Here's a simple explanation for why the retail business is brutal (XRT)

Retail is a tough business.This week, the retail sector got hammered, notably Macy's and Nordstrom, which saw shares crash.Macy's stock fell 14% on Wednesday after reporting disappointing third-quarter results. After the market closed on Thursday, Nordstrom shares were down as much as 16%, as the company's earnings widely missed expectations and its outlook for next year was also lowered.And on Thursday, Twitter user Modest Proposala great Finance Twitter follow for people looking to learn more about how to think about investing, particularly media companies and stocksexplained succinctly why retail is a brutal business."Retail has high fixed costs, high working capital intensity, fickle customers, low barriers to entry," theywrote, calling the sector a case study forthe worst-possible business.On Thursday, they added that this is something to remind yourself as an investor any time you think the sector looks "cheap." This means that as, say, a multiple of earnings to share price, the sectorlooks relatively attractive against other investable opportunities.But so the original point made neatly breaks down the elements of why retail is a brutal business.As a traditional brick-and-mortar retailer, your fixed costs are numerous. You've got to have the physical space, inventory, personnel, and supply chain to keep the whole system running.These costs are also variable over timenamely, all of these things tend to getmore expensive. That means you need to keep shoveling profits back into the business to maintainyour profit margins or market share. There's your high-working capital intensity.Andas Modest noted, consumers are fickle. One day people want to buy Abercrombie, then next yearit's American Apparel, and then the year after that it's something we don't even know about yet.The American consumer is a powerful forceconsumer spending accounts for about two-thirds of GDPbut also a force that is hard to predict and harness.So in retail, you're basically making a four-sided bet that you can keep your costs low(ish), your inventory fresh, and your (hopefully growing base of) customers happy and stay nimble enough to stave off upstart competitors.That's a big bet.SEE ALSO:Nordstrom crashesJoin the conversation about this storyNOW WATCH: The killer jobs report could mean a rate hike in December
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