Date February 2019
Mall vacancy rates recently hit their highest point in seven years driven in part by anchor vacancies including Sears and Bon-Ton
The Department Store sector has been the weakest performing sector for the past three years, per Moody's; however, upscale malls are performing well despite the downturn in non-premium locations
Department stores finished the 2018 holiday season with a 1.3 percent decline over last year; however, online sales growth was very positive at 10.2 percent
80-100% high-end
80-95% mid-tier
75-90% mass market
The struggle continues for department stores: The decline of traditional shopping malls and the move to more accessible outlet stores and online shopping continues to have a negative effect on the foot traffic in department stores. Per information from Retail Dive, mall vacancy rates recently hit their highest level in seven years due to bankruptcy-driven store closings including Sears and Bon-Ton. Ongoing struggles in the segment show that department stores must not only maintain focus on their experience-based and omnichannel offerings, but must also offer incentives to keep consumers engaged and excited to visit their stores. In the aggregate, department stores finished the holiday 2018 season with a 1.3 percent decline over last year. This result follows two years of growth below 2 percent, some of which can be attributed to store closings. However, online sales growth for the segment indicated a more positive story, with growth of 10.2 percent.
There has been some positive industry news, as department store Macy's was successful in generating better numbers in 2018. CEO Jeff Gennette was named executive of the year by Retail Dive after the chain saw a positive turnaround following the closure of nearly 100 stores in recent years. Macy's momentum continued in the third quarter with comparable store sales increasing 3.3 percent and online sales up by double digits. Management noted that online sales had increased by double digits for 37 consecutive quarters as of third quarter 2018. The company came out of the holiday period with a positive 1.1 comp sales performance (owned and licensed sales), and with e-commerce sales up double digits. The company has worked hard to turn itself around by launching initiatives including its pop-up shop concept, The Market @ Macy's; implementing a new loyalty program; boosting private label sales from 29 to 40 percent; and purchasing Rachel Shectman's interactive concept "STORY" — a retail shop-in-shop concept that mixes up merchandise and customer experience offerings frequently to fit different themes.
Others in the space, including JCPenney, have not been as fortunate. The company reported that third quarter 2018 net sales had fallen 5.8 percent year over year. Now working under new CEO Jill Soltau, JCPenney has struggled with markdowns and rightsizing its inventory, which has been an ongoing challenge. In an attempt to grab some of the holiday toy market share in the wake of the Toys "R" Us liquidation, the company increased its toy offerings by 40 percent over last year. Despite the effort to expand further into the toy space, comparable store sales for the combined nine-week holiday period decreased 3.5 percent on a shifted basis, and 5.4 percent on an un-shifted basis.
Consumer preference for value and products at a discounted price has helped lift department stores that frequently offer sales and discount programs, including Kohl's, which generated positive comps of 1.2 percent for the holiday and has had success in gaining attention from a younger customer base. Nordstrom also produced positive holiday comps (1.3 percent for stores and 18 percent for digital), however its Nordstrom Rack off-price concept outperformed the full-line stores with positive comp store sales of 3.9 percent for the season.
Although department stores also compete with online giant Amazon, some of their largest competitors are superstores like Walmart and Target. Not only do these superstores offer low prices, they also have an extensive e-commerce selection that appeals to consumers who prefer to shop online. The difficulty in keeping up with big-box competition is that they have more to offer than traditional department stores, like grocery sections. Customers come in for the purchase of niche items, and end up buying other things they could have shopped for in a department store, like apparel and appliances.
In addition to the changing consumer sentiment around mall-based retail and the department store concept in general, department stores are also vulnerable to seasonality. To the extent that inventory levels and seasonal or slow-moving inventory is not managed effectively as part of normal-course business, it may become challenging to sell through in an off-season liquidation event, resulting in lower gross recovery values in certain categories. Gordon Brothers recommends that lenders partner with appraisers in requesting annual seasonal models to address swings in inventory levels and sales capacity and their potential impact on net recovery values.
Store closures continue: As department stores continue to face significant threats across the competitor spectrum—from superstores and discounters to online and specialty retailers—most chains came out of 2018 looking to close underperforming stores. Despite a positive holiday performance, Macy's plans to close the last eight stores of a three-year downsizing plan in 2019. Nordstrom, JCPenney, and Kohl's all have plans to close underperforming stores in 2019, including some where leases are expiring and not being renewed. Discount department store Shopko filed bankruptcy in January and plans to close 38 stores in addition to the 39 stores it closed pre-filing.
While continuing to compete for every consumer dollar, the department stores sector is expected to contract 1.3 percent over the next five years, albeit at a slower rate than the past five years, during which it declined 4.3 percent. As per capita disposable income increases through 2023, revenue declines are forecasted to slow based on data from IBISWorld. As the sector continues to right-size, lenders with department stores in their portfolios, particularly those that are mall-based, should continue to conduct regular appraisals in order to understand changes to net recovery values as they occur.
Consumer Inventory Valuations
Retail & eCommerce Valuations
Joined Gordon Brothers in 2011
Becky Goldfarb
Managing Director, Retail Valuations