COVID-19 Industry Brief
Effects of the Coronavirus on the Department Store Industry Updated September 4, 2020
- Market Dynamics: The decline of traditional shopping malls and the move to more accessible outlet stores and online shopping continues to impact foot traffic for traditional department stores. This trend was in place prior to the coronavirus pandemic outbreak, with department store sales dropping by 5.7 percent in the United States, by 1.6 percent in Canada, by 0.3 percent in Europe, and by 0.2 percent in Australia for the 2014 to 2019 period.
- COVID-19 Impacts: Guidance from the U.S. Department of Homeland Security indicated that the department store sector was generally not considered essential infrastructure during the pandemic-related shutdown period, leading to the closure of a significant number of traditional department stores in the United States, including Macy’s, Nordstrom, Burlington Stores, Stage Stores, Saks Fifth Avenue, Sears, Kohl’s, and JCPenney.
- Bankruptcy Concerns: Camilla Yanushevsky, a retail stock analyst for investment research firm CFRA Research, said the fallout for retail will be “pretty striking” after several years of mass closures. “It’s a battle of who’s going to survive, who’s just going to close and who’s going to need to file for bankruptcy,” she said. “The companies that are most at risk are the ones that were already distressed before the crisis.” In 2020, five department store chains have filed bankruptcy as the fallout continues for the segment across value profiles from discount to luxury, including JCPenney, Stein Mart, Stage Stores, Lord & Taylor, and Neiman Marcus.
- Store Closures:
- JCPenney: After years of accumulated losses and continuing sales declines, JCPenney filed for bankruptcy reorganization in May. The company is expected to close 242 stores permanently; however, was granted rent relief for June and July for approximately 600 ongoing locations.
- Stein Mart: Stein Mart is closing all 279 stores across the country. Stein Mart CEO Hunt Hawkins said the company was ultimately pushed to the brink by the coronavirus pandemic as its liquidity dried up and sales declined significantly.
- Stage Stores: Stage Stores, which had suffered financially for several years, is closing all locations and winding down company operations after failing to find a buyer after filing for bankruptcy in May.
- Lord & Taylor: Lord & Taylor is closing 19 of its 38 stores to make itself more attractive to a potential buyer after owner Le Tote filed for bankruptcy in early August.
- Neiman Marcus: Neiman Marcus is closing five of its namesake locations, as well as 17 of its off-price Last Call stores, according to court documents. The company came to an agreement with "a significant majority of its creditors," to be majority owners if the process, which is expected to eliminate approximately $4 billion of the company’s existing debt, wraps up as expected in the fall of 2020.
- Valuation Outlook: How liquidation values hold up will in large part be dependent on what level of multiplier can be realized in a going-out-of-business setting in a recessionary economy while social distancing rules are in place and health concerns related to the coronavirus remain heightened, especially as it relates to indoor mall locations.
Date February 2021
- Temporary closures amid the COVID-19 pandemic lockdowns hindered the struggling department store industry and annual revenue declined almost 18% year over year in 2020.
- E-commerce sales exceeded holiday expectations while brick-and-mortar sales lagged behind.
- Major department store retailers filed for bankruptcy in 2020, including JCPenney, Neiman Marcus and Lord & Taylor.
Approximate net recovery on cost
COVID-19 Accelerates Industry Decline: The COVID-19 outbreak in March 2020 caused brick-and-mortar store closures that largely disrupting the retail industry. Despite already declining sales trends, the pandemic accelerated the department store industry’s struggle, and annual revenue declined 17.8% in 2020. Department stores were classified as non-essential businesses and forced to shutter while operators contended with delayed or canceled orders and employee layoffs.
After being forced to close its stores from March 18 through May 4, Macy’s reduced its management headcount by approximately 3,900 and reduced staffing across its store portfolio, supply chain and customer support network in June. Macy’s sales declined 20.2% on an owned plus licensed comparable basis for the third quarter of 2020. The decline was driven by lower store traffic as store sales were down 36%, while digital sales increased 27%.
Similarly, Kohl’s laid off hundreds in August and reduced its corporate staffing base by 15%. Although Kohl’s sales showed improvement over the course of the year, preliminary results have the company’s comparable sales declining 11% for the fourth quarter of 2020 over last year.
Throughout the ongoing pandemic unemployment rates increased 4.6% in 2020, and cash-strapped consumers spent less on apparel and other discretionary items. Big box department stores offering grocery and healthcare products, such as Target, were deemed essential retailers and remained open during shutdowns. As such, Target performed better especially through its e-commerce platform and added services like curbside pickup. Target’s comparable sales increased 10.8%, 24.3% and 20.7% for the first three quarters of 2020, respectively, while comparable digital sales grew 141%, 195% and 155%, respectively.
Apparel-heavy retailers, such as Macy’s and JCPenney, suffered considerably more as essential products took precedence for consumers. Apparel and accessories, one of the hardest hit retail categories, saw total sales drop 25.8% in 2020 as compared with 2019.
Several major department stores filed for bankruptcy in 2020 continuing an ongoing trend. JCPenney filed for Chapter 11 bankruptcy in May and closed over 150 stores by year-end, with plans for additional closings in early 2021. Neiman Marcus also filed for Chapter 11 bankruptcy in May, closing over 20 stores and outlets. Additional filers included Lord & Taylor, Stage and Stein Mart with each chain liquidating all of its remaining retail stores.
How liquidation values hold up for traditional department store retailers will in large part be dependent on what level of multiplier can be realized in a going-out-of-business setting in a recessionary economy while social distancing and capacity limitations remain in place. This segment will continue to underperform as health concerns related to the coronavirus remain heightened, especially as it relates to indoor mall locations.
Holiday Sales Exceeded Expectations but Traditional Department Stores Lagged: Amid the ongoing pandemic, 2020 U.S. holiday sales beat expectations with online shopping leading the way. Total retail sales grew 3% versus an estimated 2.4% over the 75-day holiday period, which ran from October 11 through December 24, as many retailers began the holiday season early. Online sales increased 49% from 2019, according to Mastercard SpendingPulse data.
In 2020, e-commerce sales accounted for 20% of sales, up from 13% of overall retail spending in 2019. Within the typical holiday period from November to Christmas Eve, sales grew 2.4%. Home-related categories had the strongest growth, as furniture and furnishing sales grew 16% and home improvement products grew 14% compared with 2019. Not surprisingly, the weakest categories were apparel and luxury falling 19% and 21%, respectively. Some retailers scaled back on holiday inventory purchases with losses leading up to the holiday period, and did not require large clearance events at year end to sell through remaining goods.
Fewer shoppers visited malls during the holidays, and department store performance lagged as shoppers were still wary of shopping indoors. However, anchors with outside entrances and convenient
in and out parking access fared better than mid-mall locations. Mall vacancies reached their highest rate in 20 years increasing 0.3% to 10.1% in the third quarter of 2020 according to data from Moody’s Analytics REIS. Of the country’s 1,793 enclosed shopping malls, almost 500 are at risk with many dependent on foot traffic from office workers and tourists.
Total retail sales at department stores fell 10.2% during the extended holiday season with online spending growth of 3.3%. Nordstrom stated its net sales dropped 22% for the nine-week holiday period; however, digital sales rose 23% and represented the bulk of the company’s business. Target performed well for holiday with digital comparable sales up 102% and store sales up 4.2% for November and December.
One bright spot for the apparel industry has been athletic and athleisure clothing for both men and women. With retail brands ranging from Louis Vuitton to Target introducing new product lines incorporating stretch fabrics for comfort and athletics, the category is projected to grow about 6.5% annually in the U.S. through 2023, based on information from research firms Euromonitor and Coresight Research. In March 2021, Nordstrom announced that it is launching a partnership with digital home strength training equipment brand Tonal as a tie in to accentuate its activewear business. Beginning in March, Nordstrom will begin the rollout of 40 Tonal shop-in-shops to showcase Tonal products in its active departments alongside athletic wear and other fitness accessories.
Finally, in terms of overall success amidst the pandemic, a big differentiator for retailers across the board was the availability of convenient, contactless pickup and delivery services. Target’s same-day pickup channel grew 193% year over year for the holiday season, while its curbside pick-up service increased 500% and sales through its Shipt delivery option grew 300%. Companies that do not offer curbside pickup and other delivery conveniences are losing market share to those that do.
Ultimately, customers must have compelling reasons to shop the department store format that cannot be found in specialty or discount retail outlets, or the segment will continue to decline.
Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2021 Gordon Brothers, LLC.
Reference sources: RETAIL DIVE, U.S. CENSUS BUREAU, CREDITNTELL, BLOOMBERG, IBISWORLD, RETAIL DIVE, CNBC, USA TODAY, VOX, TARGET, INC., GLOBE ST., NATIONAL RETAIL FEDERATION, CORESIGHT RESEARCH, EUROMONITOR