Three months ago, department store stocks got crushed after a series of subpar earnings reports. Comparable-store sales declined at every major department store company in the first quarter of fiscal 2017. In light of this sales slump, investors didn't care that several department store operators posted solid bottom-line results.
Nordstrom (NYSE:JWN) and J.C. Penney (OTC:JCPN.Q) arguably have the most riding on their ability to get comp sales rising again. Nordstrom has made huge growth investments in recent years, and it needs comp sales growth to make those investments pay off. Meanwhile, J.C. Penney needs comp sales growth to return to sustainable profitability. Let's take a look at these two retailers' efforts to bolster their comp sales trends.
Nordstrom strives for better execution
In recent years, Nordstrom's sales trends have been better than those of other department store companies, largely due to its strong e-commerce business and its successful Nordstrom Rack off-price chain.
During Q1, Nordstrom continued to see double-digit e-commerce sales growth. However, comp sales fell 0.8% overall. Predictably, Nordstrom's full-line stores posted steep comp sales declines. More surprisingly, the Nordstrom Rack chain also reported a 0.9% comp sales decline.
Indeed, it has been several years since Nordstrom Rack posted strong comp sales growth, even as other off-price chains have continued to thrive. One reason is that the growth of Nordstrom's off-price e-commerce business has cannibalized in-store sales. Another issue is that taking returns from Nordstromrack.com in Nordstrom Rack stores has created serious inventory management problems. Management is aware of these issues and working to overcome them.
Of course, Nordstrom also needs to find new ways to boost customer traffic at its full-line stores. Nordstrom's famous Anniversary Sale, which began near the end of the second quarter, tends to be highly effective in this regard. The company's rotating pop-up boutiques have also been a key traffic driver -- but they are only installed in eight high-volume stores.
Good execution is the key to success for retailers today. Nordstrom has invested a lot of money over the past five years to open up new growth opportunities, but those investments will only pay off if the company can avoid unforced errors.
Branching out for growth
At the other end of the price spectrum, J.C. Penney has also been posting better comp sales results than many of its peers in recent years. Last year, comparable-store sales were flat in a very tough market. During 2015, J.C. Penney posted an admirable 4.5% comp sales gain.
Unfortunately, J.C. Penney wasn't spared from the retail slowdown earlier this year. Comp sales plunged 3.5% in the first quarter. Nevertheless, J.C. Penney maintained its guidance for full-year comp sales to be roughly flat (plus or minus 1%). That would require a return to comp sales growth at some point during 2017.
Execution will be important at J.C. Penney, too. The company is speeding up production of its private label apparel brands so that it can react to fashion trends more quickly. It is also shifting toward more casual styles in the key women's apparel business.
That said, CEO Marvin Ellison recognizes that the apparel market alone won't provide the growth J.C. Penney needs. That's why the company is rapidly diversifying its offerings.
One big focus area is appliances. Appliances were one of the few bright spots at J.C. Penney in the first quarter. The company opened about 100 new appliance showrooms last quarter, while continuing to expand its assortment in existing locations. Furthermore, the second quarter is a seasonally strong period for appliance sales, anchored by the Memorial Day and Fourth of July holidays.
Last month, Ellison confirmed that J.C. Penney was on track to post significantly better comp sales results for Q2 relative to the prior quarter. However, investors will have to wait until Friday to see if comp sales actually reached positive territory.
The preliminary data suggest that the second quarter was kinder to department stores than the first few months of 2017. Nordstrom and J.C. Penney have been posting better sales results than most of their peers in recent years, so they may have been able to capitalize on the favorable environment to get comp sales growing again.
Still, the entire industry continues to face massive headwinds. To regain investors' confidence, Nordstrom and J.C. Penney need to grow comparable-store sales on a consistent basis. That will require much-improved execution and continued innovation at both companies.