped out of the recession robustly. If their current caution remains for another year or two, retailers have no way to combat it. Price cuts do not appear to have driven store traffic over the holidays. If price reductions are not a hook, what other leverage do retailers have?

In one respect, retail is like every other consumer-driven industry. When the consumer disappears and cannot be lured back into the market, cutting company expenses is all that remains in an effort to dig in to survive.

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