Macy’s and Nordstrom Have a Fashionable New Look: Going Small

Much of the bad news was baked into Wall Street expectations, which might help explain why department store stocks weren’t in free fall after their results. Kohl’s is down by a mild 0.7% since its earnings call on Wednesday. Macy’s stock rose 11% after its earnings call on Thursday morning. Nordstrom, which rode the meme-stock train after Ryan Cohen took a large stake in early February, edged down 0.6% after market close on Thursday following its earnings call. It is still up about 19% year to date.

Their read of the consumer? Not in the mood to spend—even those earning higher incomes. Nordstrom said on Thursday’s earnings call that there has been a pullback across all income levels, though it has been worse for lower-income shoppers. Macy’s similarly expects discretionary spending to be under pressure across all income tiers this year. Kohl’s said customers were turning to its more affordable private-label brands. All three retailers relied on discounts to clear out inventory, a move that squeezed their gross margins. Kohl’s saw the biggest impact: Gross margins declined an eye-watering 10.2 percentage points in the quarter compared with a year earlier. All three department stores expect their top lines to shrink this year.

Trends from their credit-card businesses are also concerning. Macy’s said it saw higher credit usage, slower repayment rates and increasing bad-debt levels. Nordstrom said credit metrics were declining compared with the prior year, though they remain better than prepandemic levels. Here, it is worth watching the outcome of a proposed rule to curb excessive late fees on cards. While credit-card revenue isn’t a large component of the top line of department stores, it is an important contributor to the bottom line. At Macy’s, for example, credit-card revenues in 2022 accounted for nearly 50% of its operating profit. Paul Lejuez, equity analyst at Citi, estimated in a report that late fees represent about 30% of Macy’s credit-card portfolio revenue. Macy’s said on their earnings call Thursday that the company is still evaluating how that late-fee rule might affect its business.  

While the swing to healthier growth in 2021 and the early part of last year breathed some life into department-store stocks, a tougher consumer backdrop should bring focus back to their shrinking market share. The three department stores combined made 3% less in sales last fiscal year compared with 2019, while off-price giants

Ross Stores

and

TJX

expanded roughly 17% and 20%, respectively. 

Such sustained losses call for a smaller but more profitable business model, one that Macy’s is already achieving with a smaller store base. Notably, it is the only company out of the three that managed to expand operating margins last year compared with 2019.

Nordstrom is moving that direction, too, announcing on Thursday that it would wind down Canadian operations so that it can narrow its focus on the U.S. business. Its exit from Canada, which never turned profitable, should help push operating margins up this year.

Kohl’s path to profitability is a bit more uncertain: The new chief executive is pushing forward existing initiatives—such as adding popular Sephora shops inside its stores and an expanding activewear assortment—that haven’t yet had striking impacts on its bottom line.

Investors are certainly appreciating the smaller, more profitable look. Macy’s stock trades at 0.26 times expected revenue, a 30% premium over Nordstrom and 44% higher than Kohl’s. In this consumer climate, a scale-back might be the only thing that fits department stores.

Write to Jinjoo Lee at [email protected]

Much of the bad news was baked into Wall Street expectations, which might help explain why department store stocks weren’t in free fall after their results. Kohl’s is down by a mild 0.7% since its earnings call on Wednesday. Macy’s stock rose 11% after its earnings call on Thursday morning. Nordstrom, which rode the meme-stock train after Ryan Cohen took a large stake in early February, edged down 0.6% after market close on Thursday following its earnings call. It is still up about 19% year to date.

Their read of the consumer? Not in the mood to spend—even those earning higher incomes. Nordstrom said on Thursday’s earnings call that there has been a pullback across all income levels, though it has been worse for lower-income shoppers. Macy’s similarly expects discretionary spending to be under pressure across all income tiers this year. Kohl’s said customers were turning to its more affordable private-label brands. All three retailers relied on discounts to clear out inventory, a move that squeezed their gross margins. Kohl’s saw the biggest impact: Gross margins declined an eye-watering 10.2 percentage points in the quarter compared with a year earlier. All three department stores expect their top lines to shrink this year.

Trends from their credit-card businesses are also concerning. Macy’s said it saw higher credit usage, slower repayment rates and increasing bad-debt levels. Nordstrom said credit metrics were declining compared with the prior year, though they remain better than prepandemic levels. Here, it is worth watching the outcome of a proposed rule to curb excessive late fees on cards. While credit-card revenue isn’t a large component of the top line of department stores, it is an important contributor to the bottom line. At Macy’s, for example, credit-card revenues in 2022 accounted for nearly 50% of its operating profit. Paul Lejuez, equity analyst at Citi, estimated in a report that late fees represent about 30% of Macy’s credit-card portfolio revenue. Macy’s said on their earnings call Thursday that the company is still evaluating how that late-fee rule might affect its business.  

While the swing to healthier growth in 2021 and the early part of last year breathed some life into department-store stocks, a tougher consumer backdrop should bring focus back to their shrinking market share. The three department stores combined made 3% less in sales last fiscal year compared with 2019, while off-price giants

Ross Stores

and

TJX

expanded roughly 17% and 20%, respectively. 

Such sustained losses call for a smaller but more profitable business model, one that Macy’s is already achieving with a smaller store base. Notably, it is the only company out of the three that managed to expand operating margins last year compared with 2019.

Nordstrom is moving that direction, too, announcing on Thursday that it would wind down Canadian operations so that it can narrow its focus on the U.S. business. Its exit from Canada, which never turned profitable, should help push operating margins up this year.

Kohl’s path to profitability is a bit more uncertain: The new chief executive is pushing forward existing initiatives—such as adding popular Sephora shops inside its stores and an expanding activewear assortment—that haven’t yet had striking impacts on its bottom line.

Investors are certainly appreciating the smaller, more profitable look. Macy’s stock trades at 0.26 times expected revenue, a 30% premium over Nordstrom and 44% higher than Kohl’s. In this consumer climate, a scale-back might be the only thing that fits department stores.

Write to Jinjoo Lee at [email protected]