With most of the leading retailers like Macy's Saks Inc., Nordstrom, TJX and J.C. Penny suffering serious contraction in their sales, the reality of the downturn has hit home for department stores, after a year when the financial crisis took a firm stranglehold on consumer spending. "It is hard to predict when sales will get better and when they're still getting worse," Liz Dunn, analyst at Thomas Weisel Partners said. "We are looking at first quarter 2010 at the earliest for a rebound." The red ink has 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-invent pricing structures to woo shoppers, but that temporary discounts are hardly a solution. "Heavy discounting has driven consumers to stores but retailers might not be very pleased with this equation, they would prefer to get inventory in line and under control," she says. However, Dunn notes that luxury retailers including Nordstrom and Coach have lowered prices to more everyday prices on a permanent basis, and says this is a strategy that should work.
Nordstrom is offering lower initial prices and Macy's is promoting its everyday value collections more too. They are telling consumers that they have integrity but they are also adding value. "There are shoppers out there looking for bargains but also people looking to meet their needs, and their families' needs, on a consistent basis," she told. Dunn also thinks good customer service plays second fiddle when purse strings are so tight in the first place. "Service isn't going to win sales at this point. There is more interest in service when economic times are good, but right now value is outweighing service," she says.
Extent of Damage
Sales at department stores are typically down by high single or low double digits year-on-year, whereas specialist clothing chains are seeing declines closer to 20%. However, Dunn points out that the relatively slower declines in sales at department stores can be explained by the extra consumer traffic buying non-discretionary items for the home. She said that department stores and specialty clothing retailers are ultimately in the same boat during this financial crisis, because both face the challenge of getting consumers through the door during a difficult retail environment. The established performance of the Biggest US department stores means that double digit profit declines are more damaging than lethal.
Upmarket chain Nordstrom reported a 68% fall in full-year profit to US$68m as sales dropped 8.5%, while JC Penney's net income nearly halved to $572m as sales fell 6.9%, and Macy's full-year profit slid to $310m in 2008 from $750m in the prior year. Only Saks swung to a full-year loss of $154.9m for the annual period, from $47.5m profits in 2007, as the combination of sales declines and aggressive promotions eroded margins. However, Saks, which has slashed 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: "It is our expectation that the economic environment will remain extremely challenging through 2009, if not beyond, and we have planned accordingly."
Kohl's, which posted net income down 8% to US$885m, should benefit long-term from the acquisition of 31 stores from bankrupt chain Mervyns in a joint bid with Forever21. The collapse of the 149-store Mervyns business late last year is an example of just how fragile the department store sector is though.
With consumer spending yet to bottom out completely, most department stores envisage further sales drops in their guidance for 2009. They do, however, note that the uncertain direction of the economy makes predictions of future performance difficult. For the 2009 fiscal year, Nordstrom expects same store sales to decrease10% to 15%, JC Penney forecasts a fall of 12% to 15%, and Macy's is predicting same-store sales down between 6% and 8%. Kohl's expects its full-year same-store sales to drop by 5% to 8%, while Saks thinks same-store sales will decline in the low double digits.
Widespread reductions in capital expenditure and cost cutting like store Closures, job losses and salary caps are already in evidence as chains re-size for a shrunken economy, with 7,000 job cuts announced at Macy's and 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 depends on how prolonged their woes are.
"Some haven't taken action yet and so there might be more 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 is costing many shop assistants their jobs. But sadly, the return in revenues that would restore some much-needed cheer is not being entertained in the gloomy outlook of department store retailers.
Originally published in The Stitch Times: May 2009