Dive Brief:
- After posting strong fourth quarter numbers, department stores may already be overvalued by investors, as the "fundamental upside is limited" for the sector, analysts with Deutsche Bank led by Paul Trussell said this week in a report emailed to Retail Dive. Stock prices for department stores — such as Macy's, Kohl's and Dillard's — dropped in the low single digits following the report, which came ahead of first quarter earnings releases.
- One exception called out by the analysts was Nordstrom, which sells in a better-performing luxury segment and is more insulated from weather patterns that might hurt other retailers in Q1. Looking at the long term, the analysts noted that mall-based retailers and department stores remain "structurally challenged" given the expansion of e-commerce and Amazon's footprint, the growth of off-price retail, and shifts in consumer spending to restaurants and other experience-based services.
- Not helping things for the sector is a continuing loss of market share in apparel. Analysts with Morgan Stanley said in an April report that Amazon grabbed an extra 1.5% of the U.S. apparel market last year apparently "at the expense" of department stores. Sears Holdings, Macy's and J.C. Penney together lost 0.8% in market share in 2017, according to Morgan Stanley estimates. Ross Stores, Nordstrom Rack and Gap's Old Navy also added between 10 and 15 basis points of market share in 2017.
Dive Insight:
The travails of the department store sector are well-documented. The decline of B- and C-class malls, aging of the customer base, explosive growth of e-commerce, rapid expansion of off-price and the continued dominance of big box retail have landed a gut-punch.
The question is when, and if, the bleeding will stop. After the holidays, the healthier players appeared to have stabilized and seemed poised to build on their fourth quarter performances. After a dismal 2016, most major retailers — with the exception of Sears — posted positive comps for 2017, according to data compiled by Moody's in an April report.
Analysts with the ratings firm project that comparable sales for J.C. Penney, Kohl's, Macy's and Nordstrom could remain flat or grow in the very low single digits — which represents an improvement for the sector.
The first and second quarters of this year could shed light on the sector's prospects. Deutsche Bank's report comes ahead of Q1 announcements for department stores. Analysts with the bank noted that weather and an early Easter could pressure comps for department stores during the quarter.
The long-term challenges for department stores are steep. If malls continue to decline, it would be an expensive and difficult undertaking for department stores to reposition geographically. Upgrades to e-commerce and omnichannel capabilities — necessary for the stores to compete with Amazon — come with steep costs attached. And Amazon only seems to get more ambitious and hungry for market share by the day.
Moreover, off-price is still growing in both sales and stores, and is likely to continue to do so at the expense of department stores. The American middle class — around which department stores grew up — has been shrinking for years. And not least of all, apparel bankruptcies — including that of department store retailer Bon-Ton Stores, which is in the process of liquidating its entire business — are still sending waves of heavily discounted merchandise onto the market, adding price pressure to a sector that has long been trying to get its discounting under control.
