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Department Stores Find Different Ways to Disappoint

Sarah Halzack
Department Stores Find Different Ways to Disappoint

(Bloomberg Opinion) -- When you consider the long-term arc of transformation in the retail industry, the lousy results we’ve seen from old-school department stores in the latest earnings season aren’t  at all surprising. But when you take a more short-term view, the performance was an undeniable letdown.

After all, it was only a year ago that Macy’s Inc. and Kohl’s Corp. investors, in particular, were sending shares higher after upbeat holiday and first-quarter performances offered hope they were finding their footing. Their latest results point to areas where they may have gone back a step. Same goes for Nordstrom Inc.; as for laggard J.C. Penney Co., it continued to fall behind.

What changed? For one, fresh worries that tariffs could be coming to clothing and shoes from China are fueling pessimism about the department store segment overall. But, also, the specifics of each major chain’s results offered unique reasons for concern. Here are the worry points that stood out for me:

J.C.  PENNEY CO.: With this troubled retailer, the greatest alarms are what we didn’t hear on its earnings call. The company has barely offered financial guidance for the year, saying only that its free cash flow will be positive. Comparable sales, income, and inventory are all huge question marks. And while the company has offered some measure of detail on how it will repair profitability, including by pulling out of the low-margin appliance business, there have been scant details about how it will drive sales. I realize J.C. Penney has lots of new faces at the top – CEO Jill Soltau, who started in October, has only recently hired a chief merchant, a chief transformation officer, a CFO and numerous other senior leaders. They’re likely still getting their strategy together. But the problem is, J.C. Penney’s sales and stock price have been so wounded in recent years that time is simply not a luxury they can enjoy. More specifics are needed, quickly.

KOHL’S :  When Kohl’s cut its annual earnings guidance on Tuesday, executives chalked it up to factors including a tariff hike and its dismal first-quarter results. But they also said the outlook reflected plans to get more aggressive on pricing and promotions. On some level, it’s an understandable move. The company said its home-goods, in particular, suffered mightily at the hands of better-priced competitors in the first quarter. And, indeed, the likes of Target Corp. and Wayfair Inc. have strong, value-priced home assortments. (Walmart Inc. is also coming on strong in the e-commerce home arena.) In a category such as home goods – which consumers approach differently than commodity purchases like diapers or milk – there’s a real risk that chasing market share with promotions is a race to the bottom. ( See Bed Bath & Beyond Inc. for Exhibit A of how that can go wrong.)

MACY’S: The chain had the most respectable earnings report of the bunch, with comparable sales up 0.6% from a year earlier. But the composition of that sales growth leaves me uneasy. Macy’s reported transactions were up 5.7% in the quarter from a year earlier. But it also said that average units per transaction were down 2.2% as its best customers spread out their purchases over more digital or in-store trips. In other words, some of that eye-popping transaction growth probably doesn’t reflect renewed interest in Macy’s; it just shows its most faithful customers shopping at a different rhythm – one that likely reflects how the retailer’s new-ish loyalty program offers top spenders free shipping with no minimum. Meanwhile, Macy’s has been enthusiastically touting Backstage, the off-price section of its stores, because it is contributing significantly to comparable sales growth. But Backstage also weighed on average unit retail, or the average amount customers paid per item, in the quarter. Macy’s needs consumers to think of it as an aspirational place to shop. As Backstage becomes a more of a bulwark of its business, I worry it will cheapen the Macy’s brand overall.

NORDSTROM INC.: The headline numbers of the retailer’s Tuesday earnings report were grim, including a 3.5 percent decline in net sales.  But looking under the hood a bit more, one figure that caught my eye – and not in a good way – was its e-commerce growth, which slowed to 7 percent in the quarter from a year earlier. That’s a significant drop from the 16 percent digital growth it notched in the fourth quarter and the 20 percent pace it achieved in the quarter before that, and it stacks up unfavorably to the “double-digit” growth that Macy’s recorded in the period. Strong online sales might have made its other struggles in the quarter more forgivable. But this result dents my confidence that Nordstrom is transforming itself into a company that is fortified for retail’s future. 

Department stores have long been a uniquely challenged corner of the retail industry. In this latest quarter, they did little to show they are solving their most fundamental problems.

To contact the author of this story: Sarah Halzack at shalzack@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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