July 10, 2008 / 12:31 PM / 9 years ago

Department stores lead sales declines among retailers

<p>A customer pushes her shopping cart past a display at a Wal-Mart Supercenter in Rogers, Arkansas June 5, 2008. REUTERS/Jessica Rinaldi</p>

CHICAGO (Reuters) - Department stores posted disappointing June same-store sales results on Thursday, hurt by slow mall traffic and consumers looking to cut discretionary purchases, and shares of the companies fell.

Department stores were the worst-performing sub-sector of retail in June, down 3.8 percent versus a year ago, according to Thomson Reuters Estimates, worse than the estimate of a 3.2 percent decline.

JC Penney Co (JCP.N) led the slide in department stores shares, falling about 10 percent on the New York Stock Exchange after the company posted a weaker-than-expected 2.4 percent decrease in June sales at stores open at least a year.

Nordstrom Inc (JWN.N) shares fell almost 9 percent after meeting Wall Street expectations with its 18.6 percent decline.

“Department stores today have fallen into a rut,” said Kurt Barnard, president of Barnard’s Retail Consulting Group. “We are dealing with a situation that clearly shows that consumers are reluctant to spend money, and frankly I don’t blame them.”

Department store chains, mainly located in malls, are facing slowing sales and lower foot traffic as cash-strapped consumers turn to discounters such as Wal-Mart Stores Inc (WMT.N) for bargains.

Looking ahead to July, department stores will face difficult comparisons with the year-ago period, when same-store sales rose 3.5 percent, said Lazard Capital Markets analyst Todd Slater in a research note on Thursday. That limits any chance for positive news from that sector, he added.

Department stores that target middle-income consumers, such as JC Penney and Kohl’s Corp (KSS.N), face a bleaker picture in the long run than their high-end peers such as Nordstrom and Saks Inc SKS.N, said Craig Johnson, president of retail consulting firm Customer Growth Partners.

“Those folks are basically the man in the middle and they’re offering a value proposition that is not as attractive,” Johnson said.

Further consolidation among mid-tier department stores could help in the longer term, though near-term gains in sales can be made if department stores can introduce more compelling fashions and products, analysts said.

“You have to at all costs create something for the store that makes it stand out in a way that can not be overlooked and sidestepped,” said Barnard, adding that he has yet to see this at most U.S. department stores.

“Consumers will act when they see something they have not seen before and it looks interesting.”

MALL TRAFFIC DECLINES

Fewer shoppers in malls have also hurt sales at specialty apparel retailers such as American Eagle Outfitters (AEO.N) and Limited Brands LTD.N, which operates Victoria’s Secret and Bath & Body Works stores.

Eight of the 10 companies whose sales performed the worst in June compared to expectations were either department stores or mall-based apparel stores, according to tracking firm Retail Metrics.

“The mall-based apparel retailers are the ones who are being hit the most by consumers right now who are more cost-conscious,” said Britt Beemer, chairman of America’s Research Group, which tracks consumer behavior. “When you talk to parents they’ll say we go to Target (TGT.N) and Wal-Mart to save money and we go to the mall to spend money.”

JC Penney said on Thursday that June same-store sales at its off-mall locations were stronger and more consistent than its mall locations.

Lagging mall traffic is largely a function of rising gas prices, Needham & Co analyst Christine Chen said in a research note, adding that most retailers have controlled inventory levels well, sustaining profit margins, and earnings estimates likely will not be lowered.

Of the department stores, JC Penney and Nordstrom were the worst performers on the New York Stock Exchange, with Penney’s closing down 10 percent, or $3.59, to $31.93 and Nordstrom down 8.7 percent, or $2.72, to $28.52.

Reporting by Erin Zureick; editing by Carol Bishopric

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