Falling Sales Mean Tougher Fixes at Department Stores -- Heard on the Street

By Miriam Gottfried Features Dow Jones Newswires

Investors are growing convinced that there may be no future for department stores.

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First-quarter earnings reports from Macy's, Kohl's and Nordstrom sent shares of all three down significantly Thursday. At Macy's, same-store sales fell by a greater-than-expected 5.2% and earnings missed analysts' estimates by a wide margin.

Even though cost controls helped Kohl's earnings exceed expectations, the market chose to focus on its same-store-sales decline. At Nordstrom, earnings exceeded expectations and overall sales climbed, but same-store sales were slightly worse than expected. Shares, which had fallen during the trading day, tumbled even further when the company reported after hours.

Those reactions showed that even some good news can't change investors' view that department stores are in structural decline.

The earnings numbers brought into sharp focus two difficult problems facing the stores. For Macy's, the quarter's results showed that closing underperforming stores, the go-to strategy for many struggling retailers, has yet to deliver the desired lift to same-store sales. The company said it expects to begin receiving those benefits in the second quarter, which is one reason it maintained its full-year guidance.

For Macy's and Kohl's, efforts to tightly control inventories failed to overcome declines in sales. Excess inventories hurt gross margins at Macy's. Kohl's credited good inventory management with an improvement in gross margins.

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Even so, Kohl's sales decline of 3.2% in the quarter outpaced the inventory decline of 2.3%. The company also said sales were down only 1% in March and April combined, but that wasn't enough to offset their high-single-digit decline in February.

Nordstrom's inventory was in line with sales, suggesting investors were largely punishing it along with the rest of the group.

Macy's and Kohl's are trying to reverse the sales slide. Macy's executives highlighted the Backstage off-price concept, Last Act clearance sections and Bluemercury cosmetics chain as growth areas.The company said a pilot program aimed at focusing its selection of women's shoes and improving the shoe-shopping experience produced a "nearly double-digit" sales increase in those stores. It plans to provide more details about pilot programs at its investor meeting June 6.

Kohl's is focusing heavily on activewear from Under Armour and Nike, which it said grew by a percentage in the mid-teens in the quarter. It also expects to benefit from competitors closing nearby stores.

Department stores have just a few more quarters to convince investors they aren't in permanent decline.

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

(END) Dow Jones Newswires

May 11, 2017 18:15 ET (22:15 GMT)