Department Stores Pick Up Momentum Thanks to Black Friday

Early numbers are in for the Black Friday weekend with strong growth over last year. That momentum has even extended to brick-and-mortar retailers, which saw only small traffic declines during the busy period.

Find out why department stores are feeling confident about the quarter, and what investors should watch as they head into the final month of the year on this episode of Industry Focus: Consumer Goods.

A full transcript follows the video.

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This video was recorded on Nov. 28, 2017.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Tuesday, Nov. 28, and I'm your host, Vincent Shen. Fools, I hope you enjoyed your holiday, some time with family and friends, or did some shopping, responsibly, during the weekend. We'll share some of the initial data and trends from Black Friday before turning our attention to department stores. Joining me via Skype from Sacramento, California, I'm excited to welcome senior contributor, Adam Levine-Weinberg, to the show. Hey, Adam! Thanks for joining us!

Adam Levine-Weinberg: Hey, thanks for having me on the show today!

Shen: It's been too long since I had you on the Consumer Goods edition of Industry Focus. How are you liking life on the West Coast, though?

Levine-Weinberg: It's been very nice. I just moved out here a little less than two months ago, and I'm settling in pretty well.

Shen: Nice. I'm glad the move has been treating you well. Are you ready to talk about Black Friday?

Levine-Weinberg: Yeah, let's dive in!

Shen: Did you do any shopping?

Levine-Weinberg: I did a little bit of research on Black Friday, not so much actual shopping. But I did buy a couple of things.

Shen: Alright. We'll get to some of your firsthand experience braving the crowds. Before we do that, I wanted to make a quick announcement. It's Giving Tuesday, and in the spirit of the season, The Motley Fool is proud to announce our holiday partnership with All Hands and Hearts -- Smart Response. All Hands and Hearts deploys compassionate skilled and unskilled Volunteers in areas of disaster to rebuild homes, schools, and community infrastructure. Visit to learn more about All Hands and Hearts and make a donation. That's 200 million people are affected by disaster each year. Your donation can make a world of difference.

Now, the results we have to share with you regarding Black Friday weekend activity, these are initials figures and estimates. Many of them will differ depending on the source and the methodology of their surveys, but the important thing to take a note of is how spending changed directionally year-over-year. On last week's episode, Dan and I noted that Black Friday should technically be losing its significance in terms of its share of holiday spending as retailers spread out their marketing and promotion a full week before Thanksgiving through Cyber Monday and afterwards. But the numbers don't necessarily bear that out. Adam, can you give us some of the high-level results you were able to find so far in terms of weekend activity?

Levine-Weinberg: The growth numbers are actually surprisingly consistent across the board. Adobe Analytics is one company that's been providing a lot of great data on trends, particularly for online spending. They found a pretty steady 17% across the board increase. So for Black Friday itself, it reached a little over $5 billion, and that was up 17% year over year. For the combined Thanksgiving and Black Friday two-day period, sales were up 18%, and that was $7.9 billion. Looking at the month of November as a whole, again, up 17%, up until yesterday, that would be Cyber Monday, and that was to about $50 billion over that 27-day period. So you've seen a pretty consistent trend in terms of online revenue growth across this whole past month, about 17%. And obviously, it does vary a bit day to day, but it seems like the trends are pretty consistent. Then, the early data that we have on Cyber Monday revenue also comes in at 17% increase year over year. It's pretty surprising just how little the trends from day to day have changed from this year and last year.

Shen: So the overall big takeaway is, consistent growth, especially among those online channels, and specifically to online, mobile did prove to steal the show a little bit this year, according to another source I found on Shopify. For orders made on its platform, they said over 65% were mobile, with the rest from desktop, and that was an approximately 7 percentage point swing from last year. Overall, we have less data available that's inclusive of sales performance in stores. That'll take a little bit more time for these various research firms and companies to aggregate. But each year, investors do look to the results from the Black Friday weekend as an indication of how the brick-and-mortar retailers are performing and what their outlook might be for the rest of the holiday season. The results I found pointed to surprisingly robust traffic at physical stores.

ShopperTrak had preliminary data indicating that foot traffic fell just 1% year over year on Black Friday itself, and slightly more than that with a 1.6% decline for the combined Thanksgiving and Black Friday period. Given some of the pushback that we've seen from consumers and retailers to opening stores on Thanksgiving Day, I think the greater drop for that two-day period overall makes sense. Adam, those are some of the big picture numbers and takeaways. But since we're on the topic of brick and mortar, I'd like to get updates from you on the major department stores. The last time we covered it on the show, the big trends included ongoing store closures, weak traffic, some new investments in omnichannel and their discount or off-price initiatives. How are the department stores responding to the early Black Friday numbers and results?

Levine-Weinberg: Generally speaking, department stores have seen a little bit of an uptick in the past month or month-and-a-half, which is really good because third quarter, the numbers were on the mediocre to bad scale. On the mediocre side, you had someone like Kohl's (NYSE: KSS), Kohl's had comp sales of 0.1%. Which was pretty good, given the headwinds that they were facing during the third quarter. But obviously, you want to have your comp sales after more than a fraction of a percent. Meanwhile, someone like Macy's (NYSE: M), that's a company that has posted comp sales declines for now 11 straight quarters so nearly three years. However, all of these companies have said that comp sales have been much better starting around the second half of October. And a big part of that is that companies have a big presence in the northern part of the country, in the Northeast, having really benefited from colder weather, which didn't really kick in until the second half of October, and then it got even colder in November. And that's what drives really great sales for coats, scarves, boots, sweaters, and other cold weather items.

So, looking at Black Friday in particular, several of the CEOs fortunately gave some data about how they were doing on Black Friday. Kohl's CEO, Kevin Mansell, said that the sales for Thanksgiving and Black Friday were significantly better than what the company saw last year, both in-store and online. Again, cold weather apparel helped a lot. They're also doing very well in activewear from Nike, Adidas, Under Armour. That was a bit of a surprise, not that these are better categories within apparel, but apparel as a whole has just been a big weak spot. And traditionally, for Black Friday, you see a lot more sales of the big-ticket items -- things like electronics, kitchen and home appliances. So that's where Kohl's was expecting to see their best results, but it actually did pretty well in apparel as well. And the last thing that Kohl's management noted was that they opened an hour earlier this year compared to last year, so 5 p.m. compared to 6 p.m. on Thanksgiving, and that seemed to help them.

Shen: I'll add that, it seems like Kohl's is seeing some of their investments from the past year pay off. They have their new shopping app, they have a lot more omnichannel initiatives -- for example, they're shipping more from their stores. The company noted that it saw record traffic to its website during the holiday. Then, some other initiatives, like buy online pickup in store, also enjoyed significant growth, up 40% year over year. And for those winning products that you mentioned, in addition to the cold weather apparel that we're seeing across the industry, Mansell also mentioned some of the best sales at their store with specific electronics like the Apple Watch and Fitbit devices, and then some of those apparel categories, in terms of the activewear that you mentioned.

But let's move on. How about Macy's? What did management say there?

Levine-Weinberg: Macy's CEO, Jeff Gennette, was on CNBC pretty early on Black Friday. He sounded really positive about how the company was doing. He noted that the traffic in the Herald Square flagship store in Manhattan was up significantly when they opened, also an hour earlier on Thanksgiving Day so 5 p.m. Generally, across the chain, they are expecting sales to be up. They're doing very well in the Northeast and the northern part of the country, again, because of this stronger demand for cold weather gear. Later during the weekend, they said that they expect to break a million sales of cold weather items over the Thanksgiving to Cyber Monday weekend.

Now, the one issue there is, on Black Friday itself, Macy's ran into a slow down with its payment system for credit cards and gift cards. It seemed to be a capacity issue, just too many people trying to buy too much stuff at once, and the whole system, it didn't entirely crash, but some people couldn't complete their transactions, and the processing of other transactions slowed down dramatically. So you have these really long lines in stores, to the point where some people just walked out rather than waiting. So that obviously wasn't good. The one saving grace was that this didn't start until about noon eastern time, and it was for about six hours. So it was definitely during a decent chunk of Black Friday, but a lot of the spending happens both on Thanksgiving Day now, and then in the overnight hours and early morning. So I think Macy's was probably able to get most of the sales that they would have otherwise gotten, but they probably did leave some money on the table through that glitch that they had.

Shen: Yeah. I think the big thing to keep in mind here is, in terms of that store activity and the traffic that they're seeing at certain stores like the Herald Square store location being higher, and what they've seen in the past, that being an encouraging development. The products that are seeing strong demand, that colder weather apparel that we keep talking about, winter gear that includes coats, sweaters, boots, those things do tend to be higher margin items. If you add on to that the fact that, after months and months of a lot of discounting from the department stores to remain competitive, the industry seems to be hitting its stride a little bit more with in-store experiences, things like pop-up shops and other initiatives that can bolster traffic without relying on that steep discounting that cuts into the profit.

With Macy's, for example, they have their new loyalty program, they have Macy's Backstage, they have their greater integration of their in-store and digital shopping experiences. So the company currently has closed to 50 Backstage concepts open within its larger department stores. Initial results there have been encouraging. Following the trend that we've seen with other retailers that we discuss on the show, things like buy online, pickup in store, has also been very positive as the company improves its navigation information on inventory for its website. For example, when a customer goes to pickup their item, they'll often end up purchasing something else while they're at the store. Macy's, as a result, enjoys a 25% lift as a result of that. What that all adds up to, according to the CFO, is comps in the fourth quarter holiday season should increase 100 to 150 basis points from the third quarter. They have some momentum from the store closures in 2016 as stores will pick up a portion of the sales from the closed locations, improving comps at the stores that are still in operation.

Otherwise, we still have some big department stores we have yet to cover. For example, Sears (NASDAQ: SHLD) and Nordstrom (NYSE: JWN). Any news or updates from them?

Levine-Weinberg: Both of those companies tend to be pretty tight-lipped about their results during the quarter, so we haven't heard anything from Sears or from Nordstrom. Sears is scheduled to release its quarterly earnings report later this week, so it's possible that they will say something about how they did during November, especially if they did well. But that's not a guarantee. They don't take any questions from analysts, so it's harder for people to push and find out more information from them.

The last thing we could talk about is Amazon (NASDAQ: AMZN), which is obviously the elephant in the room. Amazon also didn't provide that much information about their Black Friday, Cyber Monday performance this year. They did say that orders through their mobile app were up more than 50% on Thanksgiving Day. Amazon also put out a press release after Cyber Monday saying that it was a record for Amazon device sales. So Alexa-enabled devices, Kindle and Kindle Fire devices, all those things did very well for them. But they didn't say how they did on a more general merchandise level.

Shen: Yeah. I saw a press release, I think it was put out earlier today, from Amazon. They said their best-selling device over the weekend, as you mentioned, those Alexa-enabled devices, specifically the Echo Dot, which sold very well both online and at its Whole Food stores. I thought that was an interesting development. I think this is another year where Amazon is taking over a lot of the e-commerce growth, the market share. Some analysts estimate the company claimed more than half of all digital purchases on Black Friday. Pretty incredible.

Next up, we will get some insight into your own personal experience when you went to the malls in your area, and we'll also close out with some things that investors should look for in the rest of this holiday shopping season.

Now, we have the management comments and initial data points that we discussed so far. But Adam, I want you to share some of your takeaways from your own experience venturing out on Black Friday. What jumped out to you the most?

Levine-Weinberg: From a big picture level, what I saw confirmed what we already knew, which was there's a really big difference between good malls, bad malls, and great malls. That's what I experienced visiting some of the malls in the Sacramento area over Black Friday. I started out in Arden Fair Mall, which is the closest mall to downtown Sacramento. It's a very well-performing mall. It's mostly full, it's mostly national brands, there's a lot of the top brands that people want to shop for. It doesn't have a lot of the super luxury items, though. So if you go there on a typical weekend, it's actually quite busy, but it generally caters to a moderate-income clientele. So on Black Friday, when I went there, I was able to park without any trouble, but it was still a fair walk away from the entrance, and I parked deliberately on the Sears side, because I was strategically guessing that would be the least busy.

Shen: [laughs] Sure.

Levine-Weinberg: I actually discovered the Sears at that mall was quite busy, which was somewhat of a surprise. But in many of the departments, there were a lot of people there. I then went, after the trip to Arden Fair Mall, so Sunrise Mall, which is the opposite end of the spectrum. This is a struggling mall that's in a pretty good location but has just lost a lot of its tenants. It doesn't have very good highway access, so it's a little bit out of the way. As a result, you drive in, you can park very close, even on Black Friday. In the big anchors, there were a fair number of shoppers but not nearly as many as you could see at Arden Fair. And when you walked through the interior of the mall, it was kind of depressing. There weren't that many people there. A lot of empty storefronts. The new trick is, you put a wall with a vending machine instead of having a store, just to make it look less empty. But even so, there were lots of storefronts where there clearly were things. The food court only had two-thirds of the stalls filled. S, it was pretty clear that this mall is on the rocks right now.

After that, I went to Westfield Galleria at Roseville, which is by far the best mall in this region. Sales per square foot are 25% to 30% ahead of even Arden Fair, which, as I said, is a pretty good mall. This is where all the top luxury brands go in the Sacramento area. And I drove around the parking lot 15 or 20 minutes around 1 o'clock in the afternoon and could not find a parking space. So I eventually bailed out. But what you could tell from that is, the malls that are not doing well, like the Sunrise Mall that I mentioned earlier, those malls may be dead or dying. But the best malls in the country are still hopping. There are lots of people out on a day like Black Friday, to the point where they were probably losing traffic, people like me, who just found it too difficult to get in.

Shen: It was that busy.

Levine-Weinberg: Yeah, it was just that busy.

Shen: And that seems to be something that we've touched down in the past, with the malls that service a wealthier, more premium clientele and market. Those have tended to hold up much better than the malls on the lower end of the price spectrum.

But wrapping up here, Adam, if we follow the new timeline with the holiday shopping season, so essentially stretching from Nov. 1 through the end of the year, we're about four weeks now into the period with five weeks or so to go, what do you think Fools should be following and watching in the final stretch of 2017?

Levine-Weinberg: I would say that the first half of the holiday shopping season has been really great for retailers, but that's not a guarantee that by the end of the shopping season, it's going to still be really great. So what we've seen, last year, for instance, Kohl's mentioned that they did really well over the Black Friday weekend, really well in the week leading up to Christmas, but that in-between period in the first three weeks or so of December, they had a big sales decline year over year. So they had a limited shopping season with very peaky demand during the biggest shopping periods of this one-month period. So as a result, they ended up with a 2% comp sales decline. So what we want to be looking for is, can retailers find ways to maintain the momentum and keep people coming back into their stores during the first weekend of December, the second weekend of December, the third weekend of December? Because we know that when we get out to the last few days before Christmas, there's going to be a surge. But it's really maintaining the momentum in between.

Shen: Yeah, and I think a lot of that is going to be driven by how these companies approach some of those online digital initiatives, some of the things that will bring people in store, like shop online pickup in-store, things like that will help maintain traffic during the lulls and away from those two periods that you mentioned.

Levine-Weinberg: Another thing that you're seeing is offers that expire where you have to come in sometime in the early to middle of December. So people who shopped at Kohl's this past weekend may have been able to earn Kohl's Cash, which they can use, but they're going to have to use it in the first half of December. So that may be able to drive repeat traffic. Similarly, you're seeing Macy's offering Macy's Money for certain purchases. If you buy something online and agree to have it shipped later, then you can get this Macy's Money that you can use in store. So there's a variety of ways that they can try to shape consumer behavior, but whether those are actually successful, we still have to see.

Another big question is whether the favorability of the holiday calendar will help. Some years, there's four Saturdays between Thanksgiving and Christmas, and some years there are five. Historically, when there have been five Saturdays, which includes this year, that's been very good for retailers, because Saturday is the biggest shopping day of the week. Again, this depends on how big of a lull there is in between this past weekend and the week leading up to Christmas. Another big question is how big the Super Saturday will be. Saturday, Dec. 23 is the last Saturday before Christmas, that's historically a really big shopping day, even bigger than Black Friday. It's particularly good for the physical retailers this year, because for the most part, there aren't going to be deliveries on Dec. 24, because it's both a Sunday and Christmas Eve. So if you're missing something and you need to get a gift, that day is really going to be your last day to go get it, and you're going to have to buy it in a store from something that I have right there. So that's potentially a really big sales driver and could allow some of these retailers to close the holiday shopping season with quite a bit of momentum.

So I say those are the main things. The last thing I would add is weather. If the weather cooperates and it stays cold but not really snowy, that would be great. However, if you have a big snowstorm that gets lots of people stuck inside over one of these big shopping weekends, that's obviously going to help out somebody like, because people are going to want to order from their homes rather than going out to the stores.

Shen: Yeah. We've heard a few CEOs already speak to how the cold weather is helping them in terms of those apparel categories, and the benefits it can have on their bottom line. Otherwise, we'll keep an eye out and have to update listeners once the quarter is in and we have results from the big players here. Adam, that's all the time we have today. Thanks for joining us! It's great to have you back on the show.

Levine-Weinberg: Thank you very much!

Shen: Thanks, Fools, for listening! Shout out to our producer Anne for making us sound better than we should. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levine-Weinberg owns shares of Apple, Kohl's, Macy's, Nordstrom, and Under Armour (C Shares) and has the following options: long January 2018 $90 calls on Apple, short January 2018 $140 calls on Apple, and short February 2018 $160 calls on Apple. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, Fitbit, Nike, Shopify, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Adobe Systems and Nordstrom. The Motley Fool has a disclosure policy.