BOF | LAUREN SHERMAN
NEW YORK, United States — It’s been a month of turbulence for some of America's most venerable department stores. In late December, Saks Fifth Avenue announced the closure of its women’s store in lower Manhattan after just two years in operation. The news was followed by the early January announcement that Richard Baker, executive chairman of Saks-owner Hudson’s Bay Company (HBC), was buying out one of its stakeholders. This indicated that there will likely be more sweeping changes at the group, which also sold off, and then closed, its famous Lord & Taylor flagship last year.
Also in early January, Neiman Marcus Group (NMG) investor and adversary Marble Ridge Capital filed another motion against the Dallas-based company, the latest in a series of lawsuits stemming from NMG's decision to separate successful German luxury e-commerce site MyTheresa from Neiman Marcus, which is facing a serious debt load. (Marble Ridge has accused NMG of “being in default under its agreements with its debtholders” and trying to protect MyTheresa from a potential bankruptcy.)
Despite the peripheral drama, Saks Fifth Avenue and Neiman Marcus both experienced positive sales momentum during the holiday shopping season. By contrast, their down-market competitor Macy’s Inc — which includes Macy’s, Bloomingdale’s and Bluemercury — missed analysts’ expectations, posting just a 1 percent increase in sales over November and December, driving shares down by 20 percent.
And 2019 is just getting started. America’s department stores, which have struggled in the past five years to adapt to shifting consumer behaviour despite the strength of the US economy and improved shopper sentiment, are set to face their most challenging year yet. New York is shaping up to be a key battleground — and possible stumbling block. Nordstrom, which recently lost co-president and third-generation executive Blake Nordstrom, who passed away from cancer in early January, has made a major bet on its inaugural New York women’s store, set to open this year. Neiman Marcus, too, is entering Manhattan, marking the first time every major upscale American department store player will have a presence in a highly competitive market that has long been saturated with more luxury retail than even its top-earning denizens can likely support.
While most of America’s high-end department stores are not immediately threatened by bankruptcy, they are all pushing up against fundamental changes in consumer behaviour that have forced them to rethink their models. “The whole concept of the department store is outdated,” said Robert Burke, a retail consultant.
"There was a time when you had a designer customer, a contemporary customer, a sale customer — people stayed within these boundaries," Burke added. "Today, there are no rules. The customer wants and demands to cross-shop all of these areas."
And the apparel category — a major driver of sales for department stores — has been hit harder than many. (Department stores will account for just 8 percent of the apparel market by 2022, down from down from 24 percent in 2006, according to Morgan Stanley.) “There aren’t massive apparel trends anymore; they’re micro in nature, which is harder for retail to forecast,” said Oliver Chen, an analyst at Cowen & Co. “There’s hyper-fragmentation, not to mention pricing pressure in the market.”
Chen said that Nordstrom and Saks Fifth Avenue in particular have made noticeable changes to their strategies by investing in technology and upgrading the experience both online and in-store. “Clothing is only one piece of the puzzle,” he added.
But these shifts require massive investment. “Often, these stores are not as nimble as smaller [multi-brand retailers],” Burke said. “It takes time for them to change.”
And yet, change they must — and quickly. On top of all of the company-specific challenges they’re facing, and the macro changes in consumer behaviour they’ve been facing for a while, there is also the fact that they're operating in a highly promotional environment — which could intensify if the economy weakens.
Reliance on Chinese tourism dollars is another concern. While tourism from the region began to dip with the 2016 election of President Trump, it stills drives significant sales to all of these retailers. More recently, it has slowed in the midst of the trade wars and increased Chinese spending at home. Department stores’ off-price channels, too, are no longer the saving grace they once were. (Sales at Saks Off Fifth, for instance, were down more than 2 percent in parent company HBC’s most recent fiscal quarter.)
So, what’s next for these department stores, which many fashion brands still rely upon in order to hit their own sales targets?
Neiman Marcus Group
The Dallas-based group is making significant operational changes while facing pushback from investors and a large debt load.
The Neiman Marcus Group (NMG) — which includes Neiman Marcus and Bergdorf Goodman — is still fending off activist investor Marble Ridge Capital, which remains indignant over Neiman’s plan to transfer ownership of fast-growing e-commerce player MyTheresa to investors Ares Management and the Canada Pension Plan Investment Board, effectively blocking creditors from making claims on the asset if NMG were to file for bankruptcy. (More than half of its $4.7 billion in loans are due in 2020.)
Chief executive Geoffroy van Raemdonck, a veteran of Louis Vuitton and Ralph Lauren, who joined the business in February 2018, is laser-focused on two major initiatives that could move the retailer forward. Neiman Marcus Group has seen five quarters of comparable store sales growth — up nearly 3 percent in the most recent quarter — although it is still operating at a loss. Sales in the 2018 fiscal year were $4.9 billion, with comparable store sales up 5 percent year-over-year.
“I really don’t think of us as a department store; department stores have so many different things; they’re an aggregation,” Van Raemdonck told BoF. “The luxury fashion world is where we compete.”
Neiman Marcus has long sat in the top-tier of multi-brand retail, but many of the exclusive services it offers to VIP customers, such as personal styling, are now readily available across retail. In order to compete with other luxury retailers — Saks, yes, but also Farfetch, as well as independent multi-brand and mono-brand stores — Neiman Marcus will need to scale those services so that more of its customers can take advantage of them. Which means upgrading its technology.
Currently, 20 percent of Neiman Marcus sales categorised as in-store already take place via phone, email or text exchange with a sales associate. Much of that is done through an app called Sales Floor, which, at present, allows approximately 275 sales associates across the country to create tailored mood boards from which clients can shop. While Sales Floor has been in use for about seven months, the company has also launched a “digital stylist” service, an invite-only programme that allows customers to consult 50 dedicated “stylists” — with plans to add 25 more — through digital channels like text or FaceTime. So far, customers using a digital stylist are spending two times as much as the average and returning products 40 percent less of the time, with more than 50 percent making second purchases.
At the same time, Neiman Marcus is gearing up for its long-awaited Manhattan store opening in the much-hyped Hudson Yards development this spring. There, it will not only face competition from retailers throughout the city offering similar product — including its own sister store, Bergdorf Goodman — but also Forty Five Ten, the Dallas-based independent multi-brand retailer that has long vied for the dollars of the Texas city’s most adventurous fashion customers. It just so happens that Forty Five Ten is opening its first New York outpost at the same time, in the same development.
Van Raemdonck seemed unphased by this, saying that that Neiman Marcus’ strong digital and e-commerce presence in the New York metro means that it already has been cultivating a loyal customer base in the area for almost 20 years. (In the fourth quarter of fiscal 2018, online sales accounted for 36 percent of Neiman Marcus' overall business.) He believes that this leg up, combined with exclusive products and experiential elements geared toward an art-loving customer — the company’s art collection is renowned — will draw people in. “I don’t see this as a traditional shopping experience,” he said.
Hudson’s Bay Company (HBC)
With executive chairman Richard Baker buying another chunk of the business, onlookers are eager to see what debt-shrinking deals the company will make in the coming year.
The group that owns department stores Saks Fifth Avenue, Hudson’s Bay and Lord & Taylor made historic moves in 2018, starting by selling off Lord & Taylor’s famous Fifth Avenue flagship for more than $850 million to WeWork, best known for its leased co-working spaces. HBC subsequently announced the closure of that store and up to 10 Lord & Taylor locations — out of 50 — overall. It also spun off its European business in a joint venture that generated proceeds of CAD$631 million, or about $475 million at current exchange.
Then, right at the end of 2018, the company announced that it would close its Saks Fifth Avenue women’s store near the World Trade Center in downtown New York, which opened just two years ago, stating that the smaller-format store — adjacent to the offices of several publishing houses and banks, meant to serve the commuting customer along with those living in upscale developments close by — was a “test concept.” In the end, its clients preferred the larger Fifth Avenue location, which offers a greater breadth of product, or shopping online.
Regardless of why HBC decided to close the downtown store, the swift move is indicative of the state of retail overall, not to mention the state of the group. Gone are the days of waiting out a novel concept to see what sticks in the long-term; companies must iterate and cut losses as quickly as possible. HBC expects to pay off about $2 billion in approximately CAD$3.98 billion ($3 billion) in debt in the fourth quarter of its fiscal year, which ends February 2.
Some of the company’s investments in digital technology and physical upgrades have paid off: Saks Fifth Avenue reported six consecutive quarters of growth in comparable store sales, up more than 7 percent year over year in its most recent fiscal period. Along with a $250 million reorganisation and renovation of its Fifth Avenue flagship — once appraised at about $3.7 billion — it has continued to upgrade the tools with which it communicates with clients, using technology to enable in-store stylists to communicate with geo-located customers asking questions online.
“For so long, luxury owned the high-touch, one-to-one relationship with clients,” said Marc Metrick, president of Saks Fifth Avenue and Saks Off Fifth. “If you went to a grocery store in 1987, you didn’t experience that one-to-one. Same thing if you went to Blockbuster. Fast forward to 2017 and now Netflix is emailing you. On customer experience, we compete with everybody.”
Metrick and his merchandising team have also worked over the past three years to reposition Saks Fifth Avenue as a pure-luxury destination, convincing established brands to sell with the retailer for the first time, and gaining exclusives on new and emerging labels. (Exclusives are increasingly important given that most products are available at multiple competing retailers at once.) During Metrick's tenure, Saks has earned standing as a good partner to its brands. Today, women’s designer fashion is one of the store's fastest-growing categories.
But will it be enough in the long term? Luxury marketplace Farfetch is perhaps the biggest threat, given that it is sourcing product from hundreds of multi-brand and mono-brand stores. As mid-market stores like Lord & Taylor continue to be trampled by Amazon and increased competition at the high-end continues to further segment market share, winning over customers will become increasingly difficult.
In November 2018, activist investor Joe Sitt of Land & Buildings called upon the HBC to sell Saks Fifth Avenue and Lord & Taylor in order to pay back the rest of its debt and generate a return for its investors. HBC chief executive Helena Foulkes has not ruled out the scenario, stating that “everything is on the table.”
One scenario that has emerged again and again is some sort of partnership between HBC and the Neiman Marcus Group, which has a more pressing debt problem. Talks have fizzled multiple times, most recently at the end of the summer when a plan was proposed for NMG to acquire Saks in an exchange of assets, with NMG head Van Raemdonck leading the new group and Metrick staying on in a strategic role, according to a source familiar with the negotiations. HBC would have remained a minority shareholder in the new venture. However, talks ended before fashion week in September after an inability to reconcile certain realities of such an arrangement, including an increased store fleet. As more spending shifts online, retailers are trying to right-size their physical footprints, not increase them.
Barneys New York
The New York institution has never faced more competition and its costs for maintaining the status quo have never been higher.
With just 23 stores in its portfolio — 10 of which are outlet — Barneys New York, which has been majority-owned by hedge-fund billionaire Richard Perry since 2012, is a small player compared with main competitors Neiman Marcus and Saks Fifth Avenue. But its cultural capital was once far bigger than its business.
In 2015, Barneys generated close-to $900 million in annual sales, with EBITDA more than doubling since the team of (former chief executive) Mark Lee and (current chief executive) Daniella Vitale joined in 2010. Lee and Vitale transformed the image of the store, long known as a place where fashion eccentricity and young designers were celebrated to something far slicker and more commercially minded.
With concept stores like Dover Street Market, The Webster and 10 Corso Como courting high-fashion obsessives with niche interests, Barneys has never faced more competition in its hometown of New York City. In 2016, Perry sought a partial sale of Barneys, courting funds in Silicon Valley and beyond, hoping to position the retailer as a serious competitor to next-generation luxury players like Net-a-Porter. No deal materialised, and Perry closed his hedge fund later that year.
In 2019, Barneys faces a steep rent hike on its 230,000-square-foot flagship Madison Avenue store, the crown jewel in its portfolio and biggest driver of sales, although the company said it has not plans to leaving the building or downsize its footprint there, as earlier reports posited.
Barneys’ Chelsea location, which opened in 2016 as a part of a $200 million investment to overhaul its physical store network, has underperformed, according to sources. However, a company spokesperson denied this, and said that the location continues to perform well. While chief executive Daniella Vitale could not be made available for comment, a company spokesperson said that the several key results — including double-digit growth of the online business — means that Barneys remains optimistic about growth.
The spokesperson said that Barneys, which was profitable as of 2016, is not currently for sale. But if Perry, who sources say has in the past compared owning Barneys to owning the Yankees, were to entertain offers, he will likely need to look outside of the US.
“It’s a trophy asset,” said David Tawil, president of Maglan Capital, a hedge fund that focuses on distressed assets. “I don’t think that any other operator is going to want to buy it. You have to get a foreign buyer ... or someone very innovative who already has some massive cash product.”
With high-low mix that has impressed brand partners and shoppers, Nordstrom is in an enviable position. But can it successfully sell women’s clothes in the highly competitive, already too-crowded New York City market?
Seattle-based department store chain Nordstrom’s successful move upmarket — fueled by a high-low merchandising approach and early investment in both back-end technology and online user experience — has cemented it as the preferred partner of brands big and small, regardless of price point. Today, 30 percent of Nordstrom’s sales are through digital channels, outpacing many of its competitors.
In its 2017 fiscal year, Nordstrom hit more than $15 billion in sales for the first time, up 4 percent from a year earlier, and is projected to reach $15.5 to $15.6 billion in fiscal 2018, beating its own expectations.
Can it keep up the momentum? This year, Nordstrom is betting heavily that it can carve out a significant business in Manhattan, where it’s opening a women’s store for the first time in its history. (There is already a Nordstrom Rack and a Nordstrom Men’s outpost, which opened last year.) It won’t be easy. While Nordstrom’s location near the Time Warner Center should benefit both from commuter and local traffic as well as tourism traffic from Central Park, business at its men’s location nearby has been slow-going, according to market sources. (Nordstrom did not respond to a request for comment regarding the performance of the men's store.)
The company will also have to address the operations hole left by the passing of co-president Blake Nordstrom in early January. While the three Nordstrom brothers ran the business as equal partners, eldest sibling Blake, who disclosed in December that he had been diagnosed with lymphoma, was president from 2000 to 2015 and touched many parts of the operation.
Still, despite unexpected challenges, Nordstrom remains better positioned than most of its competitors, said Cowen & Co.'s Chen. The retailer is further ahead when it comes to tech-driven services, such as curbside pickup, and experience-driven retail, thanks to long-running initiatives such as the Nordstrom “Pop-In” concept.
“[Blake Nordstrom’s] instinct was always to make decisions based on what customers wanted, with one eye on how demand was changing,” Neil Saunders, an analyst at GlobalData Retail, said in a statement at the time of the executive's passing. “This, along with his view that the business should be run on a long-term basis, meant that Nordstrom was usually one step ahead of rivals on big retail trends like omnichannel, own-label development and the creation of an off-price spin-off.”
It was only recently that Macy’s was unseated as the largest apparel retailer in the US. Can it fight off Amazon with experience?
While every product maker has been affected by the rise of Amazon, directly or indirectly, perhaps no apparel retailer has suffered as much as Macy’s. Brands that Macy’s is known for stocking — including PVH-owned Calvin Klein and Tommy Hilfiger — now sell more units to Amazon than they do the 161-year-old department store, according to Morgan Stanley research.
In early January, Macy’s reported holiday sales that missed expectations, causing its shares to fall by 20 percent. This year, eight more Macy’s stores will close as part of a 2016 plan to close 100 locations overall. Selling off valuable real estate and shedding leases at undesirable low-performing malls has allowed the company to continue shrinking its long-term debt, which is around $5.5 billion.
Like many retailers, Macy’s, which also owns Bloomingdale’s and Bluemercury, plans to fight back by focusing on experience as well as non-apparel categories, such as beauty. In 2019, the company said it will open 60 new outposts of beauty retailer Bluemercury, the calmer, gentler, smaller-format competitor to Sephora and Ulta.
Last year, it also acquired rotating-concept-shop Story, which has long served as a case study for bigger retailers. Story, which changes concepts driven by big-picture ideas and cultural touchstones every four-to-eight weeks, uses live interactive experiences and frequent product turnover to create foot traffic and excitement on a steady basis.
“A store needs to be broader than just a place of transaction,” chief executive Jeff Gennette told BoF earlier this year. “It needs to be a place where people gather and if you don’t bring in experience, education and entertainment, you’re not going to do as well.”
While investor focus is on Macy’s, the group also owns Bloomingdale’s, which competes at a higher price point, most directly with Nordstrom. Bloomingdale’s has a history in experiential retail — it was a celebrity hangout spot in the 1970s — but the latest iteration is a concept called the Carousel, where the store showcases its more fashion-forward offering through a rotating series of pop-up installations.
“Putting out average product with a recognisable brand name is not going to work,” said Bloomingdale’s chief executive Tony Spring. “You have to really get it right.”