Dive Brief:

• Department stores continue to report woeful earnings, the only group of retailers that have lost money in the second quarter, according to research firm Retail Metrics in its report “Retail Headwinds Persist,” which includes an index of 116 chains.

• Losses have mounted for Sears in particular, according to the report (forwarded to Retail Dive), and operating income is expected to drop substantially for six of the eight publicly traded department stores. Just four of the eight (Macy’s, Kohl’s, Nordstrom, and Dillard’s) are expected to turn a profit in the quarter.

• Retail Metrics estimates that overall second quarter retail revenues will rise 2.9%, or 3.6% excluding retail giant Wal-Mart. Drugstores, home improvement stores and personal care retailers like Ulta, along with “entertainment retailers” (a segment led by a smaller-than-expected loss at bookseller Barnes & Noble), are expected to experience at least modest growth.

Dive Insight:

Retailers have been forced to cut into their margins with traditional investments in higher labor costs, e-commerce operations, inventory management and logistics (all driven by competition from e-commerce, notably Amazon) and with “out of the box” investments to boost their stores’ customer experience quotient, Retail Metrics founder/president Ken Perkins writes.

“The Selfie generation insists upon interaction with brands that they engage and purchase,” Perkins said. “They are far more inclined to allocate discretionary dollars to experiences ranging from skydiving to parasailing to global travel than previous generations that were more inclined to purchase goods. And let’s face it, a plethora of new experiences have emerged over the last decade and half that are syphoning spending away from traditional retailers and adding to their woes.”

But perhaps most significant is that all retailers, and department stores in particular, are getting hit by a variety of factors that have undermined an otherwise healthy economic environment. Lower fuel prices, strong employment gains, solid auto and home sales, rising home prices, and low interest rates have not been enough to underpin what is now a story of a diminished American middle class, Perkins writes.

Perkins cites Pew Research Center data reflecting that the percentage of American adults in middle income households has deteriorated every decade since 1971, when it was 61%, to just 50% in 2015. Low-income households increased from 16% in 1971 to 20% in 2015, while high-income households also expanded from 4% to 9% over a similar period. Moreover, net worth over this time frame has skewed heavily toward high-income earners. America’s Research Group found in July that some 26 million Americans are simply too poor to shop, except for necessities.

“Often left unsaid, and in our opinion underestimated, in terms of retailers’ struggles has been the long, slow steady erosion of the American Middle Class,” Perkins said. “A large vibrant middle class fueled economic growth and consumption for much of the post-war period. 

That explains the rise of dollar stores, off-price stores and the sharing economy, according to Perkins.

“Technology has made it possible for shoppers to purchase, borrow, or sell with the click of a mouse by-passing traditional retailers altogether,” he said. “Companies like The Real Real have greased the skids for consumers to become retailers themselves. Thrift shops are thriving as Goodwill and Salvation Army stores among others have expanded… All of this speaks to less demand for new product at full price. Consumers were trained by retailers during the Great Recession to shop on sale and many retailers have found it difficult to exit the promotional merry-go-round. The key point here is much of the U.S. population are gravitating toward these venues based on an inherent necessity to stretch tight budgets.”