Bon Ton, Macy's Find a Middle Way to Profit - For Now

(MoneyWatch)  The middle has been a sweet retail spot of late. Mid-priced department-store chains like Bon-Ton Stores (BONT) and Macy's (M), have turned in good financial results. But they should not get too comfortable.

The 278-store Bon-Ton recently released its fourth-quarter results and posted $80.3 million in net income, up from an $87.7-million loss in the same year-ago period. Bon-Ton's sales at stores open at least a year fell 2.4 percent in the fourth quarter, never a good sign. But that was a major improvement over the 9.7 percent plunge the retailer faced a year ago. Meanwhile the 850-store Macy's posted a 3.7 percent same-store-sales gain in February, compared to an 8.5-percent drop in February last year.
There are several reasons for the improvement. For a start, there is the effect of pent-up demand, as consumers begin to spend again, albeit cautiously. Moreover, last year's sales were so lousy that it wasn't hard to turn in better numbers. And department stores are discounting heavily, undercutting some apparel specialty chains on price. "People are shopping for deals at the department stores," says Jeff Green, a retail consultant who is the head of the firm Jeff Green Partners.

Can it last? Bon Ton, Macy's and other mid-priced retailers cannot get too comfortable.

Expanding off-mall players like Kohl's (KSS) and J.C. Penney (JCP) will increase the pressure on department stores in smaller markets and in older, more rundown malls. Both Bon Ton and Macy's have too many stores in those types of settings. For example, during Bon-Ton's fourth-quarter conference call management said that smaller markets in eastern Pennsylvania performed the worst. More broadly, being in the middle is always an uneasy position; Bon Ton and Macy's are vulnerable to being squeezed from the top by luxury players and from the bottom by discounters.

To continue to cut costs and keep the sales uptick coming, department stores might want to weed out their weak locations and concentrate on their presence in the stronger malls. This is not a message either of them are hearing at the moment. Bon-Ton isn't planning on closing or opening any stores this year. Macy's only has five closures on tap. Green thinks that is not enough.

"I don't think it would hurt for them to pare back," he advises. "Every retailer needs to right-size themselves."

Store image by Flickr user Mirandala.