Woes deepen at US department stores

FT, May 12, 2017

By Pan Kwan Yuk & Mamta Badkar

Investors who have been hoping that American department stores will have a better start to the year following the annus horribilis of 2016 were left sorely disappointed on Thursday.

Three chains — Macy’s, Kohl’s and Dillard’s — reported another quarter of steep declines in comparable sales, missing expectations and sending their shares sliding.

Macy’s shares tumbled 17 per cent to its lowest level since August 2011 after it said its sales decline had entered a third year.

Retailers are facing unprecedented upheaval amid falling mall traffic, shifting consumer shopping patterns that prioritise spending on recreation, and fierce competition from online stores and off-price retailers that offer branded goods at steep discounts.

In response, companies are shuttering shops and shedding jobs at a pace not seen since the Great Recession.

Macy’s has already said this year that it could cut up to 10,000 jobs and shutter 100 stores, and Jeff Gennette, its chief executive, told analysts on a conference call that the US remains “over-retailed compared to other markets”.

“These are unusual and challenging times for retail, especially for mall-based department stores. We know that these changes we’re seeing are secular and not cyclical,” Mr Gennette said. “But we don’t have our head in the sand as to the significant challenges that we face to get the business growing again.”

Despite efforts by Macy’s to lure bargain hunters and younger shoppers with its own off-price product, Backstage, and a successful partnership with skin and spa chain Blue Mercury, its comparable sales fell 5.2 per cent in the first quarter. That was steeper than analysts’ estimates of a 3 per cent drop and came on top of the 6.1 per cent fall the company reported for the same quarter a year ago.

Kohl’s, which has been trying to lure shoppers by selling Under Armour athletic wear, also saw little improvement in sales. Although the company said the tie-up with Under Armour “exceeded a very aggressive launch sales plan”, that was not enough to fully offset the industry’s wider structural challenges.

Kohl’s like-for-like sales for the three months to the end of April fell for a fifth straight quarter, dropping 2.7 per cent, a much steeper fall than the 0.6 per cent dip the market was expecting. Its shares slid 7.8 per cent on Thursday.

Arkansas-based Dillard’s said same-store sales fell 4 per cent, the seventh consecutive quarter of decline, sending its shares down 17.5 per cent.

Few analysts are expecting the road ahead to get easier soon. S&P is forecasting double-digit declines in first-quarter earnings for department store operators and big box retailers. And retail bankruptcy filings so far this year have already outpaced those recorded for the whole of 2016.

Dana Telsey, analyst at Telsey Group, said: “The first quarter was tough for everyone and we will see more differentiation as the year proceeds depending on the new elements they add to their offerings on product and service. The department store space is going through a reinvention.”