Department stores need to protect their turf.
“Market share defensibility” has become critical to the sector’s credit profiles, according to an analysis from Fitch Ratings titled “Department Stores: Clamoring for Share,” written by analyst Monica Aggarwal.
The debt watchdog said the department store sector has been “the most pressured category in domestic retail and is one of the few major areas to have actually contracted in size over the past decade. As a result, market share gains are even more necessary to sustain healthy profits and cash flow.”
The sector’s lost share to specialty chains, discounters and off-pricers and saw its sales shrink at a compounded annual rate of 2.2 percent over the past decade as retail sales, excluding automobiles, rose 4 percent, Fitch said.
The pain hasn’t been felt universally, though.
Kohl’s Corp., which has hit a rough patch lately, has been the strongest department store gainer, growing its share of sales within the sector to 10 percent last year from 2.6 percent in 2000. And the rating agency said Macy’s Inc. was the best positioned in the middle market, with strong momentum from new merchandising and store initiatives.
Sears Holdings Corp. has been the biggest share donor, giving up almost $9 billion in sales over the past five years, Fitch noted. More recently, J.C. Penney Co. Inc. has also lost some ground to competitors as it gets reinvented by chief executive officer Ron Johnson.
Fitch predicted the top 10 department stores as a group — Macy’s, Sears, Kohl’s, J.C. Penney, Nordstrom Inc., Dillard’s Inc., Neiman Marcus Inc., Belk Inc., Saks Inc. and The Bon-Ton Stores Inc. — would see no sales growth this year. Combined earnings before interest, taxes, depreciation and amortization are also expected to be about flat.
Weakness at Penney’s and Sears should be offset by relative strength at other large players.
Fitch said luxury department stores should continue to outperform this year, but that inventories seem to have grown faster than expected sales gains. “This could drive some downward pressure on gross margin for the remainder of 2012, particularly if sales momentum slows down given the continued stock market volatility,” Fitch said.
Looking further ahead, the sector faces online opportunities and offline challenges.
Fitch said department stores can better develop the e-commerce business to drive sales, but that vacant mall space could ultimately hurt customer traffic.
“Fitch thinks that more store closings and a potential restructuring of Sears over the next 24 months could have growing implications for traffic patterns and competitive dynamics within the mall,” said the report. “Mall vacancy rates could increase given the lack of appetite today of big-box retailers even outside the department store space to add incremental square footage.…The loss of an anchor tenant could potentially be a negative for the remaining retailers to the extent that it impacts mall traffic, given the significant overlap between retailers such as Macy’s, J.C. Penney and Sears.”