A disappointing Q1 for department stores kept all eyes on a select few retailers throughout Q2. Although the major department stores managed to improve their financial results over Q1, these retailers still have plenty of internal fixes to implement in order to successfully complete any turnaround effort — including facing the reality that store closings may be a necessity.
In the latest example of the hits these brands are still taking, Macy’s announced it would close 100 stores by 2017 — approximately 15% of its brick-and-mortar arsenal — as the company’s net sales decreased 3.9% and comparable store sales dipped 2%. This is the second year in a row Macy’s is closing a significant number of stores, and it follows the January 2016 announcement that the iconic brand would be implementing a $400 million cost-cutting plan.
Macy’s woes are not unique among department stores. Here are the Q2 financial results for some of the vertical’s biggest players:
Kohl’s experienced a 2% sales dip and a 1.8% comparable store sales decline, but did increase net income 7.7% as higher gross margins were attributed to tighter inventory control;
Nordstrom saw sales decrease 0.2%, with comparable sales decreasing 1.2% in the period, but net income tumbled from $211 million to $117 million;
Dillard’s reported a net income dip from $30 million to $12 million, with net revenue decreasing 4% and comparable sales dropping 5%; and
JCPenney, just as in Q1, had by far the most positive results coming out of the quarter, narrowing year-over-year losses from $117 million to $56 million and increasing comparable store sales 2.2%.
At this point, the issues plaguing these and similar brands are all too familiar. They include a failure to maximize the value of their brick-and-mortar stores, an inability to differentiate their in-store experiences, as well as a rise in online apparel sales (and competition from surging e-Commerce players in general). But Macy’s dramatic store closings should be a clear sign for similar brands to finally admit that they could well have too many stores open, and that the only way to move in a positive direction is to cut long-term costs.
“A lot of these other retailers are going to have to evaluate their stores,” said Madeline Hurley, Retail Industry Analyst at IBISWorld in an exclusive interview with Retail TouchPoints. “It seems like a general trend that things are headed downward at the moment. They may not have to make as dramatic of an exit as Macy’s hundred-store closing, but they should look at their store portfolio and see which stores are going to make them enough revenue and profit, and whether or not closing them would be a better option than leaving them open.”
Luxury retail brands, many of which have struggled in their own right as they attempt to pivot their pricing and promotional strategies, are themselves getting fed up with the department stores’ results. Coach is exiting 250 of the approximately 1,000 department stores that offer the brand’s products, while Michael Kors will no longer be participating in department store promotional sales as of February 2017. These departures could accelerate the downward spiral for department stores, taking away yet another differentiating factor for their host stores.
Major Off-Price And Home Improvement Brands Succeed Despite Amazon’s Power
One of the biggest challenges facing a wide range of brick-and-mortar retailers is Amazon’s ongoing dominance. Walmart’s recent $3.3 billion acquisition of Jet.com was widely seen as its attempt to close the e-Commerce gap with the pure-play behemoth. Walmart’s e-Commerce sales from July 2015 through June 2016 were an impressive $13.6 billion, but they still totaled a mere 16% of the $82.8 billion in sales raked in by Amazon during the same period.
Of course, many retailers are thriving even in a highly competitive landscape. Several players in the off-price and home improvement verticals, including TJX, The Home Depot and Lowes, have shown that not every large retail model has to be in a head-to-head rivalry with Amazon.
“A lot of the off-price stores that are doing well, or even fast fashion stores such as H&M and Zara, offer a value proposition to consumers that they’re getting good quality products for a lower price than they normally would at a regular department store,” said Hurley. “Having an established perception of value to the consumer is crucial now. People want the quality, but they don’t want to have to pay a pretty penny for it.”
TJX brings this added value proposition through its supply chain, purchasing overstocked items at a markdown from other retail brands. With the cheaper merchandise, the brand can worry less about pricing issues, knowing it can provide consumers with the same quality items at its own dictated discounts. The numbers have been strong for the brand as a result: Q2 net revenue increased 7%, comparable sales bumped up 4% and net income bumped up 5% to $562 million.
The off-price model seems to be reeling in new consumers as well. The company’s brands, T.J. Maxx and Marshalls, saw increases of more than 4% in their share of total off-price buyers in the past six months, according to Checkout Tracking, a data service from NPD Group.
And while Nordstrom’s full-line stores continue to flounder, its Nordstrom Rack series of stores has ridden the wave of the off-price craze. Net sales increased 11.2% and comparable sales increased 5.3%, with Nordstrom adding 22 Rack locations from Aug. 30, 2015 to July 30, 2016.
“Nordstrom should support the growth of Rack,” said Tom Redd, Global VP of Strategic Communications at the SAP Global Retail Business Unit, in a discussion on RetailWire. “It is an extension of the business and in the right cities and locations it is a major retail player. Nordstrom Rack makes Nordstrom a place for more to shop — high-enders and mid-end channel. The key is to not over-stuff or start creating products for Rack. That ruins the outlet image. Stay true to Rack’s focus.”
In the case of the home improvement retailers, The Home Depot, Lowes and Ace Hardware have continued to buck the rest of the industry because their customers still need to physically browse products in-store before making a purchase.
The Home Depot reported a 6.6% increase in net sales and a 4.7% boost in comparable sales, with net income increasing 9.3%. Lowe’s, which did perform below Wall Street expectations, still had a net profit of 3.7% even after incurring an $84 million loss related to its acquisition of Canadian home improvement retailer RONA in February 2016. Sales for the quarter increased 5.3%, while comparable sales improved 2%. To complete the big three, Ace Hardware boosted same-store sales 2.4% and net income 5.8%.
As home improvement projects increase with a rebounding housing market, both retailers can be assured that people are still more likely to enter their stores to seek out the products they need. While approximately 11% of shoppers would buy from Amazon when planning a home improvement project, 36% said they planned on shopping at Home Depot and 21% planned on visiting Lowe’s, according to a recent survey by UBS reported in the Wall Street Journal.
The success of these home improvement companies and off-price retailers shows that brick-and-mortar will continue to play significant roles in the evolving retail landscape regardless of Amazon’s e-Commerce dominance. However, the efficiency of these stores will be the primary factor in determining omnichannel retailers’ success going forward. With more goods now being sold through digital channels, store space as a whole is not as valuable in holding merchandise as it had been in the past.
In evaluating the state of their physical stores, department stores now have to measure if their value proposition requires keeping them open, or if downsizing allows them to maintain their brand promise. If they choose the latter, then they must take necessary steps to differentiate their remaining stores through new brand experiences, which can include more events, interactive customer service, greater use of in-store technology and potentially making greater use of stores as fulfillment centers for online sales.