Department Stores Try Different Tacks to Weather E-Commerce -- Update

By Suzanne Kapner and Austen Hufford Features Dow Jones Newswires

Macy's Inc. and Kohl's Corp. reported mixed third-quarter results, underscoring the challenges department-store chains face as shoppers buy more online and setting the stage for a competitive holiday season.

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Kohl's pointed to a strong back-to-school season, leading to surprise growth in its stores open at least a year. Macy's, meanwhile, said it increased its gross profit margin, thanks to efforts to control spending on inventory.

Shares of Macy's rose 8.6% in Thursday morning trading as the company's profit exceeded Wall Street's estimates, while Kohl's fell 3.2% after its margins fell short of expectations.

Kohl's Chief Executive Kevin Mansell said the gross margin decline was partly due to higher shipping costs associated with an increase in online orders. He added that traffic and sales picked up in late October, after a lull in September, setting the retailer up for a strong year-end finish.

"We're super confident as we go into the fourth quarter," Mr. Mansell said.

The shift to online shopping has hurt retailers across the board. The impact on department stores has been particularly sharp, since they sell branded goods whose prices shoppers can easily compare online. The shakeout has prompted chains such as Macy's, J.C. Penney Co. and Sears Holdings Corp. to close hundreds of stores, many of them in malls that shoppers aren't visiting as frequently.

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Kohl's, whose stores aren't located in malls, has refrained from mass store closures and, according to Mr. Mansell, has picked up market share from rivals that are pulling back. It has also added popular athletic gear from Under Armour Inc. and partnered with Amazon.com Inc. to sell its Echo device and other products and to accept returns for items purchased at the online retailer.

Macy's has revamped its shoe and jewelry departments, added its Backstage discount concept to its department stores and leased space to third parties such as LensCrafters, but analysts say the moves haven't been enough.

"As much as these things are valuable, they do not address the fundamental issues facing the business," wrote Neil Saunders, a managing director of research firm GlobalData Retail, in a note to clients.

Macy's CEO Jeff Gennette acknowledged the challenges in an interview. "This is clearly the era of the consumer," he said. "They are very smart. They have more choices than ever. We at Macy's have to earn our share of their wallet."

Sales at Macy's stores excluding recently opened or closed locations fell 4% in the three months to Oct. 28, extending a string of declines. Total sales fell 6.1% to $5.28 billion, partly due to store closures.

Macy's profit more than doubled to $36 million from $17 million in the year-earlier period, as the company did a better job of controlling costs.

Kohl's comparable sales rose 0.1%, the retailer's first uptick in more than a year. Total sales rose 0.1% to $4.33 billion. Net income plunged 18% to $117 million from $142 million a year ago, thanks in part to the gross-margin decline, which fell to 36.8% from 37.1% over the same period.

Sales at both chains were hurt by the recent hurricanes and unusually warm weather in September, the companies said. Macy's also said it felt the impact from less foreign tourism. Still, both companies managed to reduce inventory in the period, leaving them with less excess merchandise to clear out at steeply reduced prices.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

November 09, 2017 13:01 ET (18:01 GMT)