The great Q1 results from Walmart and Target indicate that these top players have been doing everything they can to keep up with both Amazon and the shopper’s needs — and that it’s working. But in the same week, the results from major department stores Kohl’s, JCPenney and Nordstrom illustrate that their efforts to adapt are not yet resonating with consumers. Additionally, TJX continues to cut into these department stores’ profits, indicating how hard it is to compete with the value offered by lower prices.
Q1 delivered unfortunate earnings reports for Kohl’s, JCPenney and Nordstrom:
- Kohl’s saw same-store sales decline 3.4%, the first drop in the category in seven quarters, with disappointing performances in seasonal goods and home categories. The retailer trimmed its full-year guidancerange, from $5.80 to $6.15 per share down to $5.15 to $5.45 per share;
- Nordstrom saw same-store sales dip 3.5%, income plummet from $87 million last year to $37 million in Q1 2019, and the retailer cut its full-year guidance range from $3.65 to $3.90 per share down to $3.25 to $3.65 per share; and
- JCPenney saw the worst same-store sales dip of the three at 5.5%, and a startling net loss of $154 million, nearly doubling its losses from the same period last year.
TJX arguably has been one of the biggest beneficiaries of the problems plaguing the major department stores, seeing net sales rise 7% to $9.3 billion and same-store sales increase 5% across all its banners. And unlike its department store rivals, TJX raised its full-year guidance, from a range of $2.41 to $2.43 earnings per share to $2.56 to $2.61 per share.
The difference between TJX and the major department stores aligns with the “survival of the fittest” and the “disappearing middle” themes that retail continues to embody. Moody’s Investors Service, which rates companies based on financial stability, indicated that its “downgrades” of retailers have continued to outpace “upgrades,” with the ratio of downgrades to upgrades deteriorating from nearly three to one in Q4 2018 to seven to one in Q1 2019.
“While we expect downgrades to continue to outnumber upgrades for 2019 as highly leveraged issuers with weak growth prospects continue to fall, we expect the upgrade to downgrade ratio to improve as larger companies with stronger balances sheets and healthy cash flows continue to improve their credit profile by winning market share,” said Mickey Chadha, VP and Sr. Credit Officer at Moody’s in commentary provided to Retail TouchPoints.
‘Sea Of Sameness’ Plagues Department Stores
Even at Macy’s, which generated its sixth straight quarter of comparable store sales increases at 0.7% (versus an expected 0.3%), total sales only increased 0.7%, to $5.5 billion. While Macy’s outperformed its disappointing holiday season, the retailer’s discount Backstage locations played a key role in propping up sales.
“Macy’s shares were up on their recent earnings report because they managed a minuscule sales increase,” wrote Steve Dennis, industry consultant and President of SageBerry Consulting, in a post on Forbes. “But let’s please remember that anything less than about 3% growth is a loss of relative market share. Unless these retailers start posting much greater gains in sales and profits, an investor might do well on a short-term trade, but none of these retailers will ever get back to a position of being remarkable in both the customer and the investors’ mind.”
Dennis pointed out that Macy’s, Kohl’s and JCPenney are trapped in a “sea of sameness” that epitomizes most department store offerings today, warning all brands in this area that “better isn’t the same as good.”
“The notion that some combination of store closings, cost reductions and strategic alliances — or that sprinkling an ‘experience’ or two throughout an otherwise unremarkable store — will lead to materially improved market share and profitability is not only wishful thinking, it is abject nonsense,” Dennis wrote.
It’s not as if these retailers aren’t making sincere efforts to improve their experiences, but more that their best efforts still may not be enough to overcome their underlying issues. For example, Kohl’s revealed it would accept Amazon returns in all of its stores starting in July, a strategy that appeared to drive more traffic and revenue in pilot markets. Kohl’s then entered into an exclusive deal with Fanatics to broaden its online fan gear assortment, beginning in fall 2019.
And Nordstrom is continuing to test new stores to attract modern shoppers, with the latest of its merchandise-free Local stores being launched in Manhattan, ahead of building its first women’s store in the city later this year.
Potential Tariffs Scare Department Stores, But TJX Puts Positive Spin On Them
While the Q1 results hang over the heads of these department stores, there are also causes for future concern. With the White House expected to place 25% tariffs on roughly $300 billion of goods from China, including apparel and footwear, representatives at each department store shared concerns about the potential effects of these taxes on their business — something Target shrugged off entirely.
TJX, on the other hand, almost appears to welcome the tariffs. While CEO Ernie Herrman indicated the retailer has included a “very small impact” from the tariffs in its full-year guidance, he noted: “Historically, disruptions in the marketplace have created off-price buying opportunities for us. Further, because of our great values, if retail prices overall increase that may create an opportunity for us to attract new customers. Above all, we will always maintain a value gap versus other retailers.”