Department Stores, Including Macy?s, Looking for Ways to Evolve

MacysTwo days after Macy?s announced it had sold a 1.2 million-square-foot flagship store in downtown Pittsburgh, the company?s share price shot up. An activist investor bought into the department store operator with an eye toward turning the prime real estate the retailer has amassed over decades into a separate venture.

Selling buildings is one way to reinvigorate the nation?s struggling department store retail sector, at least from an investor point of view. But the cash influx from a real estate sale doesn?t address the consumers who have been taking their money elsewhere as they discover innovative ways to shop.

The department store business is at an inflection point, Nordstrom CFO Michael G. Koppel told analysts at investment conference last month. The last time things were this disruptive, tumultuous and thrilling was a couple of generations back when someone invented the big malls.

?Before that, everybody was in some big downtown department store and they had these giant, 500,000-square-foot, 600,000-square-foot, 700,000-square-foot stores and they only grew to that box,? Koppel said.

E-commerce and digital technology has punched through the walls of the mall. ?And that?s super exciting, and customers are responding, and we?re investing,? Koppel said.

The experimentation is evident in things like Nordstrom?s launch of TextStyle in May, a new take on the personalized shopper in which a purchase just requires sending the word ?buy? along with a code. Last summer, the Seattle retailer made it easy to buy items featured on its Instagram page.

The industry?s bright ideas aren?t limited to technology. Nordstrom, Macy?s, Kohl?s and J.C. Penney all have been chasing the high profit margins that cosmetics traditionally bring ? buying specialty companies and setting up partnerships.

Marvin R. Ellison, president and CEO-designee of J.C. Penney, told analysts at a June investor conference that the opening of a Sephora cosmetic store inside a ?rural, relatively low-volume store? in West Virginia not long ago drew crowds.

?Literally, I have photographs of customers lined up blocks long to get in for the grand opening because it was the only Sephora location in that geographic area for quite a distance,? he said.

Bringing goods to underserved markets isn?t too far from what the company?s founder James Cash Penney did a century earlier. Department stores now must tap into innovative mindset that merchants like Edgar J. Kaufmann and Rowland Hussey Macy used to enchant customers and maneuver past competitors.

And they must do it quickly. A report by bond rating firm FitchRatings in December said the department store sector could see more store closings or restructurings over the next two to three years.

A PHONE CALL TO EUROPE

Technology has always been part of the playbook.

In 1928, Kaufmann, son of one of the founders of the Pittsburgh store, made the first direct trans-Atlantic telephone call from Pittsburgh to Paris to order the latest fashions, according to archive records from the Sen. John Heinz History Center in Pittsburgh.

Being able to place orders for the latest styles by phone gave the store a technological edge. ?Can you imagine the time that cut out of the cycle?? asked Tom Windfelder, a former Kaufmann?s executive who started as a trainee in the early 1970s and ended his career with the retailer managing the downtown store.

Taking risks, even being a little flamboyant about it, was part of the Kaufmann?s culture, said Windfelder. He wasn?t around for that first phone call, but the story was part of the lore that taught new employees about the profit in taking chances.

Nordstrom?s shop-by-text project seems to embrace that attitude, and help some customers move from ?that?s cute? to ?buy.?

At Penney?s, Ellison said an omnichannel customer ? the industry term for a shopper who may connect with the retailer at the mall, but also via smartphone app or other digital avenue ? shops 2.5 times more than a typical customer.

The company is rolling out new apps and plans to partner with Apple Pay, but it?s got to get moving. ?Candidly, we are behind,? he said. ?We?re one of the few brick-and-mortar retailers today where you can?t buy online, pick up in-store same day.?

PRIME REAL ESTATE

The news that hit Pittsburghers hard last week ? that Macy?s would be closing and selling the Fifth Avenue store where Kaufmann had his offices and where 13 floors once had nooks for shoe shine services as well as a bookstore and several restaurants ? played very differently in investment circles.

Oliver Chen, an analyst with New York-based Cowen and Co., put out a research report the next day saying, ?We believe the sale signifies management?s willingness to sell properties for the right price. ??

Closing the store wouldn?t hurt the retailer much, the Cowen report said, since Macy?s has 13 other stores in the region, including five that sit about 10 miles from downtown. Customers also can shop online, it noted.

A Cowen report earlier this month had concluded that Macy?s could unlock about $19 billion in real estate value through things like sale/leasebacks of trophy properties or creating a real estate investment trust.

One of the role models for rethinking retail real estate has been Sears.

The Illinois retailer has agreed to lease space in seven of its stores to European fashion chain Primark, giving the competitor to fast-fashion retailers such as H&M and Uniqlo a foothold in the U.S. market.

?I think their strategic intent is excellent,? said Leslie Hand, vice president of IDC Retail Insights, based in Framingham, Mass. Primark sells inexpensive fashion and could draw a lot of new traffic to the Sears stores. It?s still a huge risk, she said, because the European chain isn?t well known in the U.S.

In another strategic move, Sears this year formed a real estate investment trust that bought 235 Sears and Kmart store sites, along with its interest in joint ventures that have 31 more properties. Sears, which will lease the sites, said it received about $2.7 billion from the deal that will help its move ?to an asset light, member-centric integrated retailer.?

Macy?s, the nation?s largest department store operator, has been among the most successful. But a number of department stores reported disappointing results in the first quarter and sales growth is increasingly hard to come by.

In the past, chains often kept growing by buying up competitors. Windfelder, the former Kaufmann?s executive, noted the Pittsburgh-born chain had about five stores when he got there but 50 by 2000. Competitors in Youngstown, Ohio, and Cleveland as well as in northern New York state were swallowed up. In 2005, the parent of Macy?s bought the parent of Kaufmann?s and phased out the old Pittsburgh name.

Now there?s little talk of Macy?s buying another department store chain and a lot of talk about selling real estate.

(Source: TNS)