Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

What is killing the Department Stores?

The great American institution known as the department store is dying. Revenues and stock prices are falling at chains such as JC Penney (NYSE: JCP), Dillard’s (NYSE: DDS) and the Bon-Ton Stores (NASDAQ: BONT).

BONT shares were actually trading at 81¢ on July 21, and the company reported a net income of -$82.92 million on April, 2017. Sears Holdings (NASDAQ: SHLD) reported a net income of -$1.506 billion on April 30, 2017. JC Penney reported a loss of $111 million on April 30, 2017. Even Nordstrom (NASDAQ: JWN) one of the few department success stories saw its revenue fall from $518 million in April 2016 to $371 million a year later, which indicates the retailer might be using deep discounting to keep sales figures up.

With numbers like that it is obvious the death spiral and collapse might be imminent at some historic department stores. The obvious question we have to ask here is who or what is killing department stores and why.

What is Killing Department Stores?

  1. Generation X and Millennials. These younger generations simply do not shop like their parents and grandparents. They refuse to spend their weekends at the mall and prefer to shop online. Millennials (those aged 20 to 36) are also notorious penny pinchers; that loathe the idea of paying extra for a fancy building and personal service. To make worse millennials are now America’s largest generation with around 76 million members. Generation X (37 to 52) is almost as bad, making Amazon (NASDAQ: AMZN) its’ favorite shopping destination. A particular menace to department stores is the soccer mom who’d rather spend Saturday afternoon at her son’s game than the mall.


  1. Discount department stores and resellers. This includes the TJX Companies (NYSE: TJX), Big Lots (NYSE: BIG), Ross (NASDAQ: ROST), eBay (NASDAQ: EBAY) and (NASDAQ: OSTK). These places are fun to shop at, they include lots of unusual bargains, the quality is high and the prices low. TJX in particular is giving traditional department stores a run for their money with outlets like TJ Maxx and Marshal’s. Another appeal for these stores is that they are more informal which caters to Generation X and Millennials antiauthoritarian streak. A long term menace is here is online discount operators; such as eBay, Overstock and Alibaba (NYSE: BABA), which have an incredible potential for deep discounting.

  1. Costco (NASDAQ: COST). The popularity of this club store and its appeal to the middle class should not be underestimated. Costco has become a major retailer of items sold in department stores such as small appliances and clothing. It also offers some of the side services they traditionally marketed included eyeglasses and travel. A big appeal of Costco and its competitors Sam’s Club and BJ’s Wholesale is one stop shopping featuring groceries, clothes, gasoline, a pharmacy and household furnishings under one roof. Soccer moms love that because it means one shopping trip a week. Particularly threatening to department stores is the attempt of more traditional retailers like Target, Walmart and Kroger’s (NYSE: KR) to become more like Costco. Kroger now operates Marketplace stores that sell such items as shoes and clothing as well as grocery.


  1. The aging of America. The greatest problem facing department stores today is that their best customers are getting older. JC Penney directs its’ marketing to 62 women which is a problematic because that demographic is slowly but steadily shrinking. People buy less as they get older and eventually die meaning they buy nothing. A big problem facing stores like Nordstrom (NYSE: JWN) is the impending retirement of 75 million Baby Boomers (people between 52 and 72). That means tens of millions of people will not need business clothes anymore.


  1. Amazon (NASDAQ: AMZN) – The Everything Store is poised to become the largest clothing retailer in America overtaking the fast-shrinking Macy’s (NYSE: M), Business Insider reported. Its’ Amazon Prime clothing business is aimed directly at department stores with brands like Button Down (aimed at professional men), Amazon Essentials (for families), Lark & Ro (for 20 something women) Paris Sunday (fashion for saleswomen), Eva Moon (for fashionistas), and Scout & Ro (for kids or rather mom who buys the kids’ clothes). Amazon also owns Zappos which is fast becoming America’s most popular shoe store. Prime is also major threat to department store in other areas such as lines, small appliances and furnishings.


  1. Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) – These home improvement chains have effectively stolen the tools, home appliance, paint, hardware and lawn mower businesses from stores like Sears (NASDAQ: SHLD). One reason for this is that men like to shop at them. They are actually comfortable environments for working class guys unlike traditional department stores. Another is low prices and great customer service. Generation X and Millennial customers also seem to prefer the more informal shopping environments in them to the structured setup in something like Sears.


  1. Walmart (NYSE: WMT) – Walmart’s role in killing department stores is sometimes underestimated here but it might be the main culprit. Walmart was the chain that introduced two whole generations of Americans to the concepts of informal one-stop shopping and deep discounting. It has historically sold most of the same merchandise as department stores at much lower prices. It was Walmart that killed Sears and Wards. Today, presents a huge threat because it now owns Bonobos and offers deep discounts and delivery capacities rivaling those at Amazon. A major threat for department stores would be the ability of customers to pick up high end merchandise ordered through at Walmart. Walmart will have achieved its long-term objective of killing department stores.


  1. Changing fashions. Anybody that watches a rerun of Madmen; or an old movie, knows that America is a far more casual place than it used to be. CEOs wear t-shirts and blue jeans to the office, sales people dress in polo shirts and khakis, and women can be seen in the streets in yoga pants. All this means that there is less demand for the kinds of formal and semi clothing traditional department stores specialized in. Many people simply have no need to go to department stores.

  • I for one remember going with my mom to Macy’s to buy a suit shortly after graduating high school back in the 1980s. The expectation was I would need it for a “real job.” Yet I never needed a suit; it’s still hanging in my closet gathering dust, even when I worked at the headquarters of a Fortune 500 company. My guess is we will soon see a time when the only places suits are seen is in historical dramas or old movies.


  1. Income Inequality and Wage Stagnation. Americans are bargain hunting more than ever because they have less money because of economic changes. The Pew Income Study found that the number of adults living in middle income households fell between 2000 and 2014 in 203 out of 209 cities it surveyed. Nationally the percentage of middle class adults fell from 54% to 51% during that period. The same study found that households in all classes experienced universal decreases in income between 1999 and 2014. For example lower income people saw their income fall in 221 cities surveyed by Pew. People are shopping less at department stores because they do not have the money.

The real culprit in the death of the Great American Department Stores is changing times. Since there is no way to change that investors should stay away from this sector, perhaps far away.

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