Retail Stocks Sink Further: Are Department Stores Under Threat?

Photo: Macy’s

One of the problems with living in a linked economy is that when one brand performs badly, it can have an impact on the value of another brand - even if there’s no formal connection between the two companies in question. Floating on the stock exchange can be a great way to attract money into a business, but it also leaves you vulnerable to fluctuations which affect the industry you work in.

As we found out during the global financial crisis of 2008 (which was triggered by Lehman Brothers), when one banking institution gets into difficulty, the share value of many other banks will sink. Off the back of poor trading figures for a US retail giant, several other household names are now finding that the future might look bleak.

What’s Happened?

Within the last week, Macy’s has been forced to lower its profit outlook for the remainder of 2019 after missing out on its earnings target for the first six months of the year. Having announced the news to the market, the share value of Kohl’s, Nordstrum, and Dilliard’s all took a nosedive as if they were acting in sympathy. J.C. Penney is also down compared to where it stood only a week ago.

While fluctuations in market value are an inevitable part of floating on the stock exchange, these most recent figures are enough to give serious pause for thought, and leave plenty of room for concern. Macy's, as the instigator of the news, suffered a 13% drop in value overnight after making its announcement. Nordstrom and Kohl also experienced double-figure dips, dropping 10% each. As a result, shares in Macy's are now trading at their lowest level in almost ten years. Nordstrum is performing even worse, with shares now at their lowest value since mid-2009.

Photo: Dulles Town Centre

Is It A Department Store Issue?

While department stores appear to have been particularly badly hit, they're far from being alone when it comes to retail outlets feeling the pinch of a change in consumer habits. Gap, who has long been one of the more dependable performers on the market, dropped 8% after announcing it's half-year sales figures Victoria's Secret - which is known to be suffering from financial issues - saw its parent company L Brands suffer a loss of identical size. It's far from clear whether Victoria's Secret will still be around to see in 2020.

Overall, the S&P Retail ETF is down 4%, and is lower now than it was two years ago. The retail industry in general appears to be on the slide, and there isn’t an immediately apparent way to halt it.

What’s To Blame?

Each company has its own version of events as to why performance hasn’t been as strong as suspected. In the case of Macy’s - the company that seems to have precipitated the fall - directors say that they were dealing with an excess of inventory during spring, and had to cut prices to move the inventory on. The reduced prices led to a reduction in profit, and the reduction in profit meant a change to the profit outlook for what’s left of 2019.

The explanation doesn't cover why the company's non-excess inventory wasn't selling in sufficient quantity to counteract the sale of goods undervalued. J.P. Morgan wasn't impressed with the explanation, and responded by downgrading shares in Macy's from 'neutral' to 'underweight', which in real terms saw the price of a share fall to $17 from $22.

The truth of the matter is most probably - as has been the case for many years - that online retail is continuing to eat into the profits of companies who rely on customers coming to visit them in-store. Retail companies who have adapted to this model of trading are coping fine in the current economic climate, but department stores by their very nature, are unable to replicate their business model on the internet, and therefore can't keep up. Instead, companies such as Nike, who once relied on department stores to sell their products for them, are now selling directly to customers and cutting the department stores out of the deal.

Inside a Nordstrom store. PHoto: Norstrom

The challenge of the internet isn’t going to go away, and will eventually result in the closure of companies who aren’t able to respond to the challenge. We’ve already seen this happen in other sectors; many land-based casinos now find themselves unable to compete with mobile casinos. Mobile slots specialist websites or their related casinos can offer thousands of games at the touch of a finger, and is often able to offer a better return-to-player rate because it doesn’t face the same overhead costs as a land-based casino. Mobile slots are frequently a more attractive option to players than going out of the house to play, and so they win the business. Some casinos diversify their offerings, and implement new games to tempt people out of their homes and compete with mobile slots. Those casinos which haven’t been able to do so have been watching their income steadily diminish. Department stores are the same. Collectively, department store sales figures dropped an alarming 20% between 2017 and 2018. It’s generally thought they’ll fall even further by the end of 2019. Losses on this scale are unsustainable without casualties - and possibly big-name casualties.

Aside from changing consumer habits, there are also possible political causes. As trade issues with China have resulted in tariffs being applied to some goods, some firms have encountered increased costs when trying to import goods from abroad, or sell goods outside of the United States. Bond market yields have also been recently noted to invert, which can be a tell-tale sign of an impending recession. The stock market- as well as some business methods - is highly sensitive to political and trade upheaval, and recent uncertainties on that front certainly have not helped matters.

The retail sector has coped with times of uncertainty, recession, and change before, and will continue to do so. For department stores, though, we may soon approach the point where existential questions have to be asked about whether they're still relevant to the modern way of living.