Department Stores' Act Will Be Tough to Follow
Department stores were among the hottest stocks over the last year, but they may find it hard to maintain momentum in 2004.
After outpacing the broader market, many department store companies are now trading at relatively high multiples. Those multiples could come into question later this year, when companies such as
Nordstrom
(JWN) - Get Report
,
Federated Department Stores
(FD)
and
Saks
(SKS)
start facing more difficult year-over-year sales comparisons.
Investors will likely focus on the outlook for department stores in the coming weeks as the chains report their fourth-quarter earnings. Nordstrom will announce its year-end results Thursday, the same day as retail kingpin
Wal-Mart
(WMT) - Get Report
.
Despite the group's stellar share-price performance in the past 12 months, the long-term outlook for the companies isn't great.
"There will be good operators, like in any business, and the good operators will do whatever they can to renew their business," said Craig Johnson, president of consulting firm Customer Growth Partners. "But the overall trend in the industry is still very cautionary."
Indeed, over the last 20 years, consumers have spent a decreasing portion of their wallets at department stores. Few analysts expect the trend to reverse anytime soon, largely because of competition from specialty players, warehouse clubs and mass merchants.
Analysts blame department stores' declining share on a number of factors. Chief among them is the fact that department stores are largely located in traditional malls. With the rise of strip malls and so-called lifestyle shopping centers in the suburbs, malls have less traffic. Additionally, traditional malls tend to be located in older, less affluent neighborhoods, far from the younger, more affluent neighborhoods and shoppers.
As a result, department stores have had a difficult time drawing in younger consumers, losing out to specialty apparel retailers such as
Pacific Sunwear
(PSUN)
,
Gap
(GPS) - Get Report
and
Urban Outfitters
(URBN) - Get Report
. Such stores have also lost sales of kitchen, appliance, electronics, home furnishings and other goods to stores such as
Williams-Sonoma
(WSM) - Get Report
,
Lowe's
(LOW) - Get Report
,
Best Buy
(BBY) - Get Report
and
Bed Bath & Beyond
(BBBY) - Get Report
.
Many of the department store chains reacted to sales declines by trying to lure customers through price promotions. But many cut back on service as well, to their detriment.
"The department store has lost much of its luster," said Kurt Barnard, president of consulting company Retail Forecasting. "They're struggling very hard to find an avenue that can lead
them, if not back to past glory, certainly onward to newfound success."
Over the past 10 years, department store stocks have reflected that struggle. Nearly all of the major chains have underperformed the
S&P 500's
139% rise over that period, with Nordstrom up 128%, Saks up 73% and May up 47%. Meanwhile,
Dillard's
(DDS) - Get Report
shares have fallen a whopping 52% in the past 10 years.
But investors have looked past that track record in recent months as the broader stock market and economy recovered. Over the past year, the shares of most of the major department store companies have outperformed not only the broader market, but their retail peers as well.
"These companies were falling apart. Then all of a sudden, they stopped falling apart," said one buy-side analyst, who asked not to be named. "Like a lot of low-quality companies, these
stocks jumped the most." (The source's firm manages more than $10 billion in assets, but doesn't own any of the traditional department store chains.)
Rise of the Mall Anchors |
|
Source: Baseline |
The gains left many chains, along with
other retailers, trading at relatively high price-to-earnings (P/E) ratios. Despite seeing its stock rise just 18% over the last year, Dillard's is trading at more than 36 times its projected earnings for fiscal 2004. Saks is valued at nearly 23 times its projected 2004 earnings, while Nordstrom is priced at about 20 times current-year earnings estimates.
Those valuations look even pricier considering analysts' estimations that the per-share earnings of most of the department store chains will grow less than 10% a year over the long term. Saks, for instance, has a P/E-to-growth (PEG) ratio of about 2.6, about the same as
Amazon.com
(AMZN) - Get Report
, the famously pricey Internet retailer.
Of course, the department store companies have had some positive news. Nordstrom saw its earnings soar 360% in the first nine months of last year vs. the same period in 2002, while its overall sales rose 7.9%.
Neiman Marcus Group
(NMGA)
, Saks and Sears also posted significant sales gains.
Although Federated's overall sales fell in the first nine months of last year, the firm has posted two straight months of same-store sales growth. That's a sharp turnaround for a company that through August had posted same-store sales declines in 28 of 31 months. (Same-store sales compare results at like outlets open more than one year.)
The upscale department store chains such as Saks and Neiman Marcus have benefited from the resurgence of spending by affluent customers. Additionally, a number of the department store companies have begun to focus on providing better customer service and exclusive products to attract shoppers.
"I think
focusing on customer service is the way to go," said Russell Jones, president of consulting firm Decisive Retail Technology. "That's why Nordstrom went from seeing declines in sales to seeing a rejuvenation."
But the resurgence both in department store stocks and their financial results may be short-lived as 2003's improving results turn into 2004's tough comparisons.