Can the Apple Watch Save These 2 Ailing Retailers?

By Rich

Retailers have reason to be glum about the coming Christmas sales season. The National Retail Federation estimates sales will grow just 3.6% this year, higher than last year's 3.2% increase and above the 10-year average of 2.5%, but down from 4.1% two years ago. It's not helpful either that the NRF had forecast Christmas sales would rise 3.7% in 2015; consumers may disappoint them once again.

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That spells trouble for the weakest retailers in the industry, and when retail feels down, it tends to turn to tech to save it. Coming out of the recession, we saw tech gadgets like tablet computers, smartphones, and e-readers pop up in unlikely places, like big box DIY store Home Depot selling big-screen TVs.

Now we see them latching onto wearable technology such as Fitbit (NYSE: FIT) andApple (NASDAQ: AAPL) with its Apple Watch for salvation.

A tech tuneup

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In recent weeks two particularly troubled retailers each announced they would be going all-in for tech using Apple as the conduit,Kohl's (NYSE: KSS) started selling its new smartwatch at 400 of its 1,100 stores last week, while Macy's (NYSE: M) was putting Apple boutiques in 180 of its stores including one of the very first Apple store-in-a-stores inside its flagship Herald Square location.

With the Apple Watch 2 having hit shelves in September, the belief is that thewearablewill instill excitement into otherwise stodgy department store chains. With weak sales leading into the Christmas holiday, the Apple Watch, which dominates the smartwatch segment with a better than 33% share of the market, could be the sleigh they ride to reignite growth. But theymay have backed the wrong horse: it's not just the retailers that need a sales spark lift; the smartwatches themselves can use one, too.

Image source: Fitbit.

Only time will tell

On the surface, the industry looks healthy. Industry analysts at Kantar Worldpanel say 47% of global wearables sales occurred in the U.S. with more than 15% of U.S. consumers owning either a smartwatch like theAppleWatch or a fitness band such as the ones made by Fitbit. And for those consumers that don't already own a wearables device, 9% plan to buy one within the next year.

That is data seemingly backed up by research from IDC, which found second quarter wearables growth jumped 26% year over year.

But there's a catch. Growth is not even, and though the IDC data shows that the overall wearables market is expanding like the Kantar research indicates, it finds the two segments comprising it -- "basic" and "smart" -- are heading along divergent paths.

A basic truth

Basic wearables like the Fitbit grew 48.8% from the second quarter of 2015 while the smartwatch segment plunged by 27%. Certainly there was some hesitation from consumers who were waiting for the next iteration of the Apple Watch to drop, so they held off on making a purchase, but basic wearables account for almost 83% of all wearable devices shipped during the quarter meaning consumers have voted with their dollars on what they want to buy.

Kohl's and Macy's may have thought it would be cool and trendy to partner with Apple for its pricey watch, but the consumer is looking more at the wide selection of basic devices that are available and give them a defined use at an attractive price. Smartwatches have potential, but consumers can buy the latest Fitbit for under $50 compared to the $369 the Apple Watch starts at -- and goes up to more than $1,200. Those lofty prices compared to their functionality keeps them from being a must-have item.

Image source: Getty Images.

Further, the Apple Watch 2 doesn't really offer much more than the 1.0 version, especially if you already own an iPhone. If you don't have the latter then maybe the latest model's GPS capabilities give it something of a draw, but there was no killer app ooh-aah moment when it was released.

Getting in shape

Fitbit continues to lead the overall wearables market with a 25% share, followed by China's Xiaomi, which makes the Mi Band 2 fitness band, at a 14% share. Apple comes in a distant third at just a 7% share of the overall market, barely ahead of Garmin at 6.9%.

Kohl's and Macy's may have thought they'd benefit from the halo effect of having Apple boutiques in their stores, and that its smartwatches would add an element of coolness to their otherwise mundane operations, but that's not the real problem for retail.

A holdover from the glory days of mall shopping, retailers like Kohl's, Macy's, and J.C. Penney are simply overstored. They've belatedly realized this and have begun closing down in earnest underperforming locations this year -- Macy's alone is shuttering hundreds of them -- but that's not something a simple smartwatch can cure.

Just as TVs didn't help Home Depot and cellphones didn't save RadioShack or put Target back on track, I wouldn't count on Apple saving Christmas for the department store chains.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple and Fitbit. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.