Department Stores Winning The Retail Battle

By Will Ashworth | July 16, 2010 AAA

Whoever said the department store is dead must not have seen the retail sales numbers for June. Overall, retail sales dropped 0.5% last month following a drop of 1.1% in May. Consumers are clearly not ready to open up their wallets fully. One area that seems to be doing quite well is department stores, which reported a 1.1% increase compared to May. Here are the key players and what investors can expect from them in the second half of the year.

IN PICTURES: Obtaining Credit In A Bad Economy

Same-Store Sales
Leading the charge in June was venerable Nordstrom (NYSE:JWN), growing sales 19.8% and the all-important same-store sales figure by 14.1%, the highest of the reporting department stores. The next four in terms of comps were Macy's (NYSE:M) at 6.5%, Kohl's (NYSE:KSS) at 5.9%, JCPenney (NYSE:JCP) at 4.5% and Saks (NYSE:SKS) at 2.5%. The only store that beat Nordstrom was tiny Tandy Leather Factory (Nasdaq:TLF), which delivered 21% year-over-year growth. The question investors need to ask themselves is whether this is sustainable.

Nordstrom's Having a Good Year
At first, it seemed as though Nordstrom's same-store sales were helped in a big way by its twice-a-year women and kids sale that started a week later than last year. However, upon reading Nordstrom's press release, I noticed that the lift in sales was just 400 basis points, hardly a reason to abandon ship. In fact, the future looks bright.

In May, management was projecting 4% to 6% same-store sales growth for fiscal 2010. With five months of its fiscal year in the books and its Anniversary sale upon us, same-store sales are up 10.6%. While it's conceivable that the second half of the year could be a reversal in fortune, it's doubtful. Don't be surprised when they report second-quarter earnings August 12 if they raise comp projections to between 8-10%.

Another thing to watch is its online shopping segment. In June, sales at Nordstrom.com were up 66.3% year over year. Although it's currently slightly less than 10% of overall revenues, it could easily blow past this mark by the end of fiscal 2010. Finally, I would be remiss if I didn't suggest the company open some stores just across the border in Vancouver. Starbucks (Nasdaq:SBUX) did it successfully many years ago. It can too.

Macy's Conservative As Well
Department store operators aren't to blame for maintaining same-store sales guidance despite evidence business is improving. CEO Terry Lundgren is a veteran retailer who knows the economy can turn quickly in both directions. Its year-to-date, same-store sales are up 4.9% on the back of a 6.5% gain in June. If it does meet its fiscal outlook for 3% to 3.5% same-store sales growth, Macy's investors should be happy. But as it stands now, it looks as though it will do better than that.

Macy's improvements are a result of building strong relationships with local markets through its "My Macy's" program. It's not easy operating large department stores with any kind of customization but Macy's is doing a good job implementing the program despite the inherent difficulties executing such a plan. This will be a difference maker in the years to come.

The Rest of the Pack
Wisconsin-based Kohl's was the third-best performer in June. This is another store that should consider heading to Canada. The landscape is wide-open in my opinion. Until they do, expect them to continue delivering good results in the markets where they do operate. CEO Kevin Mansell mentioned in its June sales report that its e-commerce revenues are up 50% year-to-date. That's in line with both Nordstrom and Macy's.

JCPenney and Saks don't break out their e-commerce numbers; however, it's estimated that JCPenney's e-commerce sales were approximately $1.5 billion in fiscal 2009. Flat for three consecutive years, it's looking to revive its stalled online business.

The Bottom Line
Same-store sales can be deceptive. If you are a company like Buckle whose numbers last year at this time were stellar, your comps in 2010 look terrible by comparison. On the other hand, department stores were hurting this time last year so their comps look good. The truth is somewhere in the middle.

Nonetheless, the sales gains we're seeing in department stores aren't a fluke. In fact, it appears this recession has taught them a thing or two about gaining market share in difficult times. It'll help them immensely whenever the economy returns to normal. (Learn more about the different metrics used in the retail sector by reading Analyzing Retail Stocks.)

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