Former Toys R Us CEO Gerald Storch on his outlook for retail following April's retail sales numbers

Gerald Storch, Storch Advisors CEO and Former Toys R Us CEO, joined Yahoo Finance Live to discuss the state of retail.

Video Transcript

ADAM SHAPIRO: We've been talking a lot about earnings. And of course, we're going to get retail earnings tomorrow. We've got before the bell Home Depot and Walmart, and then we've got Lowe's reporting on Wednesday. Let's talk to an expert when it comes to retail sales, Gerry Storch from Storch Advisors, the CEO, was the Toys R US CEO, as well as the former Hudson's Bay CEO. It's always good to see you, Gerry.

And when we talk about this reopening of the economy and retail, it's a different discussion for those who have integration with internet and those who are more brick and mortar. Do you have any expectation, for instance, what we might see as we start to get the earnings reports from, say, a Walmart versus a Macy's? You see where I'm going here, but, like, with Walmart.

GERALD STORCH: Well, you know, it always depends on what you're comparing from to. So Seana mentioned earlier, it's been widely reported that retail sales were flattish in, you know, in April. And what they really meant is compared to March. But they weren't flat by any stretch of the imagination. The sense that they were up 50% year over year, and, you know, last year was terrible, right? And on a two-year stack, retail sales were up 20%. It's phenomenal, actually, how well retail sales are growing. So it all depends on what you compare it to. And what we're seeing is more of a return to the patterns that existed before the pandemic.

So for all the talk, oh, clothing's back, department stores are doing great, that kind of thing, sure, if you compare them to a year ago when they were essentially closed. But of all segments, if you look at that two-year stack, i.e. pre-pandemic period versus now, department stores were still down 8% over that two-year period. So that's a compound rate, so it's really 15% in total for the two years.

So what we're seeing is the winners from before will continue to be the winners. That would be Walmart, Target, Home Depot, Lowe's, Costco, Dollar General. These companies are going to continue to thrive. I can't tell you whether tomorrow's number is going to be viewed as good news or bad news for short-term traders. I can tell you over the long-term, these names are going to continue to distance themselves from people like Macy's, like Kohl's, like all the apparel players who continue to struggle in absolute terms.

SEANA SMITH: Gerry, how much of the stimulus money do you think is driving the action that we're seeing most recently? I mean, do you think it's still a big factor, or we kind of have-- have we moved beyond that, at least right now?

GERALD STORCH: No, I think it's still a factor. That's why you have these numbers. I said, these are-- if you take what I said before, this 20% increase in a two-year stack, you know, which is what's happened to retail sales, that's phenomenal. Again, that's almost a 10%-- it's a 9.7% compound growth rate. If you take the two years, that's what it would have been. It didn't happen that way. It went down, and then it went way up, right? But that way up is being driven, at least in part, by stimulus.

You'd think a more normalized retail growth might be 4%. And you consider that healthier 5%. And we're seeing 9% plus. So that difference is what I describe to the stimulus and sort of a little bit of pent-up demand. So, certainly, has driven some of it. But fundamentally, sales remain strong in the categories you'd expect them to be strong. And the big winners continue to be, you know, home, building materials, Lowe's, and I'll give it. These are phenomenal increases that we've been seeing month after month after month. And I would expect those to continue for quite a long time.

ADAM SHAPIRO: Gerry, I want to ask you a question of how you would advise retailers, especially as cities reopen. We just got the news about New York City removing the mask mandate. And one of the sad things still is to walk by block and block and block of empty store. So how would you advise retailers to either capitalize on that? Or is it time to say goodbye to big cities?

GERALD STORCH: No, the cities will come back, just like they always have. People still want to live there. They still-- you know, people are going to return to work. The companies that that I work most closely with, they said there's some resistance on employees' part about going back to work, partially driven by ongoing sort of lingering fears of a pandemic and partly because people really like working from home. But over the long-term, that simply doesn't work. You know, people do need to come back to the office. And they will. And so, cities are going to continue to thrive. So I wouldn't worry so much about that.

I think the bigger question is who the winners are going to be and the losers are going to be in the future. There's no doubt the internet gained two or three years' worth of growth in one year. And it will be two steps forward and one back, so they won't keep all of that. But they've got to keep a lot of it. I was really interested in seeing the internet growth was still 15% year over year in April. And that's versus a period when stores had been closed in the prior year, you recall, when there was phenomenal growth.

So the internet continued to outpace retail sales as a whole. So therefore, that is a shift that you have to think is permanent. The shift towards home and away from apparel, I think that's a permanent shift. I think people have changed how they view about their consumption expenditures more into casual, lower-priced apparel, more to sports, more into some of the other-- you know, fixing up their home, more into your car. Cars are grown phenomenally during this period. It's just there isn't a lot of inventory, or else, it would have been even more astounding.

So I think we're seeing some permanent shifts take place. It's a little bit like we sailed into a storm. We sailed back out again. Many of the trends that were taking place before have been accelerated and continue as we go forward. And there's a few of these new things, like more of a focus on home, more of cocooning, those kinds of things, more on staying healthy, you know, sports, that kind of thing. But generally speaking, we find that the ship entered the cloud in one direction. It's exiting in a quite similar direction to what it entered.

SEANA SMITH: So Gerry, what does that mean for retailers who have already seen a staggering number fail over the past year? It sounds like many are still in not an optimal position as economies do reopen. Are we going to see more and more retailers continue to fail over the next several months and potentially several years if they don't meet these necessary changes?

GERALD STORCH: Yes, but not now. So what we're seeing is that it's a little bit like when you enter a rough period in the economy. You get a shakeout. A lot of people go bankrupt. We have some of that last year. We had a lot of that, obviously, during the last economic recession, last slowdown that we had. So but the ones that made it through, they have time now to get their balance sheets in order. And this period where all boats are rising-- because, basically, all boats are rising right now. Their economy is so flush, and people are spending freely.

So, during this period, they have a chance to put themselves back in order and sort of to defer the inevitable by some period of time. And some of them will make it out. Others, they're going to see, when you get a year or two down the line here, they're going to be back in the soup, you know, back with the same problems that they have. I just don't see the level of traffic returning to mall-based apparel retailers that we saw in the decade leading up to the pandemic. You know, that trend had have been, you know, only getting worse for malls. Remember all that talk before the pandemic. And nothing fixed it. It didn't get better just because the pandemic is ending. Those problems still stay. So there will be more bankruptcies, just not.

ADAM SHAPIRO: How fast will the acceleration be to eliminate the duplication? I mean, I can get the same thing at Sears that I can get at JC Penney's that I can get at Macy's.

GERALD STORCH: Well, I don't know what you can get at Sears anymore, you know, but there aren't many of them left. But and JC Penney, you know, I guess, their theory is that they can lower the expense rate enough that no matter what happens to sales, they'll still do OK. I don't think that works. I think you find out that you keep declining. So I think these department stores are in big trouble. As you point out, they sell the same thing you can get anywhere. You can get it online.

Having gone through the pandemic and out the other side, it gave the brands every excuse they need to sell to Amazon, to sell to other online retailers, and basically tell their traditional customers, I can't-- you know, I couldn't count on you during a pandemic. I got to live. I got to thrive. And so you see great success coming in cosmetics brands. They were the hallmark-- Estée Lauders, they were the hallmark of department stores. Now they don't have to be loyal to them anymore. And whatever glue used to be there to hold them to the older channels, that doesn't exist anymore.

So I think it's just going to accelerate. It's just going to continue. You know, there's going to be a breathing space here because the economy is so flush. And I laugh. Really, I said before, when they said that sales slowed in April, that is the most ridiculous way of looking at it. I can imagine, you know, compared to the first month when people really saw a breather in the pandemic in sales boom. To say they slowed, even though there were up, you know, 50% year over year, is ridiculous.

So it's just the pace of-- you know, it's like, [INAUDIBLE]. So we're going have a very flush period here. Any retailer that can't make it through this year isn't selling anything anyone wants to buy. It's just when you get to years two and three, that, to answer your question, is where are you going to see major shakeout again.

ADAM SHAPIRO: Gerry Storch, always good to see you. Gerry Storch is also the CEO of Storch Advi--