3 Things Not Called Amazon.com That Crushed Department-Store Sales Last Quarter

In the past five years, Amazon.com (NASDAQ: AMZN) and off-price retailers like TJX (NYSE: TJX) have steadily gained market share from department stores. However, these new sources of competition weren't the only reason why department stores reported dreadful sales results for the first quarter.

In this segment ofIndustry Focus: Consumer Goods,analyst Vincent Shen and contributor Adam Levine-Weinberg examine three short-term factors that weighed on sales last quarter. It turns out that the timing of when the IRS issues tax refunds may have a big impact on department stores' sales.

A full transcript follows the video.

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This video was recorded on May 16, 2017.

Vincent Shen: Let's move on to some of the things that are driving some of those top-line declines and weaker comparable-store sales that you were talking about previously. The ultimate question for people who are investing in these companies -- who are seeing these low prices and trying to better understand what the headwinds are -- why are the sales falling so much and what's the outlook for that?

Adam Levine-Weinberg: As I mentioned before Amazon.com and other e-commerce retailers are definitely taking a bite out of department stores' space. That's something that has gotten a lot of press attention, and rightfully so. And that's something that's not going away. You've also seen off-price retailers -- and TJX, in particular, is the big one -- but you will have places like Ross Stores, and I should also mention for our listeners and viewers, TJX is the parent company that owns brands like T.J. Maxx, Marshalls, and HomeGoods.

A couple years ago, it surpassed Macy'sas the biggest apparel retail chain in the country. Those definitely are serious, long-term challenges, and they're going to create some top-line challenges for department stores for the foreseeable future. It's hard to know just how much that's hurting department store sales, though. If you think the economy is growing at 2%, you would expect department stores to grow at 2%. Are they taking 2% off that and making it so that department stores can be flat or are they taking 4%. It's hard to really be sure.

Shen: To quantify exactly.

Levine-Weinberg: Yeah, to quantify exactly how much you should expect that share shift for department stores. But what we can be pretty sure of is, there are certain temporary factors that are also impacting department stores, and those factors are going to change, dissipate, at least to some extent. The one that you mentioned before was the tax refunds.

To be fair, I'm not sure whether that's a good excuse, because if people didn't get their tax returns in February, that explains why sales were down so much in February. But why didn't you get those sales back in March, when the tax refunds did come out? It doesn't entirely make sense, because most of those refunds that got lost in February still came during that first-quarter period. You could say, maybe, if you get a tax refund on February 10th, you're going to go out and get a nice Valentine's Day present for your significant other, and if you get one on March 10th, you're not going to go get a nice St. Patrick's Day gift. So, you're missing a big holiday event where, if you get the refund in March, maybe that means people save it. It's possible, but it's definitely not a very good explanation for why February was so bad.

Another issue that's definitely a problem is the particular categories that aren't doing well. One of those that's really been a problem for quite a while now is handbags. A few years ago, brands like Michael Kors were really popular. And you've seen these brands, because they become so popular, so many people bought their products, they've become commoditized, and now nobody wants them -- or, at least, people aren't willing to pay a premium, and you either have to mark it down to a ridiculous price or you can't sell it at all. So, now these brands that were driving huge growth a couple years ago are seeing huge sales declines, and it's really hard to overcome that.

Shen: We talked about that last week in terms of the Coach-Kate Spadedeal. One of the big challenges that Coach ran into, and this applies to Michael Kors as well and the other competitors in the mid-range luxury category, is the fact that they become so commonplace, commoditized, that they lose some of that aspirational value that consumers often want, stepping up a tier to that level of luxury goods. So, not surprised at all. All these companies, it seems, are taking steps to reduce discounts, to up the price ranges, to restore some of that brand value that they lost in the years of growth they were pursuing.

Levine-Weinberg: Yeah. I think it will be good for these companies in the long run, but in the short term, it means you have to give up sales. Because you need to raise the prices and give up sales from people who only want to buy the bag if it's really discounted. One other tidbit I'll mention is, Macy's said that women's apparel was actually its strongest product category last quarter. And they said the same thing a quarter earlier. That cuts against this narrative that apparel sales are all moving online, and it's going to go to Amazon and kill department stores. It's actually not really been the apparel at a lot of these companies. We might talk a little bit later about J.C. Penney. They are having some apparel issues there. But for most of these companies, apparel is not actually the biggest problem. It's some of these other big important categories like accessories, cosmetics, where they've been having more sales pressure recently.

The one other temporary factor that really impacted department stores last quarter was all of these store closures. In the long run, store closures are definitely a positive for the sector, because everybody recognizes right now that there's too much retail space in the U.S. It's vastly more per capita than any other country in the world. Quite frankly, stores need to close, especially when you have more and more business moving online. However, in the short-term, store closures are not good for department store results, because you end up competing with clearance sales. If Macy's has 700 stores in a particular market in a metro area, it has 10 stores and it's closing two of them, you're going to see sales trends decline at the other eight because you can go and get great deals at the two that are closing. So, now that the stores are closed, I think we'll see better results going forward, starting in the second quarter.

Shen: They've gone through the pain of closing the stores. Hopefully, in the longer term, they'll see the benefits.

Levine-Weinberg: Now, to be fair, there probably will be more store closures in the future, but this was a particularly big quarter for store closures. So, you saw a particularly big impact from that just in the past three months.

Adam Levine-Weinberg owns shares of JCP and M. Adam Levine-Weinberg has the following options: long January 2018 $60 calls on The TJX Companies and short January 2018 $90 calls on The TJX Companies. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon and COH. The Motley Fool owns shares of KORS. The Motley Fool has a disclosure policy.