The situation: Several midmarket department stores headed into the holiday season with unexpected momentum, lifting their outlooks after stronger-than-anticipated Q3 results.

• Macy’s delivered its best growth in more than three years, prompting the company to raise its full-year expectations. It now projects adjusted earnings per share (EPS) of $2 to $2.20—up from $1.70 to $2.05—and net sales of $21.48 billion to $21.63 billion—up from $21.15 billion to $21.45 billion.
• Kohl’s beat both top- and bottom-line expectations, delivering a rare quarterly profit, which drove it to lift its guidance. It now expects adjusted EPS of $1.25 to $1.45—up from 50 cents to 80 cents—and net sales of $14.77 billion to $14.85 billion—up from $14.46 billion to $14.62 billion.
• Dillard’s also surpassed expectations, with total retail sales and comp sales up 3% and EPS rising 7.5%.

The challenge: Even with upbeat results, midmarket department stores continue to face a tough consumer backdrop. Higher-income shoppers are still spending steadily, but low- and middle-income consumers—their core customers—are increasingly stretched as their wage gains have slipped this year, tightening budgets and making them more cautious about where and when to spend, per Bank of America Institute.

• This widening divide between higher-income and middle- and lower-income consumers helps explain why Macy’s strength came from Bloomingdale’s and—to a lesser extent—Bluemercury, while the Macy’s namesake chain continued to soften. Net sales at the flagship brand fell 2.3% including store closures. Excluding those soon-to-close locations shows a somewhat brighter picture: Comp sales for the go-forward business rose 1.7% on an owned basis and 2.3% including licensed and marketplace merchandise. In its 125 remodeled stores, comps were even stronger—up 2.3% owned and 2.7% on an owned and licensed (O+L) basis.
• Shoppers were described as “resilient and engaged” but increasingly “choiceful,” said CEO Tony Spring on the company’s earnings call. That shift led Macy’s to forecast flat to 0.5% comp growth rather than the 0.5% to 1.5% decline it previously expected.
• Kohl’s narrative follows a similar arc: progress on profitability, but tempered by caution. Despite raising its guidance, the company expects a 3.5% to 4% decline in net sales and a 2.5% to 3% drop in comps.
• Meanwhile, holiday data is beginning to show that value-focused shoppers are hunting for lower price points beyond the midmarket department-store channel. Black Friday foot traffic fell at JC Penney (-6.7% YoY), Macy’s (-5.9%), and Kohl’s (-5.3%), while Dillard’s managed only a modest 0.5% increase, per Placer.ai. That stands in stark contrast to off-price chains such as Ross Dress for Less, which saw foot traffic rise 13.9%, and TJ Maxx, up 5.2%.

Our take: While department store chains like Macy’s and Kohl’s are beginning to show some promising signs, it’s far from clear they can regain the ground they’ve lost. Macy’s Q3 sales of $4.71 billion are still about 9% below the same quarter in 2019, and Kohl’s Q3 sales of $3.41 billion are roughly 26% lower—all at a time when overall retail sales are up nearly 42% over that same period.

That challenge is particularly difficult because consumers are sharply focused on value and increasingly willing to shift their spending to lower-priced alternatives.

To win back shoppers, department stores need to clarify and strengthen their value proposition to avoid ceding more share to mass merchants and off-price competitors. But despite Macy’s push to refresh its in-store experience, it’s not yet clear the company has identified the path that will pull those shoppers back.

Whether department stores can build on their recent gains depends on how effectively they meet value-seeking consumers in the coming months.