PANEL: DEPARTMENT STORES NEED FULL-LINE MAKEOVER
Byline: Evan Clark
NEW YORK — America’s department stores — hurt by increased competition, a lack of growth and less apparel consumption — need to make sweeping changes to reverse recent declines in market share, as well as their stock prices.
This was the message from Goldman Sachs analyst George Strachan, moderator of the “What Ails Retail Stocks” session of the National Retail Federation conference here last week.
He said department stores could either produce unprecedented turnarounds, undergo massive rationalizations, slowly become privatized or simply liquidate, an option he said that was “not far away perhaps in some instances.”
Indeed, Strachan’s numbers bore out his warning. He noted that, excluding dividends, $1,000 invested in shares of Sears, Roebuck & Co. in 1990 would have grown to $3,273, a compounded annual growth rate of 12.6 percent, failing to keep pace with Nasdaq’s 19.1 percent compounded growth rate for the same period.
Sears, though, was the only department store covered that broke into the double digits. Over the same period, the compounded annual growth rates of The May Department Stores Co., Saks Fifth Avenue, Neiman Marcus and Federated Department Stores were held to mid- to high-single digits. Investments in Nordstrom, Dillard’s and J.C. Penney Co. would have lost money.
Discounters and specialty stores, on the other hand, generally outperformed the Nasdaq over the past 10 years.
A Kohl’s investor who put $1,000 into the stock when it went public in 1992 would have seen it increase to $31,107, a compounded annual growth rate of 53.7 percent. Since 1990, Dollar General and Gap Inc. saw increases of 36.7 percent and 30.1 percent, respectively. Shares of Wal-Mart Stores grew 24.9 percent while Target’s stock increased 21.5 percent a year over the last 10 years.
Panelist Teresa Donahue, an analyst with Neuberger Berman, said the “massification of trends” was one of the primary reasons department stores’ share prices have slipped and market share has been siphoned away to discounters and specialty stores.
In 1990, Penney’s and Target had, to different degrees, low price points, but were “nowhere to be found on the trendiness scale,” she said. On the other hand, both Nordstrom and Macy’s East scored high on trendiness and price points.
She said that now, to the detriment of department stores, the trendiness gap has closed some with updated merchandising at both Target and Penney’s, while pricing at those stores has remained low.
“Trends are immediately available at each and every price point,” she noted. This “massification,” though, “is obviously a great advantage to the customer,” she said.
Among her examples of the identical trends at different price points was a python skin-print jacket retailing at Target for $41.98 and Nordstrom for $447. “For a look, while it may have some qualitative differentials, it will get the point across if you want to be trend right,” she said.
Another example was snake-print bags in the style of the Fendi bag that Nordstrom carries for $85 to $220. She noted that, while they were a “far cry” from the Fendi bags that retail at a much higher price point, similarly styled bags are also available at Penney’s for $28 to $49.
The resu? “The customer sees the department store as top-of-mind for fewer items,” according to Donahue.
Richard Baum, analyst with Credit Suisse First Boston, offered ways department stores could revive shoppers’ spirits and investor interest.
Many of his suggestions took the if-you-can’t-beat-’em-join-’em approach, moving department stores closer to the mass marketers and specialty stores.
His first suggestion was to drive market share by providing the absolute best bargain for the customer. “The key for department stores here is to add service the customers want and will come to the store for,” he said.
To keep up with the specialty sector, department stores also should accelerate product rotation by ordering more than twice a year. He pointed to Zara, which orders eight times a year, as an extreme example within the specialty sector.
He said department stores also need to “communicate a simple, consistent value proposition” to their customers. On-sale merchandise at the outperforming Kohl’s is reliably in stock, a claim department stores can’t always make, he said.
Baum also encouraged department stores to “go beyond product category” and to transform departments into specialty stores. He noted that Victoria’s Secret has been successful selling not just lingerie, but romance.
Walter Loeb, president of consulting firm Loeb Associates Inc., moderated a panel later in the day entitled “Creating Shareholder Value” and noted in his opening remarks that “execution will make the difference.”