Strategy: Department stores post mixed results in Q2 (JCP, KSS, M, JWN)

Several major department store chains reported Q2 earnings last week amid growing concerns over falling foot traffic and sales for traditional retail. Results were mixed, with some chains performing better than expected, and some worse

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Several major department store chains reported Q2 earnings last week amid growing concerns over falling foot traffic and sales for traditional retail. Results were mixed, with some chains performing better than expected, and some worse:

• Macy’s and Kohl’s both reported moderating declines in same-store sales. Macy’shad a 2.8% year-over-year (YoY) drop in Q2, compared with 5.2% in Q1, while Kohl’s experienced a 0.4% YoY dip, compared with 2.7% in the previous quarter. Macy’s also had a total sales decline of 5.4% YoY to $5.5 billion, while Kohl’s saw a .9% YoY downtick to $4.1 billion. Neither company reported online sales numbers for the quarter.
• JC Penney’s earnings came in below Wall Street estimates, while its same-store sales fell 1.3% YoY, slightly steeper than expectations of a 1.2% drop. Executives blamed the poor performance on the company’s shuttering of 138 store locations and liquidation of their inventory, which it completed this quarter.
• Nordstrom bucked worrisome trends prevalent across brick-and-mortar retail, as same-store sales increased 1.7% YoY, and net sales rose 3.5% YoY. The same-store sales increase was driven by a 3.7% bump at its Nordstrom Rack discount locations. Meanwhile, online sales from its flagship site, Nordstrom.com, jumped 20% YoY, and sales from Nordstrom Rack’s and HauteLook’s sites rose 27%.

The mixed results reflect the difficult and ongoing transformation these companies are undertaking to merge their online and offline sales and operations. All of these department store chains are investing in omnichannel initiatives, with some early positive results. For example, JC Penney has said 40% of its customers picking up an online order in-store make an additional purchase of at least $50. However, retailers are generally struggling with managing costs and inventory related to their omnichannel fulfillment services. This is largely because they’ve failed to make the upgrades and integrations to their back-end systems necessary to track purchases and inventory across sales channels. Nordstrom stands out as one of the few retailers that actually has done that painstaking and costly work, and it seems to be paying off — the company's in-store pickup option grew 45% YoY in 2016, helping to drive sales across its online properties up 14%, while preventing major drops in same-store sales.

Brick-and-mortar retailers are caught on the wrong side of the digital shift in retail, with many stuck in a dangerous cycle of falling foot traffic, declining comparable-store sales, and increasing store closures. Over 8,600 retail stores could close this year in the US — more than the previous two years combined, brokerage firm Credit Suisse said in a recent report. Meanwhile, e-commerce pureplays are riding the rise of digital commerce to success — none more so than Amazon, which accounted for 53% of online sales growth in the US last year, according to Slice Intelligence.

In response, many brick-and-mortar retailers have started to use omnichannel fulfillment methods that leverage their store locations and in-store inventory in order to better compete in e-commerce. These omnichannel services, including ship-from-store and click-and-collect, can help retailers manage the transition to digital by:

• Increasing online sales by offering cheaper, more convenient delivery options for online shoppers.
• Limiting the growth of shipping costs as online sales volumes increase by leveraging store networks for delivery.
• Keeping stores relevant by turning them into fulfillment centers that pull customers in to pick up online orders.

However, few retailers have mastered these new fulfillment services. While these companies have spent years optimizing their supply chain and logistics networks for delivering goods to their stores or directly to customers’ doorsteps, most have yet to figure out how to profitably bring their store locations into the e-commerce delivery process.

Jonathan Camhi, research analyst for BI Intelligence, Business Insider's premium research service, has laid out the case for why retailers must transition to an omnichannel fulfillment model, and the challenges complicating that transition for most companies. This omnichannel fulfillment report also detail the benefits and difficulties involved with specific omnichannel fulfillment services like click-and-collect, ship-to-store, and ship-from-store, providing examples of retailers that have experienced success and struggles with these methods. Lastly, it walks through the steps retailers need to take to optimize omnichannel fulfillment for lower costs and faster delivery times.

Here are some of the key takeaways from the report:

• Brick-and-mortar retailers must cut delivery times and costs to meet online shoppers’ expectations of free and fast shipping.
• Omnichannel fulfillment services can help retailers achieve that goal while also keeping their stores relevant.
• However, few retailers have mastered these services, which has led to increasing shipping costs eating into their profit margins.
• In order to optimize costs and realize the full benefits of these omnichannel services, retailers must undertake costly and time-consuming transformations of their logistics, inventory, and store systems and operations.

In full, the report:

• Details the benefits of omnichannel services like click-and-collect and ship-from-store, including lowering delivery times and costs, and driving in-store traffic and sales.
• Provides examples of the successes and struggles various retailers have experienced with omnichannel delivery.
• Explains why retailers are having trouble managing costs with their omnichannel fulfillment efforts, which are eating into their profits.
• Lays out what steps retailers need to take to optimize costs for their omnichannel operations by placing inventory where it best meets customer demand.

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Several major department store chains reported Q2 earnings last week amid growing concerns over falling foot traffic and sales for traditional retail. Results were mixed, with some chains performing better than expected, and some worse Read Full Story