Department stores fight back: Can new strategies work?

Are the strategies that mid- and high-end US department stores are introducing this year enough to pull them out of the doldrums?

Possibly in the long run, but no one expects sales and profits to improve any time soon. Share prices are low, sales are negative in most cases (even at Dillard's, the group's traditional outperformer), and the sector's outlook for the rest of the year is bleak.

In the second quarter, Macy's sales fell 3.5 percent year over year, while Dillard's fell 5.2 percent. However, Nordstrom, which reports its second-quarter results after the market closes on Tuesday, is expected to see a turnaround from the same quarter last year. The company has seen a positive sales trend this year and posted healthy sales in the fourth quarter, even though earnings fell short of expectations.

These are crucial and turbulent times for Nordstrom, Dillard's, Macy's, but also Belk, JCPenney, Kohl's, Saks Fifth Avenue and Neiman Marcus. All of them are pushing ahead with new strategies, formats, consolidations and financial restructuring, working to satisfy increasingly impatient investors and prove wrong the many retail experts who keep saying there is no future for the department store.

Another troubling indicator for the sector came last month when Charlotte, North Carolina-based Belk was forced to deleverage, prompting a change in ownership. As part of the deal, certain existing lenders, including KKR and Hein Park, an investment firm specializing in distressed loans, took a majority stake in the company from private equity firm Sycamore Partners.

Because Belk is privately held, it is difficult to clearly assess the company's performance. However, the change in ownership suggests that Belk did not have enough revenue to cover its debt. Don Hendricks, CEO of Belk, said the transaction is “a critical milestone for Belk as we move into the future with a capital structure that positions our company for sustainable, long-term growth and profitability. We are confident that our stronger balance sheet will enable us to build on the momentum and growth of recent quarters, better serve our customers and their communities, and be an even stronger partner to our suppliers.”

Future topics

Whether department stores can reverse their declining market share as consumers spend more online, at discount stores and at mass retailers ultimately depends on three big questions: First, can they offer the kind of services not found online? Second, can they make shopping more experiential, fun, convenient and less hassle? And third, can assortments be redesigned to create more value and relevance for changing lifestyles and younger demographics.

“We should keep our eyes open to what's happening in the world,” Bloomingdale's CEO Olivier Bron said in a recent interview with WWD. Although Bloomingdale's is in relatively good shape and has even grown since pre-COVID-19, Bron sees a way to take the upscale department store to the next level. He believes Bloomingdale's needs to examine how department stores in Europe and Asia create buzz and excitement; that Bloomingdale's should increase localization of events, merchandising and marketing; generate more cross-category shopping and leverage data more intensively. Ready-to-wear, he said, remains the core of the business, although there is room for growth in other categories.

Macy's Inc.'s “Bold New Chapter” strategy, in its early stages, calls for closing about 150 underperforming Macy's locations by 2026 (55 by the end of this fiscal year), prioritizing investments in the 350 “go-forward” locations and expanding the specialized, small-format Macy's, Bloomies and Bloomingdale's outlets and Backstage off-price units. Macy's also aims to monetize $600 million to $750 million worth of assets by 2026 through the sale of stores, parking lots and some fulfillment centers. The retailer targets low-single-digit annual comparable sales growth in owned and licensed markets in 2025; annual revenue, general and administrative growth in dollars below the historical inflation rate of 2 to 3 percent and annual adjusted earnings before interest, taxes, depreciation and amortization growth in the mid-single digits.

“It's very diagnostic. It's a very clear look. It's emotionless,” said Tony Spring, chairman and CEO of Macy's Inc., of the bold new chapter. “I would characterize it as an attempt to fundamentally reposition the company for growth, to provide a better customer experience and to unlock the value of Macy's Inc.,” Spring told WWD.

The development of Kohl's

Of all the department stores remaining in the U.S.—after decades of mergers and consolidations, only a handful of names remain—Kohl's appears to be most aggressively revamping its mix to attract much-needed younger customers. Most important, Kohl's is well advanced in opening Sephora stores in its stores; the launch of Babies “R” Us is underway; clothing stores have opened in 700 of its stores; and it is looking for better brands to offset its over-reliance on private labels. Over the past year, Kohl's has revamped its home assortment with beefed-up displays of wall art, plants, storage, frames, glass, ceramics, gifts and impulse items, and added pet supplies and lighting categories to the sales floor.

With all these assortment changes and more to come, Kohl's is targeting an additional $2 billion in sales over several years, although the realignment has not yet reversed the declining sales trend. In the first quarter of this year, net sales fell 5.3 percent and comparable sales fell 4.4 percent. In 2023, net sales fell 3.4 percent to $16.6 billion; comparable sales fell 4.7 percent.

“We continue to have confidence in our strategy and believe our key growth initiatives, including Sephora, home decor, gifting, impulse stores and our upcoming partnership with Babies 'R' Us, will contribute more meaningfully going forward,” Chairman and CEO Thomas Kingsbury said as the company reported its first-quarter results. “Nevertheless, we recognize there is more work ahead in some areas of our business. Given the weak first-quarter performance and ongoing uncertainty in the consumer environment, we are taking a more conservative approach to our financial outlook for the year.”

Nordstrom's plan

At Seattle-based Nordstrom, there are signs that the turnaround strategy is working: Sales improvements have been achieved in the last two quarters, and more are expected. The Nordstrom brothers, Erik and Pete Nordstrom, want to take Seattle-based Nordstrom Inc. private again. The goal of the privatization is to achieve a higher valuation than on Wall Street, escape the scrutiny of investors and forestall an unwanted takeover bid for the company. Erik, the CEO, and Pete, president and chief brand officer, would have more time to focus on long-term strategy and spend time with their families. The Nordstroms tried to take the department store private in 2018, offering $50 per share, or $8.4 billion, with the help of Leonard Green & Partners. That proposal was rejected by a committee of the board. The Nordstroms would offer less this time because the company's current market capitalization is about $3 billion.

Nordstrom is banking on its off-price division Rack, where net sales increased 13.8 percent and comparable sales increased 7.9 percent last quarter. There were 264 Rack stores at the end of the quarter, compared to 243 in the same period last year. Another 22 Rack stores will open this year.

“We are focused on actions that we know will drive growth and profitability across the company over the next few years, including opening new Rack stores, driving Nordstrom's digital growth and increasing comparable-store sales,” Erik Nordstrom said earlier this year.

JCPenney's Renewal

Aside from its flagging top-line revenue, JCPenney is being hounded by retail experts who question whether the once-dominant department store serving diverse working families still has a reason to exist. Penney's went bankrupt in May 2020 after being hit hard by the pandemic. But the Dallas-based retailer was bailed out of bankruptcy by two major mall owners and its new owners, Simon Property Group Inc. and Brookfield Property Partners LP, reducing its debt from about $5 billion to $500 million. Penney's, which is critical to the health of many Simon and Brookfield malls, launched a $1 billion “refresh” program last year to set higher standards for store presentation and reverse its flagging sales trend. The program features smarter category juxtaposition, such as moving handbags just behind athletic wear and children's fashion, next to the photo studio and Disney shop; a clearer demarcation between casual and formal wear; central, faster checkouts instead of checkouts scattered around the store; movable furnishings; an open floor plan for longer sight lines and easier navigation; and more mannequins.

When the program was announced, Penney CEO Marc Rosen countered those who remained skeptical about Penney's future: “JCPenney is on solid financial footing and is steadily increasing its relevance and frequency with our core customers. We are poised for continued growth and know that the surest path to success is to focus on our customers.”

Just last week, Saks owner HBC received the government's green light for its $2.65 billion acquisition of Neiman Marcus Group, and Saks officials said the deal could close by year's end. The deal is seen as potentially good, but also bad. Some say it ensures the survival of both companies for the next few years; others point out that suppliers usually come under pressure when retailers gain influence over them, and that retail mergers don't always work out.

Saks officials said new financing and capital injections from the deal, future real estate sales and the fall 2024 sale expected to begin next month will improve liquidity and help catch up on overdue payments to suppliers, many of which are well over the average 60-day period.

“I would like to remind everyone that we plan to operate all of the companies under their respective names going forward, but the newly combined company will be deleveraged from its current position on a pro forma basis,” Saks Global CEO Marc Metrick told vendors on a conference call last week. “Funding will be provided through a new term loan and a new revolving credit facility with significant amounts of liquidity available.”