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Department Stores: Giving Consumers What They Want? Or Playing a Zero-Growth Share Wars Game?

Four major mainstream U.S. department store chains reported their second quarter financials in the past week. Although individually not too remarkable, collectively the results tell a story of a retail segment that has hit a wall, struggling to find ways to grow sales to a consumer whose tastes are shifting toward travel, entertainment and eating out–and away from buying apparel and home furnishings.

Macy’s

Macy’s (M) second-quarter 2015 sales fell 2.6% to $6.1 billion, its second consecutive quarter of declining sales, with comparable store sales down by 2.1%. Top performing categories in the period were handbags and fragrances, with a strong showing also made by active apparel and footwear. Weaker categories included petites and large-size apparel, men’s tailored clothing and housewares. The company cited weak tourist traffic resulting from the strong dollar as a drag on sales growth, and said that its AUR, or average unit retail price, declined in the quarter.

For the first half of 2015, sales declined 1.7% to $12.3 billion, with comps down 1.4% and net income off by 20.5% to $410 million. The retailer has reportedly dialed its planned sales growth for the full year back to zero.

Net income dropped 25.7% to $217 million, or $0.64 per share, a 20 percent decline from the prior year per-share earnings and eleven cents below analyst estimates, as big investments in omnichannel and increased medical expenses drove up SG&A expense.

Wall Street’s reaction was swift and punishing, driving the stock down 5 percent on the first day of trading after the news broke.

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J.C. Penney

J.C. Penney (JCP) had a somewhat better quarter. Net sales in the quarter rose by 2.7%, to $2.88 billion, bringing the first-half total revenue to $5.7 billion, 2.4% above year-ago levels. Comp store sales rose by 4.1% in the quarter and 3.7% for the year-to-date period.

In the second quarter, J.C. Penney cited men’s apparel, home, fine jewelry and Sephora as key growth drivers. Sephora shop-in-shops are now in more than half of all J.C. Penney doors, and continue to help the retailer drive store traffic. For the first half of the year, men’s and women’s apparel were two of the retailer’s strongest businesses.

J.C. Penney’s net loss narrowed from $172 million in the second quarter of 2014 to $138 million this year.

Investors cheered the good news, interpreting it as a sign that the department store’s turnaround strategy was finally reaping results. The stock price rose by 7% in the two days after the announcement. For the full fiscal year, analysts now expect sales to exceed $12.6 billion. Though a slight improvement over 2014, it’s still a far cry from 2012, when revenues topped $17 billion.

Kohl’s

Kohl’s sales of $4.2 billion were virtually flat in the second quarter, with comps up by 0.1%. Top performing categories in the quarter were footwear, particularly athletic and men’s dress and casual, and misses apparel, which saw a comp sales increase of 2 percent. Despite showing a slight improvement in the quarter, junior apparel showed negative comps. First-half revenues rose by almost 1 percent to $8.39 billion, despite significant “Greatness Agenda” efforts by the Menomenee Falls, WI-based department store chain to improve merchandise offerings, drive omnichannel growth and improve traffic, sales have hovered at $19 billion per year for the past five years, with little convincing investors that it will ever truly grow sales.

Dillard’s

Dillard’s sales increased by 2.7% in the quarter, to $1.5 billion, though comps were flat in the period. For the first half, revenues increased by 2 percent to $3 billion. Net income at the traditional department store retailer fell by 13 percent to $30 million.

Where’s The Growth?

Collectively, sales at these four retailers, which represent the lion’s share of mainstream department store sales, were flat to slightly down at $14.76 billion. Comps rose negligibly. Total net income for the four dropped by 38 percent, to a total of $239 million, or a mere 1.6% of revenues.

Once the backbone of the U.S. retail sector, the anchor of virtually all regional shopping malls and the lifeblood of the apparel business, department stores are under siege on numerous fronts. The sector is struggling to grow under the weight of intensified competition that is stealing consumers away and of relentless price promotions that pressure topline growth and gross margins. It is also grappling with a shift in consumer preferences away from buying “stuff” in favor of more experiential expenditures on eating out, traveling, and other activities.

Physical store traffic is on the decline. According to Big Data firm RetailNext, U.S. store traffic in May, June and July fell by 10 percent, 9 percent and 11 percent, respectively. Consumers no longer need to leave home to shop, because they can buy whatever they want from the mobile shopping mall in their pockets 24 hours per day, seven days per week. Shipping is now free from almost all major e-commerce sites. Although department stores are racing to become omnichannel retailers, with Macy’s at the forefront of this effort, the others have been slower to create a seamless experience for shoppers.

Specialty stores continue to take share from their big-box brethren, capitalizing on the preference, at least of younger consumers, for a monobrand experience over a multi-brand one. This share gain has been enjoyed primarily by the fast-fashion players. Forever21, H&M and others have been a major disruptive force in the apparel space.

Last but certainly not least, department stores have had their lunch eaten by off-pricers like TJX and Ross and, more recently, Nordstrom Rack, Saks Off Fifth and Neiman-Marcus Last Call. These last three have been growing so quickly, and becoming such a significant part of their parent company’s businesses, that it’s impossible to analyze the performance of the luxury segment without separating out the off-price sector results.

What Will the Second Half Bring?

How will department stores fight back in the second half of the year? Will they continue to merely steal share from one another, continuing the gradual decline of the channel, essentially sowing the seeds of their own demise, or will they implement strategies that will actually grow the sector?

Although Macy’s says it plans to enhance its product offering, upgrade the shopping environment, and arm its sales associates with greater product knowledge, it’s also going over to the dark side of discounting with an “if you can’t beat ‘em, join ‘em” strategy and opening six Backstage off-price stores in the next few weeks.

J.C. Penney’s new CEO Marvin Ellison told analysts on the second quarter earnings conference call that the retailer has, in his opinion, done a really nice job of brand presentation. “Where we need to work,” he said, “is on what I call the science of retailing.” Supply chain improvements, more focused marketing, and new merchandising software to improve efficiencies. Ellison also acknowledged that Penney’s is lagging the rest of the retail industry in many aspects of omnichannel, but working to catch up.

Ellison also said that Penney’s is very pleased with its assortment of national and private label brands, and, in response to customer requests, plans to place more emphasis on special sizes (petites and large sizes). Sounds like a shot across Macy’s bow.

Kohl’s has spent much of the last year increasing the penetration of national brands in its merchandise assortments in direct response to consumer requests. This fall, the retailer will roll out its localization program, under which 40 percent of its business will be around unique assortments catering to the needs and wants of local consumers. By the end of next year, the program will roll out to all departments. But to get back to 2 percent comps, the retailer knows it absolutely must increase store traffic, a difficult thing to do in today’s environment.

On the topic of promotions, Marvin Ellison was blunt: “We are very committed to being promotional. I think if we learned anything from the failed strategy is that this is a promotional space that we’re in and we’re going to have to compete.”

Macy’s CFO Karen Hoguet was a bit more conceptual in her description of her company’s forward-looking strategy, saying, “Success isn’t going to come from a big bang, but from the disciplined execution of strategic and well-planned ideas that genuinely serve the emerging needs of our consumers.”