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The Diverging Paths of America’s Favourite Department Stores

Retail spending may be on the rise, but as consumers face an ever-growing number of retail options online and off, the least savvy players are getting left in the dust.
Source: Shutterstock
  • BoF Team

NEW YORK, United States — If there's one lesson to glean from this week's department store earnings bonanza, it's that brick-and-mortar isn't dead — but Americans are getting pickier about where they shop. And as consumers have an ever-growing number of retail options, online and off, the least savvy players are getting left in the dust.

People are shopping more: retail spending between May and July rose 6.3 percent compared to the same period last year, according to a Census report published Wednesday. The heightened consumer spending power is fuelled by a strong labour market and tax cuts, according to the National Retail Federation.

But the windfall has not been shared evenly. Nordstrom on Thursday said its same-store sales rose 4.1 percent in the second quarter, blowing most projections out of the water. Macy’s also surprised to the upside with a more modest 0.5 percent increase, when the average analyst forecast was for a slight decline. J.C. Penney, on the other hand, reported slower-than-expected growth.

Quarterly sales figures are messy by nature, often artificially inflated by discount strategies or hurt by bad weather. However, in Nordstrom’s case, and to a lesser extent with Macy’s, several years of heavy investment in refreshing stores and e-commerce appears to be paying off. Their strategies, ranging from radical new store concepts to less-flashy measures like tighter inventory management, offer some clues as to how brick-and-mortar retailers can survive the rise of Amazon and myriad digital brands. Both Nordstrom and Macy’s raised their full-year sales outlook.

An early adopter of experiential retail, Nordstrom has a creative approach to omnichannel, which seems to be effective. In some locations, customers have the option to reserve clothes online and have them waiting to try on, and shoppers can drop off online returns in automated stations. Online sales rose 23 percent from a year ago, and the total share of e-commerce hit 34 percent, up from 29 percent from the second quarter of 2017.

Nordstrom was able to better compete by keeping inventories lean, president Blake Nordstrom said in a conference call with analysts Thursday. Department stores are at a disadvantage to online-only competitors because they must stock each location with clothes and accessories, raising operating costs and forcing frequent sales to get rid of unsold merchandise. Nordstrom is taking inventory management to the extreme with its “Local” boutique concept that opened in October, a 3,000-square-foot space in West Hollywood that operates without inventory. Instead, consumers visit the store to pick up and try on online orders, or visit the on-site tailor, manicurist and juicery. Two additional Local stores will open in Los Angeles this fall, president Blake Nordstrom said Thursday in a conference call with analysts. Still, the impact of this strategy is unlikely to be felt for some time.

Macy's is undergoing a restructuring plan of its own, emphasising store remodeling, an endeavour likely to be enhanced by the acquisition of experiential retail shop Story in May. Off-price expansion and improved store pickup capabilities have also helped bring in shoppers. Customers can place an order online and pick it up in 50 Macy's stores currently, and the service will be available in nearly every store by the end of the third quarter, said chief executive Jeff Gennette in an earnings call Wednesday. Inventory management was also a crucial component for Macy's progress, he added.

Even so, Macy’s shares have dropped about 15 percent since the results were announced, indicating the bar has been raised now that the company has reported its third consecutive quarter of growth.

It could have been worse: J.C. Penney missed analyst projections for revenue and profits in its second quarter report Wednesday. The Plano, Texas-based chain saw same-store sales growth of 0.3 percent — Wall Street expected 1 percent — and a 7.8 percent drop in revenue since Q2 of last year, which JCPenney attributed to the closure of 141 stores since 2017.

The company lowered its full-year forecast of same-store sales growth from 2 percent to zero on Wednesday, and has been operating without a chief executive since May. J.C. Penney is still struggling with high inventories and has been slow to chase fashion trends. Shares are down over 25 percent since Wednesday.

Looking ahead, department stores can rely on strong consumer spending to provide a cushion as they continue to experiment. The National Retail Federation on Monday predicted overall sales would rise at least 4.5 percent this year, up from its previous forecast of 3.8 percent to 4.4 percent.

So far, no department store chain has grown at that pace, suggesting that a big slice of that extra spending is headed toward online retailers like Amazon. This week’s results are a sign that some of them may have turned a corner.



Source: Kate Spade

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Source: Courtesy

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