Department store operators including Nordstrom Inc. (JWN) and Macy’s Inc. (M) may be down but they aren’t out yet in the era of Amazon.com Inc.’s (AMZN).
Retailers have shuttered stores, reorganized and landed in bankruptcy, but some are emerging with a “leaner and more refined” focus, with the largest department store operators making important progress, said Moody’s Investors Services in a new report.
Department Stores Investing In Digital
"After two years of bruising underperformance, department stores are in the midst of their next big transition, which is making shopping as seamless as possible for an increasingly exacting customer," said Christina Boni, vice president at Moody's, in a press release. "To do so, companies are undertaking the expensive but necessary process of rolling different shopping platforms -- online, brick and mortar, and smartphone apps -- into one."
Traditional retailers have been struggling for years to stay relevant in an era of online shopping, same day delivery and mobile apps that make purchasing something as easy as one click of a mobile device. They have traditionally responded by shutting stores and lowering their physical footprint, focusing on the digital aspects of the businesses. Its been slow going as Amazon continues to dominate the transformation of the physical world of shopping with its multi-billion dollar purchase of Whole Foods Market last year. Amazon can now take credit for disrupting department stores, retailers and supermarkets. (See more: 4 Retail Stocks Shattering Records Despite Amazon Threat.)
Department Stores Embrace Data
To counter the Amazon effect, Boni said department stores are turning to big data to develop customizable loyalty programs which may be critical to differentiate while others are giving customers product and inventory information online. They are also cutting costs by getting consumers to return products in store and are offering free shipping if customers reach a certain amount of purchases. Boni pointed to Nordstrom as one department store operator that has been investing in the digital experience for customers. The Moody’s analyst said that while those efforts have negatively affected margins some, Nordstrom is reaching the point where those margin pressures will begin to ease.
Shopping Apps Are the Norm
Even if margins stay compressed, Boni said, department store companies have to continue to allocate money to technology with mobile apps critical for them to remain relevant. She said shopping apps are becoming the norm for countless consumers, enabling them to check prices, make purchases, manage rewards and track orders. (See more: Nordstrom Stock Could Rally Into the $60s Without a Deal.)
Boni isn’t the only one who showed a little bit of confidence in Nordstrom. Barron’s pointed to Instinet analyst Simeon Siegel who said the company’s stock buyback plan is “unappreciated”. At the same time, he reiterated his neutral rating on the stock. He said the share repurchase program in which Nordstrom plans to buy back $3.7 billion in shares during the course of the next five years equals 42% of its market value and could provide “meaningful” upside to its earnings per share.