Outlook for Department Stores Remains Grim With Latest Bout of Earnings

By Motley Fool Staff Markets Fool.com

In this segment fromMotley Fool Money, the cast explains just how bad things have been shaking out for traditional players in the retail world. E-commerce continues to grow by leaps and bounds as consumers' love for convenience and value put significant pressure on brick-and-mortar chains.

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Both the biggest department stores and smaller brands have encountered challenges, and the question remains: What can these retailers do to ready themselves for the future?

A full transcript follows the video.

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This video was recorded on May 12, 2017.

Chris Hill: We begin with the retail sector. Bad earnings reports from across-section of mall-based retailers hadinvestors asking about the future of the entire industry.Macy's(NYSE: M), Nordstrom(NYSE: JWN), Kohl's(NYSE: KSS), J.C. Penney(NYSE: JCP) all reporting this week, Seth. We're not going to go through them one by one. Butwhen you look at this from the proverbial 50,000 foot view, this does not look like a bump in the road. This looks like a shift.

Seth Jayson:If you're in the mall, you're in trouble. People aren't shoppingin the mall. And it costs a lot to rent pieces of the mall, especially when you're one of those biganchor tents. But the smaller retailers and malls arealso feeling the pinch. Ronsaid it best during the production. I'm just going to paraphrase him. Mostpeople know this,you who are listening,how much stuffare you ordering online? The answer is a lot. Andrestaurants are seeing the same thing. People want to blame millennials, butit's everybody, especially millennials,don't want to talk to people face-to-face. Theywant to order takeout, theywant to order lots of stuff from online stores. And it may be a giant one like Amazon(NASDAQ: AMZN), it may besmaller specialists. Butif the stores aren't being filled,you're being crushed right now. This is what's happening. And there's really not a whole lotthat's going to change that.

I think,in some places, like here, you've seena shift to town centers. So somebody likeTarget(NYSE: TGT), who iswilling to move into a town center for folks who might not have one, it's almost like an inside-out mall. It hasmaybe a couple of big anchor stores, it tends to have some nicesmaller specialty places, nicer restaurants. But they also mix in townhouses and stuff so thebusiness tenants who are there cancount on foot traffic. Those are doing really wellacross the country. In the D.C. area,anybody who can adapt their model to online sales or town centers isprobably going to survive. Anybody who isstuck in the mall is going to be gone.

Ron Gross: Since Sethparaphrased me, let meparaphrase Seth paraphrasing me. No, just kidding. Of courseI agree with that. We're in the middle of a change in consumer buying patterns. As you said,it's not a trend, it's a permanent shift. As a result of technology/Amazon, there are justtoo many retailers out there,especially when you look at the department stores, butspecialty retail too, incertain sectors. Some will go out of business,that's just the way it goes, sorry to say. Someneed to go out of business. The rest need to pare down their footprint, theyneed to focus on what's called four-wallprofitability. Each storein and of itself needs to beprofitable, otherwiseit needs to be closed. Then these companies alsoneed to invest in their onlineexperience, because some of these huge multi-billiondepartment stores have terribleonline experiences.

Jason Moser: I'll tell you what,all this begs the question --I mean, I do agree that there's a surplus of retail out there, andthere are plenty of operations that the world doesn't need,if they disappear tomorrowour lives would not really change. But what is going to happen toall of that real estate? That is,I think, the big question. We'vetalked about Radio Shack before,and how perhaps Amazon would jump in there and use that as some type of piece in theirfulfillment puzzle. I thinkmore and more, we'll probably see stuff like that happen. The smart retailers willfigure out ways to usethe physical presence to helpevolve their logistics in gettingproducts from point A to point B. Now Amazon, obviously, is really the king out there, as far as it goes in logistics. But I think there are a lot of businesses out there that are learning from what Amazon has done.Wayfair, I think, is the easyexample, and we've seen whereAmazon is looking to make this bigpush into furniture. Andthe big question is, is that going to be thedeathblow for Wayfair? I don't know that it necessarily is,because Wayfair is a businessthat was built on that e-commerce model,and I think more and more businesses that start with that in mindare going to be OK. It's these businesses that have been around for ourentire lifetime, they'restill married tovery old school thinkingin a lot of cases, which isreally going to cost them.

Hill: Butto go back to something that Sethtouched on in terms of the town centers, we live in theWashington D.C. area. If you live in a small town, ornot even a small town, a smaller city, you're stilldependent on a lot ofbrick-and-mortar retail, andit's going to be one of themany things to watch in all of this --when does this shift take place for the smaller towns? And,to your point, what doeshappen to all of that real estate?

Jayson: I think in the smaller towns, probably,Wal-Marthasalready taken outa lot of the mom and pop stores. It's in the suburbs where they'rereally having these growing pains. One of the other things that can happen to malls,and I think it's happening, theLandmark here in Alexandria is nowgoing to be knocked down and turned into a town center. They're going with thiscompletely different model.

Hill: Andone thing we sawearlier this week,CoachbuyingKate Spadefor almost $2.5 billion.I'm curious, Ron,for investors who are looking at retail, is thissomething we should expect to see more of? Yes, some of these aregoing to go out of business. But in the case of Kate Spade,I think Coach looked at that and saw apretty good value. I'm wondering if we're going to see moreconsolidation.

Gross: I do actually like that acquisition. I agree with you. Yeah, usually, when you seeparadigm shifts, twothings happen: Somego out of business, and the restconsolidate. Investment bankers love it, and then, five or 10 years later, we go through another shiftand they get to break them up again. ButI would expect to continue to seeespecially the little guys getgobbled up by some of the bigger folks to shore up the business, driveprofitability and growth.

Jayson: Yeah,you might have a little morehope for specialty retailerswith a decently strong brand. But if all you are isSears, everyone knows who they are, butthey really don't have their own stuff,J.C. Penney, I don't know what the future is for them,except bye-bye.

Chris Hill owns shares of Amazon. Jason Moser has no position in any stocks mentioned. Ron Gross owns shares of Amazon. Seth Jayson has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Coach, and Wayfair. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.