Department store operator Dillard's (NYSE:DDS) reported a rather steep earnings decline this morning because sales were softer than expected.
This problem isn't exclusive to Dillard's. Many retailers have reported soft or declining numbers this quarter. I think we're on the verge of seeing some bargains among retailers. That said, when it comes to retailers it's going to take a phenomenal valuation to attract me to a department store chain. I can't help but wonder how investors can be surprised when a department store chain disappoints.
I can remember being very young and going to the local mall with my mother and aunts just about every weekend. Not my choice activity, but when you're 6 and Dad's working, you don't have much say in the matter.
I had three basic goals on these excursions: Get a soda for the ride, a grilled-cheese or hamburger for lunch, and maybe, if I was lucky, a toy of some sort. At the time -- and to a certain extent today -- it was very important that a mall have two or preferably three "anchor" stores, which were almost always department stores. Where I lived those anchors were Jordan Marsh, Filene's, and Sears (NASDAQ:SHLD). Investors know these places today as Federated Department Stores (NYSE:FD) and May Department Stores (NYSE:MAY) -- soon to be just Federated -- and my mother and aunts rarely shop there anymore.
My family isn't alone. Shoppers simply don't rely on or need the anchor stores today. We shop at Wal-Mart (NYSE:WMT) for the basics and at specialty retailers for just about everything else.
Just for kicks this morning, I took an informal poll around the office and via email asking why people still go to department stores. Only two reasons came up, and the answers were very consistent: makeup and shoes. That's very informal and unscientific, of course, but my guess is the results aren't that far from those a formal study would reveal. Of course, predicting the demise of the department store business is nothing new. But unless these stores do something radical to reinvent themselves in the near future, it's difficult to imagine what they will offer shoppers and, in turn, investors in the long term.
Among department stores, Dillard's carries a reasonable amount of debt, given its free cash flow. But the question of what the company can do to bring shoppers back is still an open one for long-term investors.
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Nathan Parmelee has no financial interest in any of the companies mentioned.
