Down in the Dumps
Sep 1, 2008 12:00 PM, By Lauren Shepherd
It hasn't been an easy year for department store operators.
Before the housing bust, department stores had been on a winning streak and seemed to dispel the notion that they were a relic of the past. However, the crash in housing prices — and subsequent credit crunch — have done a real number on retail sales in general and hammered the department store sector in particular.
Sales are down, several regional chains have filed for bankruptcy and profits in the latest quarter were less than inspiring. As a result, many department store chains — still the key anchor tenants for most regional malls — have cut back on growth, are considering new store formats or looking to diversify merchandise mixes. “In short, we can't control the economy or gas prices, but what we can control, we are,” said J.C. Penney Corp. CEO Mike Ullman on the Plano, Texas-based company's second quarter earnings conference call.
Management's tone wasn't always so grim. Through the middle of 2007, same-store sales, or sales at locations open at least a year, were stronger at department stores than at many specialty and apparel retailers, according to an analysis of the sector by Columbus, Ohio-based consumer research firm TNS Retail Forward. But since last June, sales overall in the sector rose in only four months out of 12 months and surpassed those of specialty and apparel retailers in just three months. Most analysts and industry watchers say the good old days may not return. “The consumer remains under duress, and their aggressive spending from 2002 to 2006 is unlikely to ever resume,” says Deutsche Bank analyst Bill Dreher Jr.
Second-quarter woes
In the second quarter — the most recent period for which most department stores have reported — profit and sales figures didn't do much to brighten the sector's outlook.
In August, Cincinnati-based Macy's Inc. posted a profit increase of just $1 million in its second quarter. Revenue dipped 3 percent, while same-store sales dropped 2.1 percent. Same-store sales are a big indicator of a retailer's health since they exclude new stores that can skew the comparison from the prior year's results. J.C. Penney Corp., meanwhile, reported its profits dropped 36 percent in the second quarter with sales declining nearly 3 percent. Same-store sales slipped 4.3 percent.
With performance looking bleak, some department store executives say they see salvation in new merchandise and exclusive lines. Others said they would cater to the cash-strapped consumer by opening more outlet-type stores or ramping up their off-mall property development.
Macy's is trying to cater to consumers' needs by localizing its merchandise. The company is concentrating more managers in local markets to make decisions about which merchandise goes on store shelves. That effort is expected to result in $100 million in cost savings per year, but it likely won't have much effect on the company's results until next spring. Meanwhile, apparel sales, the company said, will probably remain weak for the rest of 2008.
Macy's — like so many other chains — is attempting to energize consumer spending by introducing a slew of branded products and apparel lines. Macy's will be the exclusive department-store retailer for Tommy Hilfiger U.S.A. men's and women's sportswear. The company has also developed a partnership with FAO Schwarz to build toy stores in almost 700 Macy's department stores over the next two years.
JCPenney, meanwhile, is focusing on slowing the pace of new store openings and reducing its capital expenditure budget for next year. The company now plans 20 new or relocated stores in 2009, down from the 36 it expects to open in 2008. Both numbers are far lower than the 50 stores a year it had once planned to open.
Ullman says even though the company has scaled back its expansion plans, “we are opening and relocating stores on a selective basis in those areas where we don't have a presence and where the current demand calls for us to have an expanded presence.” The majority of those stores, he says, are off-mall locations. The company is only planning to open one more mall store this year of the 20 they have yet to open. “The fact that our new stores are performing better … than the existing 900-plus stores is a vindication of the fact our new format is more productive and a better offer in the long run and that's why we're so optimistic about becoming the leader in retailing in our sector over the next five years,” he says.
