With most of the leading retailers like Macy's Saks Inc.,Nordstrom, TJX and J.C. Penny suffering serious contraction in their sales, thereality of the downturn has hit home for department stores, after a year whenthe financial crisis took a firm stranglehold on consumer spending. "It ishard to predict when sales will get better and when they're still gettingworse," Liz Dunn, analyst at Thomas Weisel Partners said. "We arelooking at first quarter 2010 at the earliest for a rebound." The red inkhas resulted in a number of headcount reductions across a deteriorated US retail sector since the New Year too.


Strategies for Survival


In fact, department stores are being forced to re-inventpricing structures to woo shoppers, but that temporary discounts are hardly asolution. "Heavy discounting has driven consumers to stores but retailers mightnot be very pleased with this equation, they would prefer to get inventory inline and under control," she says. However, Dunn notes that luxuryretailers including Nordstrom and Coach have lowered prices to more everydayprices on a permanent basis, and says this is a strategy that should work.


Nordstrom is offering lower initial prices and Macy's ispromoting its everyday value collections more too. They are telling consumersthat they have integrity but they are also adding value. "There areshoppers out there looking for bargains but also people looking to meet their needs,and their families' needs, on a consistent basis," she told. Dunn alsothinks good customer service plays second fiddle when purse strings are so tightin the first place. "Service isn't going to win sales at this point. Thereis more interest in service when economic times are good, but right now valueis outweighing service," she says.


Extent of Damage


Sales at department stores are typically down by high singleor low double digits year-on-year, whereas specialist clothing chains areseeing declines closer to 20%. However, Dunn points out that the relatively slowerdeclines in sales at department stores can be explained by the extra consumertraffic buying non-discretionary items for the home. She said that department storesand specialty clothing retailers are ultimately in the same boat during thisfinancial crisis, because both face the challenge of getting consumers throughthe door during a difficult retail environment. The established performance ofthe Biggest US department stores means that double digit profit declines are moredamaging than lethal.


Upmarket chain Nordstrom reported a 68% fall in full-yearprofit to US$68m as sales dropped 8.5%, while JC Penney's net income nearly halvedto $572m as sales fell 6.9%, and Macy's full-year profit slid to $310m in 2008from $750m in the prior year. Only Saks swung to a full-year loss of $154.9mfor the annual period, from $47.5m profits in 2007, as the combination of salesdeclines and aggressive promotions eroded margins. However, Saks, which hasslashed jobs and closed its Club Libby Lu business as a result of the downturn,believes it has taken the hit at the right time. Its CEO Stephen Sadove says: "Itis our expectation that the economic environment will remain extremelychallenging through 2009, if not beyond, and we have planned accordingly."


Kohl's, which posted net income down 8% to US$885m, should benefitlong-term from the acquisition of 31 stores from bankrupt chain Mervyns in ajoint bid with Forever21. The collapse of the 149-store Mervyns business late lastyear is an example of just how fragile the department store sector is though.


Now, Whereto?


With consumer spending yet to bottom out completely, most departmentstores envisage further sales drops in their guidance for 2009. They do,however, note that the uncertain direction of the economy makes predictions offuture performance difficult. For the 2009 fiscal year, Nordstrom expects same storesales to decrease10% to 15%, JC Penney forecasts a fall of 12% to 15%, andMacy's is predicting same-store sales down between 6% and 8%. Kohl's expectsits full-year same-store sales to drop by 5% to 8%, while Saks thinkssame-store sales will decline in the low double digits.


Widespread reductions in capital expenditure and costcutting like store Closures, job losses and salary caps are already in evidenceas chains re-size for a shrunken economy, with 7,000 job cuts announced at Macy'sand 1,100 at Saks since the New Year. It remains to be seen whether Nordstrom,TJX, Kohl's and JC Penney will follow suit in this downsizing, and it largely dependson how prolonged their woes are.


"Some haven't taken action yet and so there might bemore to come. It depends on how quickly the economic situation takes to stabilise,"adds Dunn. Therefore, a cruel twist of fate means a lack of consumers iscosting many shop assistants their jobs. But sadly, the return in revenues thatwould restore some much-needed cheer is not being entertained in the gloomy outlookof department store retailers.


Originallypublished in The Stitch Times: May 2009