Department stores' deepest woes remain in spite of upbeat holiday sales

Key Points
  • Macy's and J.C. Penney both reported 2017 holiday sales results that outpaced analysts' expectations and topped performances from the year prior.
  • Shares went tumbling on the news, with analysts and investors saying underlying obstacles remain.
  • Sears added more than 100 stores to its list of closures.
  • More stores are expected to go dark in 2018, as department stores struggle to cope with the new normal for their industry
Here are the stores Macy's is closing next

Macy's and J.C. Penney both reported 2017 holiday sales results that outpaced analysts' expectations and topped performances from the year prior, but Wall Street has a hard time forgetting the underlying troubles that still plague the industry.

Retailers are being forced to reimagine how they operate and what they sell: faster fulfillment, less apparel inventory, a loyal customer base, and easy-to-navigate websites and mobile apps are becoming the new norm.

Macy's shares closed down more than 3 percent Thursday. J.C. Penney's stock was down around 6 percent at one point before regaining some ground to end modestly lower Thursday in spite of the retailers' largely positive results. Earlier in the week, department store stocks were rallying in anticipation of a healthier holiday across the board. But the uptick was inevitably short-lived.

"Good holiday sales are a plus for the industry and are most welcome, but when you look at retail earnings expectations they are still uninspiring — Amazon will continue to put pressure on all segments of the industry [and] e-commerce margins are unlikely to expand anytime soon as more transactions move online," Retail Metrics founder Ken Perkins told CNBC.

"Investments in logistics and the build-out of e-commerce, which are vital for survival, will continue to be a drag on earnings," Perkins said.

Both Macy's and J.C. Penney are still expected to report a drop in revenue and negative same-store sales for fiscal 2017 in light of Thursday's results. Although Macy's raised its annual outlook, citing a bump from federal tax reform, it won't be enough of a boost to get the company back to positive, like CEO Jeff Gennette aspires to do longer term.

"A healthy store base combined with robust digital capabilities is Macy's recipe for success," Gennette said Thursday in a statement, speaking to future initiatives.

A new normal

Department stores are now several years deep into the the latest round of industry challenges, and the question is evolving into: who will weather the storm, and how long will it last. The going theory has been department stores are needed, but there are simply too many of them. As retailers continue to whittle down their footprints, whether of want or need, that theory will be tested in 2018.

"We believe closing stores will allow us to adjust our business to effectively compete against the growing threat of online retailers," J.C. Penney CEO Marvin Ellison said when a round of store closures was announced early last year.

Among those department store chains that have been closing stores are Macy's, J.C. Penney and Sears Holdings, the parent company of Sears and Kmart stores. Hudson's Bay, the owner of Saks Fifth Avenue and Lord & Taylor, also recently struck a deal to hand valuable real estate over to co-working start-up WeWork.

Sears said Thursday it will shutter an additional 103 stores — 64 Kmart stores and 39 Sears, while Macy's identified 11 stores that would go dark under a prior store closure plan.

Regional department store Bon-Ton and luxury retailer Neiman Marcus are both working with restructuring advisors to address their respective debt loads. Bon-Ton recently missed an interest payment, and Neiman Marcus is planning to replace its CEO Karen Katz, sources told CNBC.

Department stores looking to be survivors must now prove they can buy inventory their shoppers want, continue to find growth in their off-price concepts and keep the apparel brands from circumventing them by going directly to their consumers. As they test smaller stores and unique partnerships, they must show these stores are profitable and can succeed in bringing in traffic.

Nordstrom has seen sales at it discount Rack division slow, and Kohl's is left to figure out if a new partnership with Amazon will benefit it in the long run.

"Holiday 2017 was a good one, but it doesn't signal a renaissance for the industry nor that they are out of the woods yet," Retail Metrics' Perkins said.

WATCH: Macy's warns despite solid holiday numbers

Macy's warns despite solid holiday sales and tax cuts