For Department Stores, the Dilemma Continues

Major US department stores from Macy’s to Kohl’s mostly delivered better-than-expected Q2 results on Thursday, but results of a single quarter can't mask the challenges still facing the sector.

While topping expectations, Macy’s same-store sales fell 2.8%, the 10th straight quarterly drop. At Kohl’s, they dipped 0.4%, following drops in at least each of the past five quarters. While Nordstrom delivered a surprise positive same-store sales gain of 1.7%, led by the 3.1% increase in its discount Nordstrom Rack chain, the increase also followed declines in at least four of the past five preceding quarters. All three of them saw profit, excluding one-time items, declined. 

The one notable disappointment, Dillard’s, swung to a surprise loss after the company had to increase profit-eroding discounts. Dillard's Q2 comparable sales dropped 1%. Gross margin from its retail operations narrowed by 2.35 percentage points.

JC Penney, scheduled to report its Q2 results on Friday, is expected to see a same-store sales drop of 2.2% while analysts projected Sears Holdings, which also owns Kmart discount chain, to see a 9% slide, according to Retail Metrics data.

Even though there are variables separating department-store retailers’ performances, the underlying challenges facing the sector are similar: many of them, especially those with more stores in the so-called mid-tier malls, are hurting from declining mall and store traffic, partly a result of increased online sales. RetailNext data showed that through July, sales and traffic at US brick-and-mortar stores have declined each month since at least January 2014. Both Macy’s sand Kohl’s, for instance, said on Thursday Q2 traffic declined.

Department stores themselves also have failed to keep up with fast fashion rivals like Zara. They also have shot themselves in the foot with frequent promotions and one-day sales.  

Meanwhile, shopper attitudes are changing: More shoppers tend to want to feel that they scored a bargain, rather than buy a name brand at full price. And many are opting to cut back on purchases of material goods altogether, choosing instead to focus on travel and other experiential purchases.

“We operate in an environment of intense and disruptive competition,” said Macy’s new President and CEO Jeff Gennette on a call Thursday, adding the company will continue to be "very promotional." 

Department stores including Macy’s, JC Penney and Lord & Taylor and Saks parent Hudson’s Bay have all announced store closings or job cuts and are experimenting with various initiatives to boost sales and traffic. They also are seeking to turn their physical stores into advantages when it comes to online sales. Kohl’s, for instance, in a move similar to Walmart’s Pickup Discount unveiled earlier this year, is testing a feature that allows its online shoppers to save money when they choose to pick up goods in stores versus having them shipped to home.

“We believe that can lower costs and also improve brick-and-mortar traffic at the same time,” Kohl’s CEO Kevin Mansell said Thursday. “We believe that physical stores are a source of strength in an omnichannel world.”

Kohl's in October also will open four new smaller stores, averaging about 35,000 square feet and a little more than a third the size of its average store, in “more dense trade areas.” “That concept is gaining traction from both sales and operational aspects,” he said.

It’s not just department stores. Retailers like Target are also expanding their smaller concepts like CityTarget in urban markets.

To dissuade shoppers from going to the likes of TJ Maxx or Nordstrom Rack, Macy’s has installed nearly 40 Backstage off-price discount boutiques inside its own regular stores, a move that the company said added about 6% in incremental sales in Q2.

“We believe that this strategy, which offers simplified pricing, a treasure hunt environment and lower price points, is resonating with many of our customers,” CFO Karen Hoguet said Thursday.

Macy’s also has turned some of its shoe and beauty departments into open-sell and self-service areas, taking a page from successful retailers like Sephora. Meanwhile, as about half of its sales come from 10% of its customers, the company is rolling out a new loyalty program, a trend seen across the retail industry. Rival JC Penney, for instance, in July also unveiled a revamped loyalty program. 

These are “all sort of band-aid stuff,” said Mark Cohen of Columbia Business School in an interview. “The slope of the curve of their performance continues to point downward. The slope may be abating a bit, but not turning up. Macy’s is the poster child of the whole sector. The department store genre is in decline.”

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