Macy's and Nordstrom Struggle to Adapt to Changing Retail Trends

Macy’s Inc. (NYSE: M) and Nordstrom Inc. (NYSE: JWN), long-time Wall Street favorites, are now in the doghouse after their recent disappointing earnings reports and lackluster guidance. Meanwhile, Wal-Mart Stores Inc. (NYSE: WMT), whose subpar performance has weighed down its shares for years, is back in investors’ good graces after issuing results that weren’t as bad as analysts had feared. Target Corp. (NYSE: TGT), which also was considered a basket case, reported an in-line quarter but pleased investors with better-than-expected comparable sales.

The biggest surprise in the retail world, though, was Macy’s and Nordstrom, but they shouldn’t be. They are relics of an earlier age when the mall was the center of the universe. Macy’s was especially slow in realizing that shopping habits have changed. It launched its off-price chain Macy’s Backstage this year, long after many of its rivals. Macy’s Backstage has five locations and will open 50 more over the next two years. Nordstrom’s was more on top of the trend. It launched Nordstrom Rack in 2014 and now has 194 locations. The chain plans to have 300 at some point.

Both companies have had made huge bets on their e-commerce operations. Seattle-based Nordstrom announced plans to spend $1.2 billion on its digital initiative. Macy’s plans for Web domination include a new digital operations center staffed with 150 employees. The Cincinnati-based company didn’t disclose its investment plans, though it is safe to assume that it is comparable to Nordstrom’s. The Seattle-based retailer reported an 11% gain in digital sales in the latest quarter. Macy’s saw an double-digit percentage increase as well. Though the chain doesn’t divulge specifics, it probably wasn’t anywhere close to the 23% revenue gain Inc. (NASDAQ: AMZN) recorded in its latest quarter.

Macy’s CEO Terry Lundgren was a huge believer in the department store, having bought many local operators and consolidating them under the Macy’s brand. Department stores, though, are becoming increasingly irrelevant as shopping moves increasingly online. Now, malls are dying a slow death, reinventing themselves as destinations for things you can’t do online, like eating out or getting a massage. As a result, the United States is awash in retail that is either underused or unused, which is a huge overhang on traditional retailers like Macy’s and Nordstrom.

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In the end, both chains had results that stunk. Comparable sales at Macy’s fell 5.2% in its latest quarter. Nordstrom’s posted a 0.9% gain, well below the 3.6% analysts had expected. The road ahead isn’t going to be easy, which is reason enough to avoid their stocks.

By Jonathan Berr

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