Healthy holiday sales and initiatives benefiting department store traffic, customer experience and inventory management are starting "to show material benefits," according to a report from Moody's Investors Service emailed to Retail Dive.
Same-store sales in the sector in the fourth quarter rose at every major department store (excluding Sears), "in stark contrast to Q4 2016 results, which fell across the board," Moody’s noted. That was in no small part thanks to a healthy consumer, more seasonal weather relative to the previous year, and a robust stock market, analysts also said. Promotional activity was not as deep as 2016. Merchandise margins were up for all the major players except Nordstrom, which were flat, according to the report.
While larger, better capitalized department store retailers continue to improve infrastructure and compete more effectively online and in store, weaker players are having trouble taking advantage of high consumer confidence and favorable weather over the holidays, according to the report.
Department stores are getting a handle on margins, pulling back on promotions and managing inventory more effectively, despite margin-squeezing e-commerce growth, according to Moody's analysts.
Dillard’s, Kohl’s and J.C. Penney all saw improvement in the range of 40 to 55 basis points, according to Moody's. Although Macy’s gross margin declined 16 basis points, its merchandise margin did improve, according to the report. Nordstrom’s margin decline was driven by higher occupancy costs related to its April 12 opening of a Men’s New York City store, although its merchandise margin remained flat.
A few players are dragging the sector down, according to the report. "[T]he laggards continue to lose ground," Moody’s warned, noting that Bon-Ton filed for bankruptcy on Feb. 4 and Sears continues to post extremely weak same-stores (which fell 15.6% in Q4) and focuses on debt.
Mark Cohen, director of retail studies at Columbia University's Graduate School of Business, warned against too much bullishness for the sector, suggesting it may not be only the "laggards" who have more ground to cover. "I think the optimism that’s surfaced with regard to the future outlook for department stores is completely misguided," he said in an email to Retail Dive. "It is unwarranted based upon a single mostly good holiday quarter, and at best foolishly premature."
The question for this market is whether the fourth quarter performance change is a dead cat bounce, according to Cohen. "Have the fundamental 'go to market' weaknesses that the department stores have been exhibiting for the past several years been overcome?" he said. "I don’t think so. In fact I don’t think anything has changed. There was plenty of evidence of better inventory management, but as for evidence of successful turnaround efforts, none that has shown any real traction yet."