A few years ago, department store operator Macy's (M +4.39%) put an "omnichannel" merchandising strategy in place. The goal was for Macy's to offer an integrated shopping experience between its physical stores and online. This strategy allows Macy's to offer better selection online, and also gives store associates the ability to sell products for which they do not have inventory, and ship them directly to the customer from a warehouse or another store.
The success of this strategy is clear in the stellar results Macy's reported on Tuesday. Adjusted EPS of $3.46 for the full year beat management's initial guidance for EPS of $3.25 to $3.30, and was well ahead of 2011 adjusted EPS of $2.88. Much of the upside was driven by growth in the online channel. Macy's reported a 3.7% increase in same-store sales for the full year, of which 2.2% was represented by online sales growth. Its magic formula for driving online sales places the company in an enviable position within the department store sector, and positions it for further growth.
Rapid growth online
Growth of the Macy's online segment is actually accelerating. Online sales grew 28.7% in fiscal 2010, 39.6% in fiscal 2011, and 41% in 2012. Moreover, Macy's achieved its strongest online sales results last quarter, with 47.7% growth, including over 50% growth during the month of December. Despite the emergence of other online-only competitors, this recent growth suggests that Macy's is seeing its online sales momentum increase, if anything.
What is most impressive about Macy's online performance is that it has been executed in a way that adds to the store experience, rather than simply moving sales from the stores to the Internet. Thus, while online growth accounts for much of Macy's sales growth, in-store sales are growing as well. Another company that has executed well on this front is Nordstrom. Nordstrom has also been growing both in stores and online, with an accelerating growth trend in the online segment.
Taking share
By contrast, some of Macy's competitors have not figured out the "omnichannel" experience. J.C. Penney (NYSE: JCP) has had particular trouble figuring out how to integrate the online channel with its new merchandising and pricing strategy. While J.C. Penney's online experience once showed promise, online sales slumped more than 30% in 2012. This is even faster than the rate of sales declines in stores. Kohl's (NYSE: KSS), by contrast, has seen nice 40% to 50% online sales gains in recent months, but this has come at the expense of in-store sales, negating the potential benefits.
Some get it, some don't
Online sales are becoming increasingly important for department stores. Chains like Macy's and Nordstrom that have figured out how to integrate online sales into their overall merchandising strategies will be the big winners going forward. Companies that can't manage that task, like Kohl's and J.C. Penney, are probably doomed to fall by the wayside.
