Don't Count Out Department Stores Just Yet

Don't Count Out Department Stores Just Yet

Based on Q1 earnings so far, the sector still has life in it

When people talk about the death of retail, that perceived gloom and doom is exemplified by poorly performing traditional channels like malls and department stores. But as major department stores report Q1 earnings, it doesn't appear to be that dire across the board. 

Macy's net sales in the first quarter totaled $5.5 billion, an increase of 3.6%. Its same-store sales increased by 4.2%, which was attributed in part to better inventory management and fewer markdowns. What's more, Dillard's same-store sales rose 2%.  

Meanwhile, Nordstrom only grew sales 0.6%, while JCPenney continued its downward trajectory with sales falling 4%.

By and large, there hasn't been a great deal of consistency. Some retailers blamed poor sales on cooler weather while others said weather wasn’t a factor, off-price is growing for some while underperforming for others, and innovation means very different things to a number of retailers.

Kohl's and Sears will report earnings this week, likely adding more color to where the department store sector is heading. But what can we take away from what department stores have disclosed so far?

Off-price stores aren't a magic bullet. The sector has taken heat from both Amazon and off-price stores like T.J.Maxx, so some department stores have launched off-price lines of their own. Last year, Macy's expanded the 2015 introduction of Macy's Backstage outlets inside of full-line stores, and it has seen success with this discount format. It opened 18 new locations in Q1 2018 and aims to open 40 more in Q2.

Nordstrom, which practically founded the concept with Nordstrom Rack in 1973, is experiencing a slowdown. Nordstrom’s full-line store sales saw stronger growth (0.7%) than off-price (0.4%). However, online sales at and HauteLook were stronger than in-store.

Retailers are finding equilibrium with physical stores. Macy’s has been closing stores for the past few years, which appears to be paying off. Meanwhile, Nordstrom is expanding strategically. “Manhattan is a premier retail destination and represents our largest online market serving customers," said co-president Blake Nordstrom. The retailer opened its much anticipated first menswear-only store in New York City this spring, and the women's flagship will open across the street in 2019. With features like 24-hour curbside pickup and digital kiosks for returns, these locations are nearly as much about branding as selling. 

Innovations are paying off. Macy's recently acquired Story, an NYC-based concept shop that changes themes every few months. This is in line with its The Market @ Macy's pop-up marketplace featuring up-and-coming brands. Macy's also introduced Scan, Pay, Go, its mobile checkout initiative, and virtual (VR) and augmented reality (AR) features to help with furniture sales. “We've piloted VR in three of our furniture stores and found it significantly increased transaction size and also reduced returns. Using VR allows us to offer a full range of furniture in roughly half the space. So we are now scaling this to 60 more doors this year,” said CEO Jeffrey Gennette during the earnings call.

Digital is still a driver. Nordstrom reported that digitally enabled sales—which encompass online sales, as well as omnichannel offerings like buy online, pickup in-store (BOPUS) and reserve online, try on in-store—were responsible for 29% of its Q1 2018 revenues, a 25% increase over Q1 2017. Online sales grew 18% during that timeframe.

JCPenney mentioned that around 80% of online merchandise can be picked up in-store on a same-day basis for free, and that close to 40% of online sales are fulfilled in this manner. What's more, over one-third of these buyers make an additional purchase once in-store.

In a SimilarWeb analysis of desktop and mobile web traffic to department store sites in February, March and April, engagement was lower in 2018 than 2017. However, this reflects visits, not sales.

While department stores are known for carrying a wide range of merchandise—to their detriment, in some cases—apparel is one of the sector's core categories. In another SimilarWeb analysis of Q1 2018 online traffic to top apparel retailers, department stores ranked higher than specialty retailers. Macy’s took the top spot by a wide margin, with a 24.4% share. JCPenney (12.5%) and Nordstrom (11.8%) were No. 2 and No. 3.

It is hard to generalize about department stores, since they include both discount and luxury retailers, and attract shoppers with different motivations. In a survey from February 2018, US apparel and accessories buyers were asked to identify their favorite retailer (Walmart and Amazon came out on top) and indicate why. Macy’s (33.1%) Nordstrom (27.7%) and Kohl’s (21.6%) won on selection, to varying degrees. JCPenney was chosen most for sales (18.4%), with this factor also being important to Kohl’s shoppers. Nordstrom ranked highest (14.9%) for the ability to shop digitally and in-store.