Earnings Rundown

America's department stores are still trying to get the formula right

Department stores show mixed holiday earnings while struggling for shoppers
Key Points
  • Macy's, JC Penney, Kohl's and Nordstrom have reported holiday-quarter earnings in recent days.
  • Department store chains are still struggling to grow sales, as big-box chains and discounters are having better luck drawing customers to stores.
  • A deadly coronavirus outbreak could throw another wrench in these businesses.

It has been a mixed bag for America's department store chains reporting 2019 holiday-quarter results.

But one thing is clear. These companies are still trying to get the formula right to bring shoppers to stores.

While big-box chains and discounters such as Target and TJ Maxx are seeing sales gains, retailers including Macy's and Kohl's are struggling to grow revenue. Shoppers are increasingly steering clear of shopping malls, anchored by department stores, opting to buy online instead. And a deadly coronavirus outbreak throws another wrench in these companies' businesses, with consumers potentially tightening up their wallets, and supply chains disrupted being overseas — primarily in China where the virus originated.

"Department stores certainly are as challenged as any segment out there," said Michael Hirschfeld, a VP at commercial real estate services firm JLL's Retail division. "Department stores used to introduce you to brands that you couldn't find elsewhere. Now, there are no department stores left that are doing that effectively."

While J.C. Penney reported earnings that topped analysts' expectations, its total revenue during the fourth quarter fell 7.7%, to $3.49 billion from $3.79 billion a year ago. Same-store sales, a metric that tracks sales online and at Penney stores open for at least 12 months, were down a whopping 7%.

Saul Loeb | AFP | Getty Images

Macy's fourth-quarter sales dropped to $8.34 billion from $8.46 billion a year earlier. Same-store sales, on an owned plus licensed basis, were down 0.5%, though that was better than the 0.9% decline analysts were anticipating.

Kohl's said Tuesday its net sales were essentially flat at $6.54 billion year over year. Its same-store sales were flat during the fourth quarter, missing internal expectations, Kohl's said, due to weakness in home and women's, and pressure on gross margins because of heightened promotions.

"Our women's business remained challenged throughout the year," CEO Michelle Gass told analysts. "We recognize that we need a much more significant reinvention in women's to improve the trajectory moving forward."

Kohl's, unlike Penney, Nordstrom, Macy's, Dillard's and others, is not as much of a traditional department store in that its shops are not normally found at malls. But the company faces many of the same challenges: It has hundreds of stores, its stores are large and its apparel assortment is massive, with clothing being one of the hardest things to sell in retail today.

Receipts at clothing stores in the U.S. dropped 3.1% in January, the most since March 2009, the Commerce Department said last month.

Nordstrom also disappointed this week. Its holiday-quarter earnings and sales missed estimates, sending the stock tumbling. Net income fell to $193 million from $248 million a year ago. Some analysts say Nordstrom has not managed its costs well, pouring investments into its recently opened flagship store in New York, for example. And revenue has not climbed enough to make up for that.

If business hasn't been difficult enough for mall-based department stores ... this [the coronavirus] is going to further erode traffic and put additional pressures on this group.
Ken Perkins
Retail Metrics founder

To be sure, each of these companies has some sort of strategy in place to try to turn things around. They have used recent earnings conference calls and meetings with investors to walk through that.

Macy's in February said it planned to shut 125 stores over the next three years, cut 9% of its corporate workforce and close some offices in Cincinnati and San Francisco, in order to generate about $1.5 billion in annual savings — which will be fully realized by the end of fiscal 2022. It has said it plans to reinvest those savings in its online business, ramping up delivery options and launching new brands, among other things.

And Penney, still expecting 2020 will bring further declines in same-store sales, is trying to fix its apparel business, which has been criticized for being outdated. The company announced earlier this week it expanded a curbside pickup service, called J.C. Penney Style on the Go, to 50 stores. Users can order online, call or text when they arrive outside a store, and have purchases brought to their cars.

Kohl's is also aiming to improve its apparel business, with women's clothing making up about 30% of sales. It plans to, over the coming year, phase out eight of its private labels that have underwhelmed in stores. Gass said the company has a new women's leadership team in place.

Each of these retailers hopes to avoid the same fate of some of their less-fortunate peers.

Sears, Bon-Ton and Barneys New York have all gone bankrupt.

Saks Fifth Avenue parent Hudson's Bay Co., meantime, has finalized a transaction to go private. The company said Tuesday its CEO Helena Foulkes is departing later this month. Executive Chairman Richard Baker will be taking over, it said, in addition to his other responsibilities.

Baker has said he hopes to be able to fix the business more easily, without pressure from Wall Street, outside of public purview.

"It will take patient capital and a long-term view to fully unleash [Hudson's Bay's] potential at the intersection of real estate and retail," he said in a statement earlier this week.

Faced with so many external pressures, publicly traded department store chains have seen massive selloffs in their shares over the past year.

Penney's stock, which currently trades under a buck, has fallen more than 57% over the past 12 months. Penney has a market cap of about $212 million. Macy's shares are down more than 48%, giving Macy's a market cap of about $3.9 billion. Kohl's shares are down about 44%, giving the company a market value of $5.9 billion. Nordstrom's stock has dropped close to 27% over the last 12 months, bringing its market value to about $5.2 billion.

Coronavirus fears

A deadly coronavirus outbreak could be another obstacle for the retail industry, and chiefly department stores, in 2020.

If more Americans end up holed up at home, avoiding human interaction and crowded public venues over fear of catching the virus, they will likely cut back spending on apparel, handbags, shoes and other discretionary items. Meantime, retailers such as Costco, Target and Walmart have already started to see throngs of shoppers at their stores stocking up on essentials such as water, toilet paper, canned goods and hand sanitizer.

Macy's CEO Jeff Gennette in late February said the company was seeing a slight slowdown in sales because of fewer Asian tourists coming into the U.S. But he said it was too soon to quantify any bigger impact on the business.

Kohl's did not factor a hit from the coronavirus into its full-year outlook. While the company has not yet seen an impact on store traffic, it is monitoring the situation closely and working with vendors along its supply chain, CEO Gass told analysts Tuesday.

Nordstrom, which is based in Washington where at least nine lives have already been taken because of the virus, also did not factor a hit from the coronavirus into its full-year forecast. The company said it has put a team in place to respond. It said it is assessing "potential implications for both traffic and supply chain."

One group is already expecting U.S. malls "will be hit hard" if coronavirus cases proliferate further across the nation.

"If business hasn't been difficult enough for mall-based department stores and specialty apparel retailers, this is going to further erode traffic and put additional pressures on this group," Retail Metrics founder Ken Perkins said about the coronavirus.