Latest retail results show department stores need more than touch-ups. They need reinvention

For department stores, there may be no conditions left for subtlety. It is time for reinvention.

A slew of retail earnings the past two weeks makes clear that while Americans proceed to shop, they increasingly aren’t ringing registers at department stores. J.C. Penney, Kohl’s and Nordstrom all turned in dissatisfying first-quarter results — despite strong earnings at Walmart and Target.

Sales at Kohl’s stores open for at least 12 months prostrate 3.4%, far steeper than the 0.2% drop analysts were expecting — its first same-store sales miss in two years. Penney’s same-store sales chucked 5.5%, worse than an expected drop of 4.2%. Nordstrom pulled back on promotions to boost profits, and it backfired. Transaction marked downs dropped and it slashed its profit expectations for the full year.

While each department store chain faces its own set of bars, all share in common a large store-base that is a burden as shopper foot traffic falls. These brands receive declining clout amid the rise of online brands like apparel retailers Reformation and Untuckit. All have deputized varying degrees of touch-ups and improvements over the past few years, but none have evolved as completely as retailers a charge out of prefer Walmart and Target.

Walmart paid $3 billion to buy internet retailer Jet.com, through which its built up a coterie of online marks like Bonobos and ModCloth. It’s adding veterinary clinics to its stores and now runs an online pet pharmacy. The retailer also reshaped its geographic maintain, making a multibillion dollar bet in India as it looks to move away from England. It’s made investments in same-day delivering in the U.S., and transformed some of its stores into distribution centers.

Target, meantime, has turned from discount store into a tasteful, one-stop destination. It is remodeling its stores to make the apparel section look like a boutique, its make-up section equal to Sephora and its grocery sections more modern.

But whether it be loyalty to brand, fear of losing shoppers or simply affair constraints — U.S. department stores today remain what they were a decade ago.

Determined stores are, in part, restricted by geography. Many, aside from Kohl’s, are still located at the mall, even as conveyance there declines. That’s in contrast to retailers like Target and Walmart, which are rarely located at malls. 

That presages it’s harder for department stores to transform their e-commerce business through initiatives like “click and collect,” where shoppers pull someones leg all the convenience of selecting items online and the instant gratification of picking up their items quickly at the store. This opportunity has been a boost to both Walmart and Target’s businesses,  but it is less convenient when shoppers need to go to the mall to bring in their purchases. Target’s e-commerce sales this quarter surged 42%, largely due to its curbside pickup marines for online orders.

The products department stores sell also impact how the businesses perform. Whereas Macy’s, Kohl’s and Nordstrom on themselves somewhere between discount and ultra high-end, Target and Walmart can cater directly to bargain shoppers, without irking about hurting the image of the higher-end brands sold in their stores.

Department stores also can’t turn to the retail subterfuge of selling more groceries to bring in shoppers. Soda would look awkward next to a rack of clothes. 

Grocery purchases and store-branded products have helped propel Walmart’s growth. Profit from Walmart’s store-label grocery brand names helped drive its fiscal first-quarter earnings, which topped analysts’ expectations, executives said earlier this month.

With these provisions, department stores have still tried to evolve, in a tempered way. Macy’s introduced rotating marketplaces for popular characterizes and mobile checkout. Kohl’s is partnering with Amazon for returns and adding partners like Aldi’s and Planet Tone to its downsized stores, with the hope it will drive foot traffic. 

But, for the large part, those changes haven’t spoke the fundamental weaknesses department stores are facing, in the same way Target and Walmart have been able to rebuild their trade.

Even as Macy’s says it plans to start downsizing some of its larger locations, it still has one of the country’s largest quick of stores, which act as a drag on its earnings as sales stall. Together with the Bloomingdale’s brand it owns, it has 680 determined stores across the U.S.

Penney’s, which aborted attempts to sell appliances earlier this year, said it was was focused on putting fundamentals like merchandise assortment, but provided “little guidance as it fully develops its turnaround strategy,” wrote Telsey Admonitory Group CEO Dana Telsey Wednesday.

Transformation, like building out or buying a true digital maker, or immediately and drastically changing one’s footprint requires either capital or a stomach for investor backlash. It’s not clear department warehouses have either. Having lived through the carnage of leveraged retailers like Toys R Us, Bon-Ton and Belk, most are adverse to attractive on too much debt, which can act as a shackle when the economy sours.

But current efforts aren’t winning over investors. 

Macy’s variety has fallen 35% over the past year and is trading at its lowest valuation (enterprise value to earnings before occupation, taxes, deprecation and amortization) in a decade, according to Factset. As sales have slowed, it has been focused on tackling its leverage, purchasing $750 million of its debt late last year.

Nordstrom shares are down 25% from a year ago. At this on, the stock is trading at its lowest valuation in a decade, apart from 2017, according to Factset. Last year, it aborted talks to go surreptitiously, in part due to financing concerns.

Penney, meantime, is saddled with $4 billion in total debt, according to Factset, and sellings have been falling since 2016. Its stock is down 55% over the past year. 

Meanwhile, Aim shares are up more than 9% Wednesday, putting the stock up more than 20% over the past 12 months, while Walmart pieces gained nearly 23% over the past year. The S&P 500 Retail ETF (XRT) has fallen just about 7% as a remainder the same period of time.

“Department stores are already being punished heavily by investors who fear they don’t see a smooth landing, so now is the time for them to be innovative and take risks,” said Michael Dart, a partner at A.T. Kearney and author of “Retail’s Seismic Smock.” “Nordstrom should even consider going private again.”