Moody’s sees further department store 'rationalization'

Bruised by weak fourth-quarter results, department stores are now planning more cautiously for 2017 as they re-evaluate how to compete in a rapidly changing retail environment,



"Despite a few bright spots in performance within the sector, disappointing holiday sales overall are prompting retailers to try and meet these secular challenges through a combination of accelerated plans to shrink their store footprints, greater focus on exclusive products and increasing speed to market as shifting consumer preferences towards e-commerce weigh on brick-and-mortar," said Christina Boni, a Moody's VP.



According to Moody's Investors Service’s new "Disappointing 2016 Holiday Prompts a Revisiting of Store Footprints” report, two outperformers from a profitability standpoint were Nordstrom's and J.C. Penney with Nordstrom's benefitting from channel diversification with its exposure to off-price, and Penney continuing to manage costs despite weaker than anticipated sales.



Nevertheless, analysts caution that top-line same store sales guidance, which is negative and at the low end for all players, underscores that growth will remain challenging as operators brace for weak traffic and further share loss to alternative channels.



To mitigate the impact of alternative channel growth and corresponding price transparency, retailers such as Macy's, Kohl's, Penney and Nordstrom's are increasingly focused on expanding exclusive/limited distribution product offerings and enhancing private label to drive visits.



And as the industry recalibrates its infrastructure with demand, store rationalization is accelerating, according to Moody's. Macy's was the first major competitor to take a significant rationalization step after announcing the planned closure of 100 stores in August 2016, Penney recently followed with its own announcement of 130-140 store closures



For its part, Kohl's has also acknowledged the need to reduce square footage, the company is focusing its efforts on optimizing potential sales for existing spaces by improving fixtures and merchandising based on lower demand, right-sizing locations, or relocating to a smaller box.