Department Stores Fight Back, but Will New Strategies Work?
Are strategies unveiled by mid-tier and high-end department stores in the U.S. this year enough to pull them out of the doldrums?
Possibly in the long term, but no one is expecting the needle on sales and profits to move anytime soon. Stock prices are low, sales are tracking negative in most cases (even at Dillard’s, traditionally the outperformer in the group) and the outlook for the sector for the rest of the year is lackluster.
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In the second quarter, Macy’s revenues decreased 3.5 percent year-over-year while those of Dillard’s declined 5.2 percent. However, Nordstrom, which reports second-quarter results after the bell on Tuesday, is expected to show a turnaround in its sales performance from a year ago. It’s been on a positive sales trend this year and had a healthy top line in the fourth quarter, though profits have fallen short.
For Nordstrom, Dillard’s, Macy’s, as well as Belk, JCPenney, Kohl’s, Saks Fifth Avenue and Neiman Marcus, these are pivotal and tumultuous times. They’re all pressing forward with new strategies, formats, consolidations and financial re-engineerings, and working to satisfy increasingly impatient investors, and prove wrong the many retail pundits that never sway from saying there’s no future for the department store.
Another troubling indicator for the sector came last month, when the Charlotte, N.C.-based Belk was forced to deleverage resulting in a change of ownership. Through the transaction, certain existing lenders, including KKR and Hein Park, an investment management firm focused on distressed debt, took over a controlling interest of the business from Sycamore Partners, the private equity firm.
It’s tough to get a clear read on Belk’s performance since it’s privately held, though the change of ownership suggests Belk was lacking enough business to support its debt. Don Hendricks, Belk’s chief executive officer, stated that the transaction marks “a pivotal milestone for Belk as we move into the future with a capital structure that positions our business for sustainable, long-term growth and profitability. We are confident that our stronger balance sheet will enable us to build on the momentum and growth we’ve seen in recent quarters, better serve our customers and their communities and be an even stronger partner to our vendors.”
Future Essentials
Whether department stores can reverse their declining market share as consumers spend more online, at off-price stores and at mass merchants boils down to three big questions: First, can they provide the kinds of services that can’t be found through the web. Second, can they make shopping more experiential, fun, convenient, and less of a hassle. And third, can assortments be remade for greater value and relevance to changing lifestyles and younger populations.
“Let’s open our eyes on what’s happening in the world,” Bloomingdale’s chief executive officer Olivier Bron told WWD in a recent interview. While Bloomingdale’s is in relative good shape and has even grown since pre-COVID-19, Bron sees a path for taking the upscale department store to the next level. He believes Bloomingdale’s needs to examine how department stores in Europe and Asia create theater and excitement; that Bloomingdale’s should increase localization of events, merchandising and marketing, and generate greater cross-category shopping, and leverage data more intensively. Ready-to-wear, he said, remains the core of the business, though there is room to grow other categories.
Macy’s Inc.’s “Bold New Chapter” strategy, in its early days, calls for closing approximately 150 underproductive Macy locations through 2026 (55 by the end of this fiscal year) prioritizing investment in the 350 “go-forward” locations, and expanding the specialized, small-format Macy’s, Bloomies, Bloomingdale’s outlets, and Backstage off-price units. Macy’s is also looking to monetize $600 million to $750 million of assets through 2026 by selling off stores, parking lots and some logistic centers. The retailer is targeting for 2025 low-single-digit annual comparable owned and licensed marketplace sales growth; annual sales, general and administrative dollar growth below the historic rate of inflation of 2 to 3 percent, and annual adjusted earnings before interest, taxes, depreciation and amortization dollar growth in the midsingle-digit range.
“It’s very diagnostic. It’s very cleared eye. It’s unemotional,” Tony Spring, Macy’s Inc. chairman and CEO, said of the Bold New Chapter. “I would characterize it as trying to fundamentally reposition the company for growth, provide a better customer experience and unlock the value of Macy’s Inc.,” Spring told WWD.
The Evolution of Kohl’s
Of all the department stores that are left in the U.S. — it’s down to a handful of nameplates after decades of mergers and consolidation — Kohl’s seems most aggressive remaking its mix, as it strives to win over much-needed younger clients. Most significantly, Kohl’s rollout of Sephora shops inside its stores is in advanced stages; a rollout of Babies “R” Us is just underway; dress shops in 700 of its locations are up and running, and better brands are being sought to augment an over-reliance on proprietary labels. Last year, Kohl’s revamped its home assortment with pumped-up presentations of wall art, botanicals, storage, frames, glass, ceramics, gifting and impulse items, as well as introducing pet supply and lighting categories to the selling floor.
With all those assortment changes and more to come, Kohl’s is seeking $2 billion in additional sales volume over several years although the re-merchandising hasn’t yet reversed declining sales trends. In the first quarter this year, net sales decreased 5.3 percent and comparable sales fell 4.4 percent. In 2023, net sales decreased 3.4 percent to $16.6 billion; comparable sales declined 4.7 percent.
“We continue to have high conviction in our strategy and believe that our key growth initiatives, including Sephora, home decor, gifting, impulse, and our upcoming partnership with Babies ‘R’ Us, will contribute more meaningfully going forward,” chairman and CEO Thomas Kingsbury said when the company issued its first-quarter results. “That said, we recognize we have more work to do in areas of our business. We are approaching our financial outlook for the year more conservatively given the first-quarter underperformance and the ongoing uncertainty in the consumer environment.”
Nordstrom’s Plan
At the Seattle-based Nordstrom, there are signs of turnaround strategies kicking in, with top-line improvements for the last two quarters, and expectations for more. The Nordstrom brothers, Erik and Pete Nordstrom, are moving to take the Seattle-based Nordstrom Inc. private, once again. Through privatization, the goal is to reach a higher valuation than what Wall Street sees, get out from under the glare of investors, and pre-empt an unwanted bid for the company. Erik, the CEO, and Pete, president and chief brand officer, would have more time to focus on long-term strategy and spend time with their families. The Nordstroms tried to take the department store private in 2018, offering to pay $50 a share, or $8.4 billion, with the help of Leonard Green & Partners. That proposal was nixed by a board committee. The Nordstroms would offer up less this time around as the company’s current market capitalization stands at about $3 billion.
Nordstrom is placing its bets on its Rack off-price division where net sales increased 13.8 percent and comparable sales gained 7.9 percent last quarter. At the end of the quarter, there were 264 Rack locations compared to 243 in the year-ago period. Twenty-two additional Rack stores are being opened this year.
“We’re laser-focused on efforts we know will drive growth and profitability across the business over the next few years, including new Rack store openings, Nordstrom digital growth and increasing comp-store sales,” Erik Nordstrom said earlier this year.
JCPenney’s Refresh
Aside from a struggling top line, JCPenney has been dogged by retail pundits questioning whether the once-dominant department store for catering to diverse, working class families still has a reason for being. Penney’s went bankrupt in May 2020 after getting clobbered by the pandemic. But the Dallas-based retailer was lifted out of bankruptcy by two major mall owners and its new owners, the Simon Property Group Inc. and Brookfield Property Partners LP, thereby reducing its debt from roughly $5 billion to $500 million. Penney’s, which is vital to the health of many Simon and Brookfield shopping centers, last year set in motion a $1 billion “refresh” program to set higher standards for store presentation and reverse sagging sales trends. The program is marked by smarter category adjacencies like relocating handbags just behind sportswear, and kids’ fashion is adjacent to the photo studio and the Disney shop; a clearer demarcation between casual and dressier fashions; central, faster checkout stations replacing checkout counters randomly situated through the store; movable fixtures; an open-floor plan for longer sightlines and easier navigation, and more mannequins.
When the program was announced, Marc Rosen, Penney’s CEO, challenged those skeptical about Penney’s future, stating “JCPenney is on strong financial footing and is steadily increasing relevance and frequency with our core customers. We are poised for continued growth and know that the surest path to success is by focusing on our customers.”
Just last week, Saks’ owner HBC was given the green light by the government to proceed with its $2.65 billion takeover of the Neiman Marcus Group, and Saks officials said the deal could close by yearend. The deal is viewed upon as potentially both good and bad. Some see it as ensuring the survival of both businesses for years ahead; others note that vendors usually get squeezed by retailers gaining leverage over them, and that retail mergers don’t always work out.
According to Saks officials, new financing and equity infusions through the deal, future property sales, and fall 2024 selling expected to kick in next month will improve liquidity, helping to catch up on delinquent payments to vendors, many well past the average 60-day period.
“I want to remind everybody we plan to operate all of the businesses under their respective nameplates as we go forward, but the newly combined company will be de-leveraged from where this combined company sits today on a pro-forma basis,” Marc Metrick, CEO of Saks Global, told vendors last week on a conference call. “It’s going to be funded with a new term loan and a fresh revolving line of credit with significant levels of available liquidity.”
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