Why Macy’s and Other Department Stores Are Having a Terrible Week

August 11, 2016, 5:00 PM UTC
Shoppers Ahead Of Consumer Comfort Figures
Pedestrians and shoppers pass in front of a Macy's Inc. store in New York, U.S., on Monday, July 18, 2016. The Bloomberg Consumer Comfort Index, a survey which measures attitudes about the economy, is scheduled to be released on August 11. Photographer: David Williams/Bloomberg via Getty Images
David Williams — Bloomberg via Getty Images

This week hasn’t been kind to flailing department stores.

Recent sales posted by Macy’s and a handful of luxury brands often found in department stores across America highlight the challenges this segment of retail must confront, as the popularity of online shopping threatens the sector and consumer shopping patterns pivot away from regular visits to the mall.

Macy’s (M) on Thursday reported that it plans to close about 100 stores early next year, out of 728 locations currently operated by the department-store giant. The move is a retreat from physical retail as Macy’s finds itself confronting perennial sales declines. For the first six months of Macy’s current fiscal year, sales tumbled 5.7% to $11.64 billion. That comes after a sales decline last year, which led Macy’s to close 40 locations earlier this year.

“Nearly all of the stores to be closed are cash flow positive today, but their volume and profitability in most cases have been declining steadily in recent years,” said Jeff Gennette, Macy’s president. Gennette has been current CEO Terry Lundgren in the first quarter of 2017. “We recognize that these locations do not yield an adequate return on investment and often do not represent a customer shopping experience that reflects our aspirations for the Macy’s brand.”

The closures aren’t exactly a surprise. Observers have long said department stores must close hundreds of locations if they want to regain productivity.

Why department stores are struggling

Since the 2008-2009 global financial crisis, consumers never fully gained the purchasing might they had before the recession because of stagnant wages and increasing costs for college and housing. And these days, Americans are spending their money in different ways: on fast fashion at chains like H&M, improvements to their homes, and for millennials, “experiences” — i.e. travel and meals out at restaurants.

As a result, department store retailers have been challenged. Shares of Macy’s, Kohl’s (KSS), and Nordstrom (JWN) have all notched double-digit declines in the past year. To be sure, Macy’s shares are climbing about 17% on Thursday to nearly $40 a share, but that is far off the stock’s high of almost $80 in 2006.


The weak traffic and sales trends at Macy’s and other department stores has led to fierce discounting to ensure apparel and other goods don’t sit on shelves too long. That’s been problematic for some of the brands that stock their goods in those stores.

Luxury brands leaving

This week, Ralph Lauren (RL), Coach (COH) and Michael Kors (KORS) all reported declining sales at the wholesale channel for their latest quarterly results. And the fierce discounting is forcing all of them to confront their own strategic pivot to rely less on department stores, because discounting hurts the aspirational luxury image that those brands are all aiming to cultivate.

Coach earlier this week made the most drastic move by announcing it would pull the company’s handbags and leather goods out of about 250 department stores across North America. The company also intends to reduce the markdowns that Coach will allow department stores to take in that channel.

Michael Kors struck a similar tone. CEO John Idol said the brand would remove itself from all coupon offers in wholesale stores in the U.S. and Canada, while also removing the brand from being part of any friends and family sales promotions. “The channel has become very promotional and, in fact, is causing us difficulties in our own retail channel,” Idol said. He said Michael Kors needed to “protect our brand image.”

The tension between apparel and accessory manufacturers and department stores for now appears to be fluid. The brands are essentially saying they are willing to cede some volume at department stores if it means they can maintain their ability to charge more. And for department stores like Macy’s, which relies on big name brands like Ralph Lauren to lure shoppers, they have to pull back from weaker performing markets and hope to make up the difference with stronger online sales.

Encouragingly, digital sales posted double-digit gains at both Macy’s and Bloomingdale’s. Macy’s said it intends to reinvest in the company’s online business, with hopes that improvements to that experience will continue to boost sales. But with overall sales at Macy’s still declining, online sales may not be the savior department stores are hoping for.

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