What's going on?
It was a retail bloodbath on Thursday in America, as shares of Macy’s, Nordstrom’s and Kohl’s all suffered after each reported falling sales.
What does this mean?
Macy’s “same-store” sales (which measure changes in sales for stores that have been open for at least a year) fell more than 5% versus a year ago – greater than the 3% decline that Wall Street was expecting. Its stock fell a huge 17%, bringing its year-to-date decline to about 30%.
The shift to online shopping is clearly a challenge for the established retailers, but it’s not the only headwind. As it becomes easier for brands to sell directly to their customers (e.g. the Nike store), the fundamental business model of a department store is under threat (which is one reason why Macy’s is shifting its focus to “exclusive” lines available only at its stores).
Why should I care?
For markets: Investors are unimpressed with the turnaround plans outlined so far.
Wall Street is savvy enough to see that sales at department stores are declining. But even with the bigger than expected declines, the stock reaction on Thursday was outsized. One explanation is likely that investors are losing confidence in these companies’ ability to adjust. Macy’s says that it is implementing a fresh marketing strategy and a better way to sell shoes and jewellery, but the challenges it, and others, are facing appear to be much more fundamental than those potential solutions address.
The bigger picture: The strength of the US consumer is in question.
Weaker than anticipated consumer spending in the first quarter appeared to hold back overall US economic growth, according to data previously released. While there are certainly other factors hurting retailers such as Macy’s (e.g. shift to online shopping), its weak sales numbers are another data point potentially suggesting the US consumer is paring back its spending. We’ll know more today as data on overall retail sales (including online) in April is released; since consumer spending makes up two-thirds of economic activity in the US, investors will be paying close attention.