Department stores come back to life

Macy's flagship store in midtown Manhattan is seen from the Empire State Building February 14, 2014, in New York. STAN HONDA/AFP/Getty Images

Remember when everyone thought department stores were going down the tubes? Those fuddy-duddy retailers were sure to be crushed by spiffy new e-tailers, a sputtering economy and a customer shift away from huge malls.

It hasn't happened. In fact, department stores spent their years in the retail doghouse figuring out how to rapidly change for a modern economy. Now, some chains are mounting a comeback, with sales and revenue ticking up.

In a surprising turn of events, it's big-box giants like Target (TGT) and Walmart (WMT) that are stumbling. Target has been distracted by a massive data breach and changes at the CEO level, and Walmart can't seem to revive its slumping U.S. sales.

This ongoing revival for department stores could be on show this week when three big chains report their quarterly earnings. Macy's (M) said Wednesday that sales in the second quarter rose 3.3 percent to $6.3 billion, up from $6.1 billion a year ago. Analysts were expecting a 4 percent jump in revenue from a year earlier. The company's operating income to $571 million, up 6.9 percent from $534 million in the year-ago period.

Nordstrom (JWN) reports Thursday, and revenue is expected to rise 6 percent from a year earlier.

Even J.C. Penney (JCP), which has spent the last several years feverishly restructuring in an effort to boost results, is finally seeing a payoff. In the first quarter it surprised investors with a 6.2 percent increase in same-store sales. It also reports its latest results Thursday, with analysts expecting a 5.9 percent increase in same-store sales.

Investors are perhaps the most bullish on Macy's, whose shares are up 13 percent this year. J.C. Penney shares have been more volatile, given the company's tumultuous past year, but have climbed more than 70 percent from lows in early March. And Nordstrom shares have risen more than 12 percent this year.

What why are these stores thriving? Here are five reasons:

Grabbing the online bull by the horns: Macy's equipped 500 stores with the ability to fulfill online orders, and as a result has seen significant e-commerce growth. The company is also rolling out its "buy online, pick up in store" service.

Nordstrom is making a big online investment with its acquisition of Trunk Club, a subscription service with 250 personal stylists that work directly with shoppers. There is no fee for Trunk Club. Customers sign up online, and a stylist selects clothes for them and ships the garments in the mail.

Cutting costs: All three department stores are cutting back on expenses, and that includes closing underperforming locations. Nordstrom is closing two locations in January, and Macy's recently announced two store closings as well. J.C. Penney said in January it will close 33 stores and eliminate about 2,000 jobs.

Giving customers what they want: J.C. Penney is going back to the private brands, such as St. John's Bay, that were spurned under the management of former CEO Ron Johnson. Private labels are generally more profitable than national brands, which will help the company's bottom line. Although the jury is still out on the turnaround, customers seem pleased -- April was the first month in 30 that the company saw growth in store traffic.

Riding the economic rebound: The retail sector could be on the cusp of a turnaround, and economists expect better trends in the second half of the year as the consumer outlook brightens, economists say. Consumers seem more confident, too. The University of Michigan's consumer survey is expected to climb from 81.8 points in July to 82.5 points in August.

Working with partners: Coach (COH) is closing 20 percent of its stores this year, and will turn to Macy's and Nordstrom to help make up for the lost sales, Fortune reports. It's even placing its own staff members in Macy's huge flagship store in Manhattan. Other retailers, such as Finish Line (FINL) and Sephora, run small boutique shops inside Macy's and J.C. Penney. While private-label brands are certainly profitable, department stores know that retail partnerships with Ralph Lauren (RL) and others are the key to a diverse customer base.

Department stores still have a long way to go before they hit the peak sales seen in 2000, Fortune reports. Overall sales for the sector topped $232 billion back then, and fell to just under $180 billion in 2012. Big names such as Mervyn's are now gone, which is one reason sales have dropped so much.

It's unclear if department stores can ever hit that peak again, but they're going to try rather than lose more business to Amazon.com (AMZN), Gilt Groupe and other online retailers. The shopping malls they anchor are largely still in a rut, but department stores are starting to shine.

  • Kim Peterson

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