Product and Service

Companies included in department stores sector in merchandise-clothing, household& furnishing, personal care industry primarily sell merchandise and services including apparel and footwear, accessories, jewelry, beauty products, home furnishings and large appliances through their department stores and websites.

Demand for Product and Service

Data indicates that comparable store sales across all department stores have decreased in the past 2-3 years primarily due to slowing down store traffic as a result of changes in shopping pattern and changes in macro-economy. We see more stores closures in department stores and mall-based stores and shrinking margins due to promotions and markdowns. However, e-commerce and recently rebounding consumers’ demand for surviving companies in this sector may be helping slow down decline of sales.

The Sector

Sector’s current, trend, causes behind trend, and future

Current and Trend

  • Data indicates that comparable store sales of almost all department physical stores have decreased in the past several years and the decrease has been recorded in almost all categories including apparel and footwear, accessories, jewelry, beauty products, home furnishings and large appliances.
  • Comparable sales of physical stores continued to decline in the past year with slowing down pace due to slower decline in transactions and rising price/less markdowns.
  • Online sales of those stores gained significant growth during the same period of time, which seems faster than what we have seem in those specialty apparel or footwear stores and may be helping make a turn in downward trend in sales of companies in this sector.
  • Data indicates that sales of value and discount department stores performance much better than full-price stores and it seems that those factors working behind the slowing down traffic of most department stores do not apply here.
  • For years, many companies in this sector have been seen to mark downs their products and close more stores as pressure of sales increased and companies’ profitability has thus been hurt due to lower price and deleveraging of operating expenses as a result of decreased sales.
  • We have seen many companies falling into cash flow trouble due to their failure to lower costs to offset deleveraging of their operating expenses when sales continuingly decrease.


Causes behind the trend

There are always some common reasons behind the general downturns in the retail industry but the impacts are different due to the difference in products such footwear and apparel or department stores.

Changes in shopping pattern/selling pattern

  1. General changes in shopping pattern of consumers/selling pattern of manufacturers will not impact the demand as whole but stores traffic. Increasing alternative distribution channels such as online sites, massive merchandises and warehouse dilute the traditional stores traffic and cause decline in transaction/sales volume of retail stores.
  2. In this situation, while demand still exists and keeps strong some of demand inevitably moves away from current distribution system and current manufacturers because e-commerce, with the lower barriers to entry, creates accessibility for consumers to products of more small manufacturers and retailers that would have no chances to compete, in traditional shopping/selling pattern, with big companies or retail chain due to disadvantage of scale. The products that they make are usually not premium products and have overlap with those that have been selling in mid-tire department stores/mall-based stores. This explains why department store’ traffic decline significantly.
  3. Value/off price products, probably because the profit is too small to cover the shipping cost, are not being purchased online by consumers and this is why we are seeing increase in sales of value department stores.
  4. The shifting of consumers’ shopping pattern to online, causing less traffic in the stores, will negatively impact demand because occasional purchasing resulted from temporary decision that consumers used to do when they shop in the stores significantly decreases due to less visits of stores.

Changes in monetary policy and pressure of price

Quantitative easing monetary policy has largely boosted inflation in products’ price by increasing consumers’ spending in the past ten years. However, as Fed ended quantitative easing policy and started to raise interest at large pace, there is a strong downward trend on products’ price due to decreasing spending of consumers. In this situation, sales decreased inevitably either due to decreased volume if companies do not lower selling price or due to decreased price when they lower price with no increase in volume. While center banks in Euro and Asia will follow the pace of Fed to raise interest there is going to a delay and the delay of monetary policy explains the different performance in retail sales between international markets and US market in the past several years.

Increasing consumers’ demand driven by macro-economy/purchasing power or the increasing marketing spending stimulated by money saved from the tax act of 2017 or increasing traffic in third party platform or reduced competition due to massive closure of stores and thus possibility to raise price may be playing the role in rebounding sales in 2018.

Industry Future

Whatever the reason is, this trend may not cease soon and may spread from US to all of other markets as consumers increase their online shopping and other governments raise interest rate as a result of Fed’s action.

Given our analysis we may have to wait, until a deeper cutting in price of merchandises, to see companies’ transaction counts coming back to previous level. We think the fast decreasing price will be passed on to compensation of workers and raw materials eventually. However, some of companies will have to face serious cash flow issue before the lost profit can be passed away. Companies with higher margin, especially those owning premium brands, will have better opportunities to survive by grabbing market share/shrinking traffic as more companies go into bankruptcy and release competition.

Online sales, due to lower price than in stores, will grab more traffic from in stores sales.


General Financial Performance of Companies In the Sector

All companies in this sector in our analysis have experienced decreased comparable stores sales (physical stores) between 2016 and the first half of 2017. Based on our data, the average growths of comparable sales (including online sales) are 0%, -2.3%, and 0.6% for 2017, 2016 and 2015 respectively. While the decrease in their comparable stores sales has been offset, to some extent, by the significant increase in comparable online sales, because the sales from e-commerce only account for a relative small portion compared with stores sales, the net sales for most companies have decreased during the same period.

However, it seems the decline in comparable sales hits a bottom in the second half of 2017 and made a turn to grow again since then driven faster growth in online sales, slower decline in transactions, and rebounding price/less markdowns. Our data indicates that average comparable sales had no changes in 2017 and gained about 2% in 2018 so far.

Under the pressure from decreasing traffic and sales, companies have to use aggressive promotion and as well shut down more inefficient stores. The resulted markdowns seems, as indicated by the decrease of about 100 basis points in gross margins of companies in the past three years, hurt companies’ profitability. The average gross margin in the first half of 2017 was  about 33.5% with a range in 30-39%. (33%- occupancy cost included and 34% -occupancy costs excluded).  At the same time, the average SG&A as percentage of sales (average 28% with a range 24-32%) decreased about 40 basis points during the same period due to deleverage of decreased sales. Therefore, we see the average operating margin went down to about 5.5% from about 7% of 2014 with a range of 2-7% (12 months trailing data, ended 20170731). The operating margin seems to have no change in the past year since the improved gross margin/rising price has been offset by increasing shipping expenses of online sales. However, we have seen solid growth in EBI in the past year and its huge potentials as continuously improving same store sales.

According to our analysis, the current companies’ enterprise price/EBI ratios vary between 13 and 22 with an average 16.

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