The coronavirus pandemic is shining a light on U.S. department stores' dependence on selling fashion and their delay in adapting to today's retail environment.
Not only are a number filing for bankruptcy, but some, including the oldest in the nation, are liquidating entirely. One by one, the categories that have defined department stores for decades have been seized by other types of retailers. Big-box chains Walmart and Target have acquired the value shopper. Best Buy and Amazon reign in electronics. The likes of Home Goods and Wayfair have become top-of-mind destinations for home furnishings. And Williams-Sonoma has sealed a place for itself in kitchens, for its high-end appliances and cutlery.
Fashion seemed to be the one stronghold department stores had left. For a while, that was enough. But not anymore.
Apparel sales are in a free fall, dropping roughly 20% year over year in July, after suffering a 25% decline in June, according to the latest data from the Commerce Department. Clothing has been one of the hardest-hit categories in retail during the pandemic, with fewer people concerned about refreshing their wardrobes when they hardly ever venture to public places. And some simply aren't able to spend on a new outfit like they used to, as millions of Americans are unemployed due to the crisis.
"Too many U.S. department stores are not so much proper department stores as they are big fashion stores with a small bolt on of other products," Neil Saunders, managing director at GlobalData Retail, said. "This model is now fully exposed, and it will continue to serve them badly."
The pain is being felt across the board, from the high end to the low end. And increasingly, it seems, these companies aren't viewed as worth salvaging. Lord & Taylor, after nearly two centuries in business, announced last week it is liquidating its remaining 38 stores. Meanwhile, talks among bidders to salvage J.C. Penney from bankruptcy have hit a stalemate, leaving it up to the companies' lenders to strike some sort of last-minute deal for survival.
Past efforts to revive these businesses have floundered. Analysts say greater online investments are needed in order to win back market share that has been ceded to Amazon and other specialty brands. Their real estate needs more pruning. And the brands that have lined their shelves for decades are actively looking to sell elsewhere — adding to all of these pressures.
"Brands partnered with department stores for exposure, for reach, because they didn't have the capital to do it on their own," said Vincent Quan, an associate professor at the Fashion Institute of Technology. "Department stores served a function. But now comes the digital age."
Nordstrom has often been viewed as a more fashion-forward department store operator compared with its peers, attracting a more affluent customer with its full-line locations, and a value shopper with its off-price Nordstrom Rack shops. And even its latest results were bleak.
At a time when more shoppers than ever are turning to the internet to buy everything they need, Nordstrom's online sales fell 5% from a year ago in its latest reported quarter. To be sure, the company said the decline was due in large part to Nordstrom shifting its annual anniversary sale into the third quarter from the second this year. Adjusting for that, it said its online sales were up about 20%. But still, other retailers were reporting triple-digit revenue growth online during the same period.
As big-box chains like Walmart, Dick's Sporting Goods and Best Buy report eye-popping, quarterly e-commerce sales, department stores are expected to be the worst-performing segment in retail this earnings season, with their profits forecast to drop 691% year over year, and their losses amounting to $1.2 billion, according to an updated tracking by Retail Metrics.
"The earnings gap between mall-based versus off-mall retail is massive," Retail Metrics founder Ken Perkins said.
Macy's is set to report earnings before the bell Wednesday, and its results are unlikely to narrow the gap. Its sales are forecast to drop roughly 37% from a year ago, according to Refinitiv estimates. It is also expected to swing to a loss after booking a profit one year earlier.
Department stores have been in decline for years. In 1992, the category accounted for 14.3% of overall retail sales, excluding gas and car dealer sales, according to data from the Commerce Department. That share had shrunk to 3.7% by the end of 2019. The falling sales, and high fixed costs for items such as large, expensive real estate, has resulted in numerous bankruptcies including Sears, Barneys New York and Bon-Ton.
So while the shift isn't new, 2020 has shown a shrinking appetite to save the department stores.
While some department stores like Kohl's and Macy's have been trying to steer away from selling so much apparel, pivoting their marketing toward other categories like furniture and toys, department stores are still incredibly reliant on moving clothing off racks to make money.
In 2019, women's apparel made up 31% of Nordstrom's total sales, down slightly from 32%, where it held steady for the two years prior. For Macy's, women's apparel was 22% of total sales in 2019, compared with 22.6% the year before.
And while department stores have long been known to be destinations for women to buy dresses for special occasions, and men to find suits and ties, they have been trying to pivot to sell more pajamas and lounge wear as consumers live and work from home during the pandemic. Neiman Marcus now has a section on its website titled "Your New Normal," showing $440 cashmere sweaters and $995 cotton silk sweatpants as the "new business casual" look.
But some say that transition is going to be easier said than done.
"I think most people have preferred brands for certain occasions," said Steve Dennis, founder of retail group SageBerry Consulting and a Neiman Marcus strategy executive from 2004 to 2008. "If you are not used to going to a higher-end place for athleisure, it's a bit of a shift. It's not impossible. But it's a real battle for market share."
With a number of bankruptcies flowing through the industry, Kohl's Chief Executive Michelle Gass recently said she believes there are billions of dollars in market share up for grabs. But will it all trickle back to the stronger department stores? Even one of the biggest names in athletic apparel and sneakers looks to be getting out of the space.
Nike is proactively cutting ties with a handful of wholesale partners including department store operators Belk and Dillard's, analyst Sam Poster of Susquehanna Financial Group said in a recent report. Representatives from these companies did not immediately respond to requests for comment.
A Nike spokeswoman told CNBC, "We are doubling down on our approach with Nike Digital and our owned stores, as well as a smaller number of strategic partners who share our vision to create a consistent, connected and modern shopping experience."
And so, like it has with many trends, the coronavirus pandemic has only accelerated a downfall.
"Department stores' decline has been masked by the survivors like Macy's who have rolled up their competition through consolidation and have presented themselves as being viable," said Mark Cohen, former Sears Canada CEO. "But that gig is over. The end was in sight pre-Covid."
"The mall-based department store is in its last stages," Cohen said.