Outlook for Department Stores Remains Grim With Latest Bout of Earnings

In this segment from Motley Fool Money, the cast explains just how bad things have been shaking out for traditional players in the retail world. E-commerce continues to grow by leaps and bounds as consumers' love for convenience and value put significant pressure on brick-and-mortar chains.

Both the biggest department stores and smaller brands have encountered challenges, and the question remains: What can these retailers do to ready themselves for the future?

A full transcript follows the video.

This video was recorded on May 12, 2017.

Chris Hill: We begin with the retail sector. Bad earnings reports from a cross-section of mall-based retailers had investors asking about the future of the entire industry. Macy's (M -1.45%), Nordstrom (JWN -2.43%), Kohl's (KSS -3.29%), J.C. Penney (JCPN.Q) all reporting this week, Seth. We're not going to go through them one by one. But when you look at this from the proverbial 50,000 foot view, this does not look like a bump in the road. This looks like a shift.

Seth Jayson: If you're in the mall, you're in trouble. People aren't shopping in the mall. And it costs a lot to rent pieces of the mall, especially when you're one of those big anchor tents. But the smaller retailers and malls are also feeling the pinch. Ron said it best during the production. I'm just going to paraphrase him. Most people know this, you who are listening, how much stuff are you ordering online? The answer is a lot. And restaurants are seeing the same thing. People want to blame millennials, but it's everybody, especially millennials, don't want to talk to people face-to-face. They want to order takeout, they want to order lots of stuff from online stores. And it may be a giant one like Amazon (AMZN -1.60%), it may be smaller specialists. But if the stores aren't being filled, you're being crushed right now. This is what's happening. And there's really not a whole lot that's going to change that.

I think, in some places, like here, you've seen a shift to town centers. So somebody like Target (TGT -0.37%), who is willing to move into a town center for folks who might not have one, it's almost like an inside-out mall. It has maybe a couple of big anchor stores, it tends to have some nice smaller specialty places, nicer restaurants. But they also mix in townhouses and stuff so the business tenants who are there can count on foot traffic. Those are doing really well across the country. In the D.C. area, anybody who can adapt their model to online sales or town centers is probably going to survive. Anybody who is stuck in the mall is going to be gone.

Ron Gross: Since Seth paraphrased me, let me paraphrase Seth paraphrasing me. No, just kidding. Of course I agree with that. We're in the middle of a change in consumer buying patterns. As you said, it's not a trend, it's a permanent shift. As a result of technology/Amazon, there are just too many retailers out there, especially when you look at the department stores, but specialty retail too, in certain sectors. Some will go out of business, that's just the way it goes, sorry to say. Some need to go out of business. The rest need to pare down their footprint, they need to focus on what's called four-wall profitability. Each store in and of itself needs to be profitable, otherwise it needs to be closed. Then these companies also need to invest in their online experience, because some of these huge multi-billion department stores have terrible online experiences.

Jason Moser: I'll tell you what, all this begs the question -- I mean, I do agree that there's a surplus of retail out there, and there are plenty of operations that the world doesn't need, if they disappear tomorrow our lives would not really change. But what is going to happen to all of that real estate? That is, I think, the big question. We've talked about Radio Shack before, and how perhaps Amazon would jump in there and use that as some type of piece in their fulfillment puzzle. I think more and more, we'll probably see stuff like that happen. The smart retailers will figure out ways to use the physical presence to help evolve their logistics in getting products from point A to point B. Now Amazon, obviously, is really the king out there, as far as it goes in logistics. But I think there are a lot of businesses out there that are learning from what Amazon has done. Wayfair, I think, is the easy example, and we've seen where Amazon is looking to make this big push into furniture. And the big question is, is that going to be the deathblow for Wayfair? I don't know that it necessarily is, because Wayfair is a business that was built on that e-commerce model, and I think more and more businesses that start with that in mind are going to be OK. It's these businesses that have been around for our entire lifetime, they're still married to very old school thinking in a lot of cases, which is really going to cost them.

Hill: But to go back to something that Seth touched on in terms of the town centers, we live in the Washington D.C. area. If you live in a small town, or not even a small town, a smaller city, you're still dependent on a lot of brick-and-mortar retail, and it's going to be one of the many things to watch in all of this -- when does this shift take place for the smaller towns? And, to your point, what does happen to all of that real estate?

Jayson: I think in the smaller towns, probably, Wal-Mart has already taken out a lot of the mom and pop stores. It's in the suburbs where they're really having these growing pains. One of the other things that can happen to malls, and I think it's happening, the Landmark here in Alexandria is now going to be knocked down and turned into a town center. They're going with this completely different model.

Hill: And one thing we saw earlier this week, Coach buying Kate Spade for almost $2.5 billion. I'm curious, Ron, for investors who are looking at retail, is this something we should expect to see more of? Yes, some of these are going to go out of business. But in the case of Kate Spade, I think Coach looked at that and saw a pretty good value. I'm wondering if we're going to see more consolidation.

Gross: I do actually like that acquisition. I agree with you. Yeah, usually, when you see paradigm shifts, two things happen: Some go out of business, and the rest consolidate. Investment bankers love it, and then, five or 10 years later, we go through another shift and they get to break them up again. But I would expect to continue to see especially the little guys get gobbled up by some of the bigger folks to shore up the business, drive profitability and growth.

Jayson: Yeah, you might have a little more hope for specialty retailers with a decently strong brand. But if all you are is Sears, everyone knows who they are, but they really don't have their own stuff, J.C. Penney, I don't know what the future is for them, except bye-bye.