Nearly two weeks ago Macy’s beat quarterly sales and earnings expectations and many on Wall Street promptly lost their mind. Same story with Dillard’s. Then Kohl’s followed up with a similarly surprising upside report that led some to conclude that maybe, just maybe, the long-beleaguered department store sector might be seeing a resurgence or—dare we say it out loud?—the beginning of a renaissance.
Alas, this rising ebullience seems far more driven by a mix of hope, misunderstanding and a heaping side order of denial than any compelling evidence that the tide is turning in any meaningful or sustainable way. Once again we are in real danger of confusing better with good.
To be sure, both Macy’s and Kohl’s sales and profits were much improved over last year. Yet their performance must be viewed from the perspective of both short-term factors and longer-term realities. On the clearly positive side there is solid evidence that both struggling retailers are executing better. In Macy’s case, inventory looks to be well managed (yielding fewer markdowns) and efforts to capture cost efficiencies appear to be paying dividends. A few targeted strategic initiatives, including Kohl’s partnership with Amazon, seem to be driving some incremental business.
With a bit more context, however, these results aren’t really all that stellar. And they most definitely are not yet strong indicators of any substantive turnaround. Notably, both retailers’ sales benefitted significantly from the move of a major promotional event into the quarter. Without this shift, same-store sales would have increased only about 1.7% at Macy’s, and Kohl’s would have been more or less flat (not that this metric is all that useful anymore anyway). That is neither keeping up with inflation nor maintaining pace with the overall growth of the broader categories in which they compete. The optimist might see losing market share at a slightly slower rate as a win. The realist opines that there is a lot more work to do to go from decidedly lackluster to objectively good.
The other thing to bear in mind is that J.C. Penney and Sears (and now Bon-Ton) have been leaking volume through store closings and comparable store sales declines. It’s hard to imagine that Macy’s and Kohl’s have not benefitted materially from this dynamic. While J.C. Penney’s future is increasingly uncertain, any upside from Bon-Ton will be short-lived. Sears looks to be the gift that keeps giving, though likely for only a few quarters more as I expect that Sears will close substantially all of its full-line stores within the next year. While this creates one-time market share gaining opportunities and fixed cost leverage, once the dust settles two factors will come into sharper relief.
The first is the contributions from a strong economy. Recent macro-economic factors have been generally positive for the product categories in which Macy’s and Kohl’s compete. Whether there will continue to be some wind beneath the sails of U.S. retail more broadly—and for the moderate-priced apparel, accessories and home categories in particular—remains to be seen. Clearly my crystal ball is no better than anyone else’s—and maybe worse. But my best guess is that both the economy and the jump ball for market share occasioned by department store consolidation peaks within the next few quarters.
The second factor that looms large seems to be the one Wall Street forgets. The moderate department store sector has been in decline for a long, long time. Some of this has to do with evolving customer trends. Some with stagnant income growth. Some with the rise of superior competing business models: initially category killers, then off-price and dollar stores and now, increasingly, Amazon. And some with more than a fair share of self-inflicted wounds. Regardless, the entire moderate sector, to varying degrees, is stuck in the vast, undifferentiated and boring middle. A somewhat better version of mediocre may the first step on an eventual path to greatness, but it may be just that: a first step.
Lift the veil from a quarter or two of slightly above average performance and the drivers of broader share losses (and related widespread shuttering of stores) continue unabated. Off-price and dollar stores, which in recent years have accounted for the biggest drain on Macy’s, Kohl’s et al., are opening up hundreds of new stores at the same time they are starting to turn up their digital game. Amazon is becoming a bigger factor everyday—and it has yet to make a big push into physical stores. Even if any of the leading department stores miraculously became more innovative and customer relevant they would continue to face significant headwinds. Bottom line: show me someone who believes that a transformation of mid-priced department stores is possible in the foreseeable future and you’ve probably clued me into who has been providing Eddie Lampert with his strategic consulting advice.
As the middle continues to collapse, it is now completely a market-share game. The near-term good news is that Macy’s and Kohl’s competition has made it relatively easy to grab some share. The near-term good news is that a generally healthy economy tends to raise the tide for all. The near-term good news is that Macy’s and Kohl’s operating discipline allows them to convert relatively small sales increases into nice incremental profit opportunities.
The bad news is neither one of them goes from incrementally better to demonstrably good until they make much more substantive and fundamental strategic changes that move them from mostly boring to truly remarkable. Neither brand has spelled out what that looks like in any compelling fashion. And once designed, getting there from here is no small task. Until then, it is way too early to declare victory.
A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.
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