Financial results from Macy's, Nordstrom, J.C. Penney, and other department stores this week make it seem like the American consumer is flat-out depressed. But the government's April retail sales numbers, out Friday -- showing the biggest jump in a year -- paint a totally different picture. What gives?
The reality is that American consumers want to shop. They just don't want to shop at your department store. And frankly, I don't blame them. And neither do investors, who have sent shares in U.S. department stores down by 50 percent this year.
Rising up in the 19th century as the only place you could find your favorite brands all under one roof, department stores are a relic of the way consumers used to shop. Today, brands such as Coach and Kate Spade have more luck selling directly to consumers. The malls on which department stores depended for decades no longer draw the traffic they once did. Who needs a trip to the mall when you can find every sweater or luggage set you want on Amazon?
To fight these trends, department stores have tried to find ways to stand out, to give shoppers stuff they can't find elsewhere. But these efforts often amount to simply ramping up private-label offerings -- clothes and other stuff labeled with the house brand. Such products now make up a fifth of sales at Macy's and a whopping 48 percent at Kohl's.
That helps pad profit margins, because the stores don't have to pay a markup to other brands. But it looks like this practice is starting to hurt store sales, as people are less excited about house brands. Earlier this week Kohl's said its private brands under-performed outside brands such as Nike and Juicy Couture and that it's trying to increase the number of these "national" brands it stocks.
The more private-label offerings these stores carry, the less they look like department stores and the more they resemble specialty retailers such the Gap. And then that raises the question: Why does a department store like Macy's need 870 stores, averaging 160,000 square feet each, when Gap manages to sell its goods in stores of around 11,000 square feet?
The more worrisome thing, though -- and what's causing this week's meltdown in retail stocks -- is that the same problems plaguing traditional, full-price department-store locations are bleeding into two areas that were supposed to be the stores' saving grace and future growth engines: online sales and off-price stores.
Private-label goods are popping up with greater frequency at off-price offshoots such as Nordstrom Rack and Saks Off Fifth, where shoppers go looking for top brands at bargain prices. And that's hurting sales at these off-price channels.
Nordstrom Rack's sales aren't falling as steeply as sales at Nordstrom proper, but they have declined for three straight quarters. Despite this weakness, Nordstrom -- which now has nearly twice as many discount Rack stores as it does full-price stores -- just keeps building new Rack stores. Nordstrom at least said this week it's going to reassess its real-estate plans. Macy's, in contrast, announced this week that its new off-price concept could grow to as many as 300 stores. Great timing.
And while Nordstrom.com sales increased by 3 percent in the latest quarter from the year before, that's down from 19.5 percent growth in the quarter that ended May 2, 2015. Macy's online sales are still growing by double digits, but that growth has slowed.
So where are consumers going? Well, the most obvious answer is Amazon, for one, where clothing sales were up 19 percent in the first quarter of 2016 from the year before -- compared to 1 percent and 5 percent drops at Walmart and Target, respectively, according to research from Cowen & Co.
But consumers are also spending their money on cars, home goods, restaurants, travel, and other things that give them a more-exciting experience than schlepping to an out-dated department store.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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