The Best & the Rest for 2013

8/7/2013
In Apparel’s 3rd annual ranking of U.S. department stores, we see retailers jockeying for position once again, with Kohl’s taking back the lead that it held in 2011, switching positions with Dillard’s, at No. 2. Macy’s and Belk, likewise, switched positions, coming in at Nos. 3 and 4, respectively; ditto for Neiman Marcus and Saks, at Nos. 5 and 6. Burlington Coat Factory and The Bon-Ton Stores, at Nos. 7 and 8, were the only two to hold their positions, with Burlington exiting the red, while Bon-Ton continued to lose money. Finally, Sears and J.C. Penney also took each other’s spots, with Sears, although still losing money, showing some signs of a turnaround, while J.C. Penney takes an even deeper nose dive.

As department stores vie for position with the consumer by introducing new private-label products, remodeling and opening stores (including outlets), beefing up loyalty programs and ramping up marketing programs, they all have turned up the heat on their omnichannel efforts, working to integrate their stores, websites, mobile and catalog to ensure that all channels work in unison, and that inventory can be shared among them. Department stores are finding that customers who shop all channels spend more than those who shop just one channel; making it easy for them to move from one to the other seamlessly is a direct line to bigger basket size and greater profitability. It’s also a crucial strategy for competing with the likes of Amazon. Greater product assortments are also key to succeeding, and department stores are expanding their merchandise via enhanced ecommerce offerings, while enabling the availability of those greater assortments in the store by providing customers with free Wi-Fi to allow them to access the web on their mobile devices.

In their efforts to make sure all channels work together to drive business to the others, department stores are making intensive capital investments in upgrading operations and making inventory more flexible. For a business such as Belk, which has just a 16-state store footprint, ecommerce operations are particularly crucial in reaching customers who may live nowhere near a Belk store, while at a store such as Macy’s, which has a far larger brick-and-mortar presence, the mission to localize assortment to various stores or regions is a crucial part of its strategy. Department stores are also rolling out mobile devices to their workforces with a goal of enabling them to serve the customer from anywhere on the floor with personalized upselling and cross-selling offerings, as well as checkout services. Making the store easily navigable and convenient is also top of mind. Kohl’s, for example, has moved its customer service from the back of the store to the front, while J.C. Penney has made customer service a part of every cash wrap station.

When it comes to profit margins, department stores still significantly lag behind the apparel companies in the top three-fifths of Apparel Magazine’s “2013 Top 50 Report,” where profit margins hit as high as 20.71 in this year’s rankings. Only the first half of the 10 department stores in our rankings would have nabbed a spot on our Top 50, were they ranked on that chart. (A reminder that Nordstrom, which files with the SEC under “Retail – Family Clothing Stores” is included in the Top 50 chart instead of the department store chart, and this year came in at No. 28 with a profit margin of 6.25 percent.)

Read on to learn more about the evolution of today’s department store.


#1 Kohl’s
Kohl’s snags the top spot this year with a 5.11 percent profit margin, as it continues to refine its store experience to better serve the customer. Just one example: as it remodels stores, it is moving customer service from the back of the store to the front. It has also converted to all-electronic signage, freeing up associates for more customer-facing engagements. The retailer ended the year with 1,146 stores, an addition of 19 over the previous year, with almost all new stores in its new small-store format of fewer than 64,000 square feet — downsizing that its customers may well relate to: the Kohl’s website offers a “Small Space Style” page where shoppers can get ideas about furnishing an apartment on a small budget. Ecommerce exceeded $1.4 billion in 2012, as the company invests in a new platform from Oracle, rolling out this summer. In its march to perfect the omnichannel experience, Kohl’s has equipped all stores with WiFi, replaced gift registries with kiosks, and will pilot mobile POS in the third quarter of this year, while its global inventory visibility project will allow the retailer to better track in-store inventory, the first step on the path toward offering in-store pickup for online orders. Despite its No. 1 positioning, the company viewed 2012 as a “disappointing” year from a financial perspective, with some categories underperforming expectations, and growth coming at a higher cost to profitability than it deemed acceptable. But Kohl’s entered 2013 planning to “own savings,” with a focus on moms, its most important, most loyal — and highest-spending —customer.

#2 Dillard’s
The department-store retailer had another strong year, with a 4 percent comp-sales increase on top of a 4 percent increase the prior year, as it continued to focus on knowing its customer and not veering from its merchandise strategy that is focused on presenting limited distribution, high-profile brands not typically found in department stores, along with well-known, highly regarded national brands — and fashionable, nationally recognized Dillard’s exclusive brands, including Antonio Melani, Gianni Bini, Roundree & York and Daniel Cremieux. Dillard’s is also working to improve the flow of merchandise receipts to stores in cadence with demand, and to pinpoint replenishment of high-demand styles and colors with greater precision based upon improvements in data analysis and logistical response. Dillard’s ended the year with 302 stores, including 18 clearance centers and a web site, and this year celebrates its 75th anniversary.

#3 Macy’s
Maybe Macy’s shouldn’t even be on this list, because according to chairman, president and CEO Terry Lundgren, the retailer has “moved beyond the meaning of ‘department store’ in the traditional sense of the word,” to be “America’s Omnichannel Store.” There’s no doubt that Macy’s has taken a leading role in this space, catering to consumers who move between stores, computers and mobile devices without missing a beat. The retailer’s best customers are those who shop all three, and to meet their needs the company has been working to ensure its stores, websites and mobile devices all work in unison. This year the retailer will equip another 208 stores with fulfillment capability, bringing the total to 500 by year’s end. Macy’s credits its success — it ended 2012 with 12 consecutive quarters of comp-sales growth of at least 3 percent — to the business strategy it has been pursuing for several years: M.O.M., an acronym for My Macy’s (its formula for localization), Omnichannel, and MAGIC Selling (the strategy for engaging with the consumer). And that consumer includes Millennials — who spend more than $65 billion on the kind of merchandise sold by Macy’s — and represent a major opportunity for the company, which Macy’s is working to capture by bringing together teams focused exclusively on this demographic. These teams have produced fresh merchandise for the Impulse (for older Millennials) and Mstylelab (for younger Millennials) areas of Macy’s stores and dotcom, and by the end of this year will expand 11 existing Millennial brands, while also experimenting with floor moves and new destination zones.

#4 Belk
This year Belk celebrates its 125th anniversary as it continues with a multi-year $600 million reinvestment in the business that will touch everything from branding and service excellence, to technology, to store remodels and expansions. The company grew ecommerce sales by 85 percent to $135 million in 2012 and is working on better integrating its customer data from both online and store sales to allow it to get a more complete view of its customers — like Macy’s, Belk has found that customers who shop both in-store and online spend 10 times more than customers who shop just one channel. Part of its massive IT overhaul will include new POS equipment including wireless tablets for sales staff, which will provide insight into a customer’s purchase history, making it easy to suggest a complementary item. The 301-store privately-held company is also focused on spreading its message of “Modern. Southern. Style.” with an emphasis on opening new flagship stores next year — one in Dallas, Texas and one in Huntsville, Ala., bringing the total to 16 — as well as expanding its ecommerce business, which it expects to account for 10 percent of total sales within the next five years.

#5 Neiman Marcus
Neiman lands the No. 5 spot, with a 3.22 percent profit margin for its fiscal year ending July 2012. Results for the nine months ended April 27 show a profit margin of 4.56 percent (vs. 4.52 percent for the same period the previous year) with revenues up 5.7 percent to $3.53 billion and net income up 6.4 percent to $160.8 million. Neiman’s, like other luxury retailers, was hit hard during the recession, but it has reinvented itself and turned its business around. Its private equity owners, TPG Capital and Warburg Pincus, which purchased the retailer in 2005 for $5.1 billion, have recently made the first moves toward issuing a new IPO, seeking an infusion of capital to help grow in a changing retail landscape where luxury retailers compete not only against their brick-and-mortar counterparts, but also against new online rivals such as design discounters Gilt and Rue La La. Neiman’s has its own foot in the discount door with 33 off-price Last Call stores, which offer goods purchased directly for resale as well as end-of-season goods from its Neiman Marcus (42 stores) and Bergdorf Goodman (2) stores and online operations. It also operates six CUSP stores, a smaller-format store that targets a younger, fashion savvy customer. Combined, Last Call and CUSP comprise 10 percent of the retailer’s business. With online generating 20.2 percent of total revenues in fiscal 2012 — and 40 percent of its online customers located outside of the trade areas of its existing retail locations — Neiman Marcus is focused, like its competitors, on getting omnichannel right. This year it made the decision to close its warehouse in China and fulfill online orders to its Chinese ecommerce site from U.S. facilities. In November, Neiman’s expanded its relationship with Target as the two teamed up to sponsor an episode of ABC’s popular drama, “Revenge.”

#6 Saks Incorporated
For a moment there it was possible that Nos. 5 and 6 would have appeared as one company in next year’s rankings, but in May, Neiman Marcus turned down an offer from private equity giant KKR that would have led to a merger with Saks, which, like Nieman’s, has a made a strong turnaround and is looking for a shot in the arm. (Last month, at press time, it was announced that Hudson’s Bay, the Canadian owner of Lord & Taylor, will buy Saks for about $2.4 billion.) The company has made itself quite attractive, expanding its OFF 5TH outlets and focusing on omnichannel via its “Single View of the Customer” platform, and on the back end is integrating its in-store and Direct inventory systems. In 2012, Saks completed the rollout of free Wi-Fi networks and also placed iPads in all of its SFA stores to allow associates to access saks.com and merchandise “look books” to expand the merchandise offerings available to customers, and to access inventory from all locations. It began a pilot of iTouch-based mobile POS devices in several of its stores, including OFF 5TH. The year also saw the start of “Project Evolution,” a multi-year migration of its existing merchandising, planning, procurement, finance and human resources information technology systems to an enterprise-wide systems solution. To meet the rapid growth of Saks Direct, the company opened a new fulfillment center in Tennessee, equipped with an advanced mobile-robotic fulfillment system.

#7 Burlington Coat Factory
It holds its spot at No. 7, but moves from the red to the black, turning a -.16 percent loss into a .61 percent profit margin in fiscal 2012. During the year, the company also hit the 500-store mark, adding 25 stores (and closing two), under its nameplates Burlington Coat Factory, Cohoes Fashions, Super Baby Depot, MJM Designer Shoes and Burlington Shoes (more than 99 percent of net sales derive from its 482 BCF stores). It expects to add 20 to 25 stores annually into the foreseeable future, while continuing to remodel older stores (since 2006, 64 percent of its store base is new, remodeled, refreshed or relocated). Its core 25- to 49-year-old female customer takes center stage this year as the company focuses on expanded product offerings and categories to increase her basket size and frequency of visits, while also turning its attention to simplifying navigation, reducing rack density, facilitating quicker checkouts and improving fitting rooms in the stores. To refine its off-price strategy further, the company instituted a Merchant Scorecard last year that rates products across four key attributes — fashion, quality, brand and price — to help formalize a framework for buying decisions. This, in addition to recent implementations of allocation and markdown optimization systems, should improve its offerings and help to drive comp-store sales growth.

#8 Bon-Ton Stores
And this is where we hit the red. It was a challenging year for Bon-Ton, which sunk further into the hole in 2012, losing more than $21 million, but president and CEO Brendan Hoffman calls it a “pivotal” year in which the company made transformational changes in its business and stabilized its financial performance, improving each quarter of the year as it better balanced its merchandise assortment, implemented more disciplined inventory management, improved marketing and upgraded its ecommerce business. The year also saw the re-launch of the company’s loyalty program. Among other goals it will pursue as it works to establish itself as the leading omnichannel retailer in the small- to mid-size communities that it serves, Bon-Ton is  working this year to grow ecommerce to 5 percent of sales by adding partners such as Coach and Michael Kors to its website. The department store is making strides toward localizing its assortment to the different personalities of the regions its serves,
re-engaging its core customer while also reaching out to new shoppers. It is investing in CRM and other marketing techniques, while working to improve gross margin via better inventory management that includes new liquidation techniques begun in 2012 as well as more strategic pricing of merchandise assortments and a focus on better inventory turnover in its smaller stores.

#9 Sears Holding
In April, the company announced the launch of a new business unit called Shop Your Way Brands with new clothing and lifestyle lines from pop stars Adam Levine and Nicki Minaj, which will be available only at Kmart and on ShopYourWay.com, Sears’ social commerce platform. Building on its long heritage of creating celebrity brands should help to continue to right the ship, which foundered in recent years but may be finally bailing water fast enough to patch the holes. While it’s difficult to get excited about a loss of $70.5 million, things are really looking up compared to the prior year’s outright carnage: a $3.2 billion loss. Since 2006, the company has been eliminating money-losing stores, closing just more than 300 Sears full-line and Kmart stores, or 13 percent of its stores, with about half of these store closings coming in the most recent fiscal year. It also completed the separation of Sears Hometown and Outlet Stores Inc., raising $446.5 million, and distributed nearly half of its ownership in Sears Canada in 2012. Sears and Kmart apparel businesses both improved in 2012, helped by declining cotton prices, improved assortments and better inventory management, which it expects to improve further this year as it adapts its supply chain to buy on demand vs. accumulating inventory that requires promotional pricing to sell. Chairman and CEO Edward Lampert identifies Sears as increasingly a “membership” company, as sales to members of its SHOP YOUR WAY Rewards program now represent more than 60 percent of business. Members buy more, spend more and visit more often. In 2012, the company continued to invest in the program by making it more social, engaging family and friends in-store and online, and also by adding features such as sweepstakes and coupons. As it works to integrate its retail channels, the company rolled out tablets and mobile devices to Sears stores across the country in 2012, introduced mobile checkout at many Sears stores and introduced a “Return/Exchange in 5” capability that allows members to fill out product return information online and drop off or exchange the item they want to return at its Merchandise Pick Up area within five minutes.

#10 J.C. Penney
Department store or soap opera? You decide. Bringing back sales promotions (eliminating them had sent J.C. Penney customers flying to its competitors) and taking personal responsibility for the retailer’s steep sales declines and $985 million net loss in 2012 didn’t keep the company from showing CEO Ron Johnson the door in early April, with his predecessor Myron Ullman taking back the post, which led to an immediate bump in the company’s stock on Wall Street. Turning JCP around will be no easy feat. Under Johnson’s leadership the company implemented major changes, and Ullman was faced with issues such as whether to stick with his strategy of turning the chain into a collection of boutiques or return to a more traditional department-store model, and whether or not to sell the company. And just in case JCP didn’t have enough troubles, it was sued by rival Macy’s after it struck a product deal with Martha Stewart and was subsequently prevented from stocking certain Martha Stewart-branded home goods pending the outcome. As of press time a decision is expected this month. Hopefully a turnaround is in the works. This spring, JCP began to draw loans from its line of credit and to seek other sources of capital, while hedge-fund billionaire George Soros took a 7.9 percent stake in the company. Meanwhile, the company has been rolling out technology, including Wi-Fi in most of its stores as well as mobile devices for associates that liberate them from fixed POS terminals and allow them to assist and check out customers on the floor. On the product side, the retailer opened the first of its new home goods sections (part of Johnson’s vision to turn the chain's larger stores into a collection of shops with one-of-a-kind goods), pitched a turnaround plan to prospective lenders that emphasized a mix of private-label and national brands such as Joe Fresh, St. John’s Bay and Liz Claiborne, and then opened a design center in New York City, headed by former product development vice president Ken Mangone, focused on developing private-label brands and new lines for signature brands. It also rebranded its big and tall men’s sections in time for Father’s Day and added back extended sizes to hundreds of stores that lost the category last year. On the customer outreach side, JCP is down on bended knee asking customers to “come back” in social media posts as well as in a new commercial, admitting that it has made mistakes and promising to listen to customers’ needs.

Jordan K. Speer is editor in chief of Apparel.



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