The Best & the Rest for 2014

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The Best & the Rest for 2014

By Jordan K. Speer - 08/01/2014

And then there were nine. The list of department stores listed on the U.S. SEC gets a little shorter this year after the purchase of Saks by Hudson’s Bay. The Canadian retailer purchased the luxury retailer in November for $2.9 billion, following an acquisition of Lord & Taylor the previous year. In other acquisitions, Neiman Marcus moved from one set of investors to another, while Burlington (which has dropped “Coat Factory” from its moniker) issued an IPO in October. Despite all of the changes, the ranking order of the department stores stayed relatively stable, with only Macy’s and Kohl’s swapping spots — Macy’s knocking Kohl’s out of the No. 1 spot, while Kohl’s settled in at No. 3. Macy’s, Neiman Marcus and Burlington were the only three in the group to see profits rise in fiscal 2013, while Sears and J.C. Penney slipped deeper into the red as both of these department stores strive to turn their foundering ships around. In a common refrain among all retailers this year — the incredibly inclement weather wreaked havoc on sales, keeping customers at bay and even leading to store closures on some days.

Much like last year, department stores continued their push for omnichannel success, chasing the ever-demanding consumer by working toward that holy grail of anywhere, anytime shopping — plus anywhere, anytime delivery. Macy’s, for example, is now offering Buy Online Pickup In Store, and Sears will carry your purchases out to your car when you pull up in the parking lot. Department stores want to leave no stone unturned when it comes to serving the customer, and they are also striving valiantly to make sure that all of that great service accompanies product that consumers actually want to buy. For department stores, moreso even than brands and specialty retailers, figuring out the balance of appropriate product is an enormous challenge — there are private brands vs. national brands to juggle; ladies’ vs. men’s vs. kids’; there’s apparel vs. home vs. cosmetics; in-store vs. online, and so on and so forth. On top of that, department stores are trying to localize the mix by store.
Loyalty programs are another big area of focus. Loyal customers tend to spend more — Kohl’s has found that sales have increased in stores where it has implemented its program. As retailers develop their combination of rewards and exclusive deals offered through these programs, they are also working to integrate them across their various channels. After all, customers who shop more than one channel have proven to buy more than those that only shop one channel.

Speaking of channels, they’re increasingly merging. As some would say, there’s only one channel, and that’s retail. As the lines blur, retailers are implementing digital displays in-store, providing free wi-fi and putting mobile devices in the hands of sales associates, allowing them to offer customers an endless aisle of merchandise from the retail floor.

When it comes to marketing, department stores are working to stand out from the crowd with everything from exclusive partnerships to spirited events to TV cameos. Belk, for example, has launched a Southern musician showcase competition (with actress Hayden Panettiere serving as brand ambassador) and Sears has joined with Seventeen magazine to launch a new line of teen apparel, footwear and accessories.

Still, it’s not easy being a department store. Even the leader of the pack saw a profit margin of just 5.3 percent. If Macy’s were included in Apparel Magazine’s “2014 Top 50 Report,” where profit margins were as high as 17.8 percent, it would have nabbed just the No. 27 spot.

Read on to find out more about what’s going on with today’s department stores.

#1
Macy’s
“M.O.M.” is still in charge at Macy’s, and the department store retailer nabbed the No. 1 spot. You do the math. In case you don’t know, that’s the acronym for the retailer’s core business strategies of “My Macy’s localization,” “Omnichannel integration” and “Magic Selling customer engagement.” Doubling down on these initiatives, Macy’s focused on precision in merchandise size, fit, fabric weight, style and color preference by store, market and climate zone; it expanded store fulfillment to 500 Macy’s locations, and completed the rollout of shipping capability this spring to all of its approximately 650 full-line Macy’s stores; and it successfully tested Buy Online Pickup In Store in 10 Macy’s locations in the Washington, DC, market in fall 2013 and has now rolled it out to all full-line stores. Macy’s also expanded capacity in its direct-to-consumer fulfillment center; this year it will complete the expansion of its fulfillment megacenter in Goodyear, Ariz. to 960,000 square feet and in spring 2015 will open a 1.3 million-square-foot fulfillment center in Tulsa, Okla., the company’s fifth megacenter and one of the largest and most technologically advanced in the United States. The retailer is putting tablets and other handhelds into the hands of its associates to assist customers, piloting kiosks to expand its assortment on the sales floor, using RFID to count item-level inventories more precisely and energizing stores with large-format digital displays. What else? It has introduced new Millennial brands such as Maison Jules, and expanded best-selling brands such as Polo Ralph Lauren, Michael Kors, Calvin Klein, Tommy Hilfiger and I.N.C. It began opening new athletic footwear shops in Macy’s stores and online under a new license agreement with Finish Line, and signed a new license agreement with Locker Room by LIDS, featuring localized pro and college teamwear in stores and online. Bloomingdale’s added a 13th outlet in 2013.

#2 Dillard’s
The department store retailer ended the year with comp-store sales up 1 percent, for a fourth consecutive year of positive comp-store sales, but a lower increase than expected, which led to heavier markdowns and a lower profitability than last year’s. Ladies’ apparel made up the largest percentage of sales for the business, at 22 percent, followed by men’s apparel and accessories, at 17 percent. With its extensive selection of private-branded merchandise, Dillard’s draws customers with a fashionable product — typically priced lower than national brands — that cannot be found elsewhere. Dillard’s closed six locations during fiscal year 2013, ending the year with 278 locations and 18 clearance centers, spanning 29 states, and an online store at dillards.com. This coming October, Dillard’s plans to open two new stores, one in The Shops at Summerlin, in Las Vegas, and the other at The Mall at University Town Center, in Sarasota, Fla.

#3 Kohl’s
In April, the magic of Disney found its way to Kohl’s, as the retailer combined the Disney brand with its very successful Jumping Beans brand, which in just five years has become the retailer’s fourth-largest brand, with annual sales of more than $600 million. Kohl’s opened 12 new stores in 2013, remodeled 30, and with new openings and closures, expects a net increase of five stores this year, and 35 remodels. The company completed an e-commerce re-platform designed to support omnichannel initiatives including an improved checkout experience and higher traffic; e-commerce sales totaled $1.7 billion for the year and have almost doubled since 2011. The company is also working to rebalance its only-at-Kohl’s brands, such as Jennifer Lopez, Mark Anthony and Rock & Republic with its national brands, the latter of which consistently outperformed the company total during fall 2013. This fall, it will introduce IZOD, which will be one of the largest men’s wear rollouts in its history; and Juicy Couture, in a move to capture more of the athleisure market. Kohl’s is experiencing a sales lift in those areas where it has implemented its loyalty program, and expects to have it rolled out to all markets by the end of the fiscal year.

#4 Belk
Comp-store sales were up 2.9 percent on top of 6.3 percent the prior year, and e-commerce sales were up 42.5 percent over the prior year to $193 million, and were the fastest growing part of the business, also driving additional traffic to stores. Online sales now represent 5 percent of business and Belk expects that to grow to more than 10 percent, as it optimizes its website for desktop, table and mobile; expands drop-ship capabilities; and expands its Item Locator program which enables customers in stores to order merchandise not available in a particular location. Profits were down, after four years of increases, primarily due to lower margins but also because of greater expenses associated with the department store’s three-year, $700 million investments in IT, customer service, supply chain initiatives and omnichannel. In IT, Belk hit some snags with its project SMART merchandise systems that required additional funds to resolve, while its web site did not perform well during the holiday season and was not accessible at critical times, which Belk addressed by making repairs to its operating platform and beginning work on a new one. It also began deployment of a new workforce management system to align store staff with traffic patterns, and rolled out a new transportation management system and new talent management tools. Among its marketing initiatives were the third “Belk Bowl,” televised on ESPN in December; a partnership with “Project Runway,” with a Belk executive serving as a guest judge on a design challenge; and the launch of a Southern musician showcase competition and concert sweepstakes that will pay homage to pop country, Americana, blues, jazz and bluegrass music, with actress Hayden Panettiere serving as brand ambassador throughout the campaign.

#5 Neiman Marcus
Lots of shakeup in the luxury market last year: After making moves to issue an IPO, Neiman owners TPG and Warburg Pincus ultimately switched tacks and sold the luxury retailer in September for $6 billion to Ares Management LLC and the Canada Pension Plan Investment Board. Earlier in the year, Saks Inc. made a play to acquire Neiman’s but when that didn’t work out, Saks instead agreed to be acquired by Canadian retailer Hudson’s Bay Co. for $2.9 billion — good investments at a time when expected increases in U.S. luxury goods spending offer attractive opportunities for growth. Neiman saw its profitability edge up 30 basis points for the year as it strived to perfect its omnichannel “anytime, anywhere, any device” strategy by merging its store and online merchandising and planning teams into a single group, and also by implementing a suite of Oracle Retail solutions for better merchandise planning and analytics. Neiman’s operates 41 full-line stores, two Bergdorf Goodman stores, 36 off-price, smaller format Last Call stores and six CUSP stores, which cater to a younger customer focused on contemporary fashion. With almost 40 percent of its online Neiman Marcus customers for fiscal year 2013 located outside of the trade areas of its existing full-line store locations, online sales surpassed the $1 billion mark, with the company’s web sites set up to ship to more than 100 countries. The retailer also has launched a full-price, Mandarin-language e-commerce website for the Neiman Marcus brand to cater to the growing affluent population in China.

#6 Burlington
A big year for the off-price retailer, which issued an IPO in October while pushing forward with growth strategies in driving comp-store sales (up 4.7 percent), expanding its store base (by 21 new stores) and increasing operating margins. Burlington also ended the year with leaner inventory, down 9.2 percent, as it worked to expand its brands (it ended the year with 4,500+) and styles while also better localizing its merchandise by tailoring assortments across brands, lifestyles, sizes and climate.  Burlington’s customers like the “treasure hunt,” and the company wants to give them as many brands as possible to choose from — and is getting help in this endeavor from a new buying office on the West Coast. The company is working to evolve its buying model as it grows its vendor base and also works toward more in-season and opportunistic buying, while also expanding its pack-and-hold initiatives. Burlington is also working to better serve its core female customer, the “brand-conscious fashion enthusiast,” aged 25-49, with improved offerings in family categories such as youth, baby, special occasion and men’s wear. The company ended the fiscal year with 500 stores and expects to open approximately 25 this year, with a goal to reach 1,000 over the long term. Recent implementations of allocation and markdown optimization systems are helping to drive comp-store sales growth, which the company expects to see in the 2 percent to 3 percent range in fiscal 2014.

#7 Bon-Ton Stores
Comp-store sales were down 4.2 percent, and the company is still not in the black, but it edged closer this year, while working toward long-term success in part by: 1) starting its new localizing strategy; 2) launching the first phases of its merchant reporting system; 3) improving inventory management via more clearance centers, by bringing more analytics to inventory planning and by improving inventory flow; 3) growing ecommerce with better assortments — to 5 percent of sales; 4) refinancing debt; and 5) increasing its private-label credit card sales from 45 percent to 47 percent. Looking ahead, the company — which operates 271 stores in 25 states under the banners Bon-Ton, Bergner’s, Boston Store, Carson’s, Elder-Beerman, Herberger’s and Younkers — will work to better balance its merchandise assortment with emphasis on key items; continue to focus on localization; open a new fulfillment center in spring 2015 which should significantly expand shipping capacity and operational efficiency; improve marketing with personalized emails; and by expanding customer service efforts. Omnichannel efforts are in full swing; in the spring, Bon-Ton launched “Let Us Find It” software linking POS to real-time inventory, and this year will roll out RFID to all shoe departments to ensure all styles are always on display for consumers.

#8 Sears
Sears fell deeper into the red than it was last year — it lost $1.4 billion after losing $930 million last year — but continued to work to simplify and focus the company, most recently by spinning off Lands’ End, which it bought in 2002 for $1.9 billion, for $500 million. The sale follows the divestment of other portions of the business in recent years (including some of Sears Canada Ltd., Sears Hardware and Outdoor Stores, and Orchard Supply) and the company is currently evaluating alternatives for its Sears Auto Center business, and looking for strategic alternatives for its 51 percent interest in Sears Canada, as it focuses on its core business assets and store real estate. The company owns 700 of its 2,000 stores, and is seeking opportunities to sell, lease or redevelop them via in-store shops; in 2013, Sears generated $2 billion in liquidity through $1 billion in proceeds from real estate and $1 billion in a five-year term loan, and also reduced peak inventory by $620 million. As it focuses on retail operations, Sears is working to transform into a “membership company” that serves its members through its Shop Your Way Rewards program and Integrated Retail platform, in store, at home, or on-the-go. CEO Eddie Lampert believes these efforts are righting the ship, heading it in a direction that will jibe with the recent changes and demands in consumer shopping behavior. To wit, Sears’ “in-vehicle pickup” — which, as you might guess, allows members to notify the store when they’ve arrived at the store through the Shop Your Way app, and then have their purchases delivered directly to cars — is the latest in a host of omnichannel efforts that also includes ship-to-store and ship-from-store programs. In 2013, Shop Your Way members represented 69 percent of all sales in Sears full-line and Kmart stores, up from 59 percent the previous year. In a bid to attract the teen consumer, last month, in partnership with Hearst Brand Development, the retailer announced the exclusive launch of Seventeen magazine’s collection at Sears.

#9 J.C. Penney
The department store continued to undo the changes made by former CEO Ron Johnson — even reverting back to its old logo and full company name (vs. just JCP) and bringing back promotions — as it worked to win back customers and attract new ones. The retailer also continued deeper into the red but is progressing through its turnaround strategy, working to stabilize relationships with key suppliers and rebuild everything from the management team to merchandising and marketing strategies — which included six new marketing spots aired during the “Academy Awards” earlier this year as part of its “When it Fits, You Feel it” campaign. The company has integrated its store and online planning teams, and is remerchandising areas such as home and ladies’ apparel, working to localize assortments while also making them more narrow and deep, in part by bringing back key item basics and popular private brands (including St. John’s Bay, a.n.a., Ambrielle and Xersion), by pumping up national brands, and by eliminating brands that aren’t capturing consumer interest. The retailer restored inventory levels, worked to improve the online experience, and this year plans to close 33 of its 1,100 stores, while opening a new store in Brooklyn. First quarter 2014 results are encouraging, with comp-store sales up 7.4 percent. The company continues to build its partnership with Sephora, with plans to open approximately 46 new Sephora shops inside JCPenney locations, for a total of 492 by year’s end.

Jordan K. Speer is editor in chief of Apparel.

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