department store

Department Stores

Industry Insight

Date January 2018

Approximate net recovery on cost

Synopsis

Current trends

  • 2017 Holiday (November/December) Comp Sales Trends:
    • Bon Ton -2.9%
    • JCPenney +3.4%
    • Kohl’s +6.9%
    • Macy’s +1.1%
    • Nordstrom +1.2%
    • Stage Stores +1.1%

 

Projected Values

 

Change in Retail Sales

 

Change in Same Store Sales

 

Change in Store Count 

 

Online continues challenge to Brick & Mortar: Online sales, led by retail king Amazon, continued to outpace retail sales in 2017. For the first three quarters of 2017, Amazon’s net sales were up 23, 25, and 34 percent, respectively, over 2016. In contrast, the department stores segment has had a tough year. Sears announced in early January that it would close another 103 stores including both Sears (64) and K-Mart (39) concepts. Despite favorable same store sales for the holiday period of November/December (+1.1), Macy’s also announced that it would close eleven stores, four of which had been previously disclosed. Per data supplied by Creditntell, most economists expect 2018 GDP growth of 2 to 2.2 percent. However department stores are expected to underperform relative to the rest of retail. Four contributing factors drove the decline, including decreased mall traffic, a slow supply chain, the shift in consumer preference away from apparel, and a decrease in foreign tourist spending.
 

Growing logistics infrastructure and innovation in its delivery business ensure that the online channel will continue to be a driver of change for traditional brick and mortar. To compete, department stores must find ways to integrate brick-and-mortar and online channels, while strategically moving out of locations that no longer work.
 

Over the next five years the percentage of services conducted online will continue to increase. In addition to apparel and accessories, IBISWorld notes that the rising data capacity of the internet will open up new online services to the mainstream, such as cloud data storage as opposed to storage on a personal hard drive. In addition, video streaming services will continue growing in popularity as the average internet speed increases. The online channel is unlikely to plateau in the near future. It’s expected that younger generations will continue to demand that more services be available via the internet even as they grow older.
 

As e-commerce continues to grow in popularity and accessibility, understanding the percentage of total revenue that online sales represent is important for omni-channel retailers. Successful businesses must continually analyze the cost-to-revenue relationship associated with running their online channel. Understanding these costs is also a key component of an inventory appraisal where the online channel is considered as part of the appraisal sales capacity. For retailers with a growing online component, working with an appraiser with experience in the segment helps lenders understand the impact that utilizing this channel can have on net orderly liquidation values.
 

Store closures continue: Ongoing retail trends including a move away from traditional malls and the ease and convenience of online shopping have contributed to non-stop growth in non-store sales. This culture shift continues to hit hard at some traditional department stores’ sales. In addition to 399 store closures for Sears and 20 for Macy’s, through Q3 JCPenney and Bon-Ton closed 186 and 7 stores, respectively, in an attempt to offset ongoing losses from underperforming stores. As part of the Sears closures, Sears Canada closed its final group of stores on January 14, 2018, thus exiting the country.
 

A bright spot for the segment is Kohl’s. The company had a better than expected holiday season with comp sales for the November/December period up 6.9 percent. Kohl’s Chairman and CEO Kevin Mansell said in a statement that “all lines of business and all regions reported comp positive sales,” with digital sales accelerating “significantly” and store sales rising on “strong” traffic during the holiday period. Through the end of Q3 the company’s store count remained relatively flat. After several tough years another positive came from JCPenney, which posted comps up 3.4 percent for the holiday season. Company management noted that category performers led by home goods, cosmetics, and fine jewelry drove the positive sales. Management added that the chain’s apparel categories continue to demonstrate improved comp performance, particularly in women’s and kids. The company also launched a “click-and-collect” program allowing customers to pick up online purchases in-store, which drove double-digit growth in online sales. It remains to be seen if JCPenney’s major challenges are over, but the positive holiday season is great news considering the overall climate for the retail sector.
 

Coming out of a positive 2017 holiday season (+1.1 percent), Macy’s sees a brighter future ahead for its brick-and-mortar stores. Outgoing CEO Terry Lundgren notes that “Macy’s is now beginning to reap the benefit of moves such as closing dozens of weak stores, decentralizing buying decisions, ramping up integration of stores and e-commerce, and using clout with vendors to get more exclusive items.”
 

Traditional department stores continue to face competition from discount department stores like Target and Walmart that have increased their product lines and capture additional consumer dollars. These companies have continued the push to transform stores into supercenters by adding fresh grocery sections. By supplying all of a household’s necessities under one roof, including apparel, small appliances, and groceries, discount retailers offer convenience to consumers.
 

As they continue to fight specialty and online retailers for every consumer dollar, the department stores sector is expected to continue to contract over the next five years, albeit at a slower rate than the past five years (-5.0 percent). As per capita disposable income increases more rapidly through 2022, revenue declines are forecasted at an annualized rate of 2.6 percent, totaling $137.0 billion. Lenders with mall-based department stores in their portfolios should continue to conduct regular appraisals in order to understand changes to net recovery values as they occur.