Department-Store Sales Plunged Last Quarter, but There Was a Silver Lining

A slew of department stores ranging from Macy's (M 0.16%) to J.C. Penney (JCPN.Q) to Nordstrom (JWN 4.40%) reported their first-quarter results last week. Comp sales declined across the board, but several department stores still managed to improve their earnings on a year-over-year basis.

In this segment of Industry Focus: Consumer Goods, analyst Vincent Shen and contributor Adam Levine-Weinberg dig into how department stores are protecting the bottom line in the face of a weak sales environment -- and in some cases, producing enviable earnings growth.

Vincent Shen: A lot of these companies have seen comparable-sales declines, revenue declines, some cost-cutting measures, store closings, and other reorganizations, and asset sales have helped them boost their bottom lines. But what are we seeing for these companies, in terms of their core key headline results?

Adam Levine-Weinberg: Across the sector, if you look at the major department store chains, last quarter, low- to mid-single-digit comparable-store sales declines were pretty much the norm across the board. You look at Macy's: Comp sales were down 4.6%. Kohl's, it was down 2.7%. You had down 3.5% at J.C. Penney, down 4% at Dillard's, and then at Nordstrom, if you slice out the Rack, which is their off-price chain, and just look at their full-line comp store sales, they were down 2.3% in that part of their business. So, all in, that's down in the 2-5% range. The only real exception so far is Sears, which hasn't officially reported their results yet. But Sears has really been struggling mightily and losing its relevance pretty quickly. Through late April, they had already seen an 11.9% year-over-year decline in their comp sales. Barring a huge change in the last week of April, they're going to have a double-digit decline. So, pretty bad results on the sales front. In many cases, these companies are closing stores, so total sales are declining at an even faster rate than the comp sales declines.

On the other hand, if you actually look at the earnings results, surprisingly good for many of these companies. Macy's is the only one where you really saw an earnings wipeout last quarter. Macy's reported that its adjusted earnings per share was down about 40% year over year. So, clearly, that was a big miss, and that's why Macy's was one of the hardest-hit companies after the earnings reports last week. On, the other hand, if you look at Nordstrom, Nordstrom reported EPS up 19% year over year. You look at Dillard's, it was down 2% year over year, so down but not disastrous in any way, shape or form. Kohl's was up 26%, that was actually the biggest gain, and that's why Kohl's stock only declined about 8-10%, as opposed to 20% for a lot of these other companies. J.C. Penney, its numbers weren't very easy to compare. They had a big asset sales gain last quarter. If you include the asset sale gain, they actually posted positive adjusted earnings per share compared to a big loss a year ago. If you take out that gain, they still were a little bit better on a year over year basis in terms of their core profitability.

So, overall, what you see is these department stores have huge sales problems, and at Macy's, that did translate into a big earnings decline. But many of these companies actually improved their earnings results, or basically held the line. There're a few reasons for that. First of all, last year in the first quarter was just as bad, in terms of bad weather, in terms of the timing of when it got warm and when it was cold, inventory mismatches, a lot of these stores weren't expecting sales to be so bad a year ago, so they got caught with too much inventory and had to take a lot of markdowns. If you look at the results this year, you both saw a cost-cutting where they were taking operating expenses out in many of these companies. Then, also, gross margin improvements, which really speaks to the improved Inventory management. For a department store, you would obviously love to have sales growing, but at least if you expect sales to be declining, you can take the proactive inventory management steps in advance so you're not stuck with too much on your shelves, and you can at least get a better margin on what you are selling.

Shen: Yeah, in turn, obviously, the things that you have a hard time moving through, getting out of your inventory, you have to sell at a discount or through promotions, and that hurts your profitability and your margins.

Levine-Weinberg: Yeah, it's really the clearance part. All these department stores have some amount of promotionality to their business models. They're used to marking things down 50%-60%. That's OK. It's when they get into clearance, and they have to start marking stuff down 70%-80% because they just need to get rid of it right away, if it's part of the collection of winter clothing and now it's getting into late March, then they just have to sell it for however low they have to go to get rid of that merchandise, because they just can't afford to hold on to it for another year.