Can Department Stores Make a Comeback?

Huge share-price declines at the likes of Macy's (M 0.16%) and J.C. Penney (JCPN.Q) indicate that investors are losing hope that these companies can meet their financial goals. Indeed, there wasn't much to like in their first-quarter results.

In this segment of Industry Focus: Consumer Goods, analyst Vincent Shen and contributor Adam Levine-Weinberg turn their attention to several recent initiatives that could help stabilize sales at department stores. They also dig into J.C. Penney's strategy for profiting from the potential demise of Sears Holdings (SHLDQ).

Vincent Shen: We've heard a lot of the negative aspect or the bearish tune of what's affecting these department stores. In your view, you mentioned how the store closures are good for the long term. Are there other tailwinds that investors in these companies or these management teams can look forward to that might at least give some people who are following the space, like, "Oh, that's something to be positive or optimistic about"?

Adam Levine-Weinberg: There're a few things that I would mention in this respect. The first is, department stores are actually pretty early in the process of responding to the recent change in their sales trends. On the one hand, department stores are very slow-moving, historically, and that's definitely a bad thing. This is not the first time they've been caught flat-footed by some change in industry sales trends.

On the other hand, what that also means is they're working on it now, so there's a chance that things will get better. So, just a few of the major things they've been doing recently, big trends, are at Macy's and J.C. Penney, they're moving to open-sell environments for shoes. Rather than having to go get a salesperson to go in the back, get you a shoe box with the size that you want, you try it on, it doesn't fit, they have to go back again and get a different size or different color, they'll have all the shoe boxes out on the floor, you can try it on yourself. It's cheaper for them because they don't need as much staff. It's a much easier, faster experience for you. People are used to this now. If you're going to DSW, nobody is going to the back to get you a pair of shoes.

Shen: No, absolutely not.

Levine-Weinberg: So, it's just one of those things where, 20 years ago, this would have been unthinkable for a department store to make you get your own shoes. Now, that's what customers want, in many cases, so that's what they're going to do. There's an increasing focus on uniqueness across the board. Macy's has talked about this a lot in the last couple of quarters. They signed an exclusive deal with DKNYfor women's apparel starting next February. Kohl's just started a big partnership with Under Armour a few months ago, bringing in Under Armour apparel. You're seeing the same things at pretty much every department store. They're trying to find a few things that are unique about them that will drive traffic. J.C. Penney has its Sephora shops for cosmetics that have been doing extremely well.

Shen: With J.C. Penney, I'm glad you brought that up so we can dive in. They're really making some big changes jumping and expanding into other product categories. And this may be something that presents a big opportunity for them going forward as they test this. Tell us a little bit about the appliances and these other shop-in-shops that they're expanding into.

Levine-Weinberg: Yeah. I think, what you're saying for J.C. Penney is, one, they are being very strategic in looking at where Sears gets a lot of revenue and where they can take revenue away from Sears. Because Sears is closing tons of stores. They're definitely at a risk for bankruptcy in the next several years, so there are definitely sales that are being donated to other companies. Appliances is one area where J.C. Penney said, "Look, we have a lot of people actually going on to our website searching for a refrigerator and we don't sell refrigerators, so maybe we should. People want to buy a refrigerator, apparently, from us." So, they've put appliance shops up. Last year, they put it into about half of their stores. By the end of this year, it's going to be in at least two-thirds, if not more, of their stores. They see this as being a really big sale driver going forward. They've got other categories where they're doing similar things.

They're testing out new furniture and mattress displays. They started a partnership with Ashley Furniture, which is a really big furniture manufacturer. They're testing flooring, in-home custom windows, all kinds of different areas where they think they can get some sales share, particularly in the home section of the store, where they actually used to be really good and struggled a little bit when Ron Johnson came in as CEO about five years ago. So, they're trying to rebuild that strength, especially because a lot of consumer dollars are going to home improvement right now. They see that as being a really big sales driver, and you have this secondary benefit of, if Sears goes bust, there's potentially a lot of sales on the table in this area.