Retail industry sees its split widening
Mall-based and department stores struggle as others adapt to a changing environment.
The divide between the retail industry’s winners and losers is widening.
That became even more evident Wednesday with the latest batch of earnings reports: Big-box stores and off-price retailers have been responding faster to shoppers’ increasing shift online by offering expanded deliveries and better merchandise. But many mall-based clothing chains and department stores continue to suffer weak sales as they struggle to attract shoppers.
“There is an increasing polarization in retail,” said Neil Saunders, managing director at GlobalData Retail. “It’s a vicious cycle, and it’s difficult to pull out of the tailspin.”
For the first two fiscal quarters of this year, earnings at off-mall retailers rose 3%, compared with a drop of 29% for mall-based retailers, according to the research firm Retail Metrics, which analyzed results at 105 retailers.
On Wednesday, Target Corp. raised its annual earnings guidance after reporting strong sales and traffic. It was helped by its sameday delivery services, as well as a strong lineup of homegrown brands. Lowe’s Cos., the nation’s second-largest home improvement retailer behind Home Depot Inc., blew past Wall Street’s second-quarter earnings expectations, buoyed by strong demand for spring goods and by sales to contractors.
Both companies’ stocks soared. Target rocketed up 20.4%. Lowe’s jumped 10.4%.
This week, Home Depot handily beat second-quarter profit expectations. Last week Walmart Inc. raised its outlook for the year. Offprice chains such as TJX Cos.’ T.J. Maxx are also faring well, resonating with shoppers who love to treasure hunt.
But clothing chains and department stores haven’t differentiated their merchandise enough, and now discounters are further squeezing them by pushing into more affordable trendy fashions, retail industry analysts say.
Last week, Macy’s Inc. lowered its annual earnings guidance after revealing that its second-quarter earnings suffered as it slashed prices on unsold merchandise. J.C. Penney Co. is in worse shape; it posted another quarter of sales declines. And on Tuesday, Kohl’s Corp. shares fell after the company posted a sales decline even though business improved later in the quarter.
Nordstrom Inc.’s secondquarter results — which it reported Wednesday after the stock market closed — beat expectations, but its profit and sales still declined.
Saunders and other analysts say that they started to see a clear divide between retail’s winners and losers four or five years ago, and that the gap has gotten more pronounced.
For several years, a strong economy provided tail winds to retailers,and last year’s tax cuts gave merchants a nice sugar high. But as the economy starts developing some cracks, vulnerable retailers will become even more exposed.
Analysts also say that the shift to online shopping keeps accelerating, giving a big advantage to such retailers as Target and Walmart that have invested billions of dollars in online deliveries and in their stores. Some mall-based retailers are now looking at other ways to bring in shoppers, including subscription rental services and carving out areas to sell secondhand clothes.
Target reported Wednesday that its comparablestore sales, which include online sales, rose 3.4% as customer traffic climbed 2.4%. Its online sales soared 34%.
Still, it’s an uncertain time for all retailers.
The Trump administration has imposed a 25% tariff on $250 billion worth of goods imported from China. A 10% tariff on an additional $300 billion worth of Chinese goods is pending, and if it’s enacted, U.S. tariffs would hit basically everything China ships to the U.S..
It appears the retailers that have been winning all along will be the ones to better navigate the tariff storms.
Although the trade war presents an additional layer of uncertainty and complexity, Target Chief Executive Brian Cornell told analysts Wednesday, his company has a diverse assortment of goods, deep expertise in global sourcing and a sophisticated set of manufacturing partners around the world.
Macy’s said last week that its shoppers don’t have an appetite for higher prices caused by the trade war. The department store chain raised prices on some luggage, housewares and furniture to offset the costs of the 25% tariff implemented in May. Macy’s vowed not to increase prices as a result of the 10% tariff, and CEO Jeff Gennette said the company will speak with vendors about ways to offset rising costs if the trade war escalates.