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Department Stores Ride The Wave

Many department store chains have weathered rough surf and are ready for smooth sailing ahead.

After a slew of restructuring, bankruptcies and general tough times in the late 1980s and early 1990s, the department store business, much like the nation's economy, is in the midst of a prolonged recovery.

According to a 1997 research report from San Francisco-based NationsBanc Montgomery Securities Inc., many proclaimed the death of the department store as recently as a few years ago. "Yet today," the report states, "we observe the successful overall restructuring of the department store sector."

The report adds that some major industry players -- Federated, May Co., Neiman Marcus, Sears and JCPenney among them -- had to implement significant changes in their organizations to survive the economic angst of a few years ago. While some companies used technological innovation to streamline cost structures, the report said, some took write-offs, and others used bankruptcy to overhaul their operational and financial structures.

The report also states that while some stores dropped by the wayside, others may be following in their paths. "While the country had about 25 major department store companies 10 years ago, today we are down to approximately 12," the report says, adding that further consolidation should be expected.

The retail backdrop According to a report from New York-based Donaldson, Lufkin & Jenrette, at the end of 1997 the department store industry was operating in an economy marked by low interest rates and consumers ready to spend. The report notes that as Christmas 1997 approached, consumer confidence was high, disposable income was up, and interest rates were low -- factors that indicate potentially strong retail performance.

The important Christmas season promised strong returns for department stores, judging by a late-1997 American Express Retail Index report. In a national survey of 800 consumers, the report notes that respondents expected their 1997 holiday spending to exceed 1996 levels by approximately 6 percent.

Department stores stood to be major beneficiaries of this rise in spending, according to the report. "With everything from hair dryers to handbags under one roof, department stores are the top choice of shoppers for the third year in a row, as cited by 80 percent of consumers," the report says.

Merchandise variety... Jeffrey Stein, retail analyst for Cleveland-based McDonald & Co. Securities Inc., notes that one-stop shopping for a variety of goods has given the sector a built-in advantage. "The department store has become the ultimate superstore, where you can find a variety of men's, women's and kids apparel, home furnishings, and a variety of other products all under one roof."

Stein adds that merchandise variety, particularly when it comes to apparel, has helped department stores regain much of the market share lost to specialty retailers in the 1970s and 1980s. "The emergence of numerous premier apparel brands -- Tommy Hilfiger, Polo/Ralph Lauren, Nautica and Liz Claiborne -- have helped department stores increase their product quality and rates of sales growth," he says. "The department store is run as a type of mini-mall, with each of these brands having its own selling space, merchandising and point-of-sale display."

...with a focus on apparel The emphasis for department stores these days is apparel, which comprises about 70 percent of annual sales for the department store industry. Department stores have held on to roughly 16 percent of the total apparel market for the past four years, according to NationsBanc Montgomery Securities.

Tom Tashjian, NationsBanc managing director, notes that the sector's stores-within-a-store presentation of both their own private labels and specialty brands gives department stores a competitive advantage. "This format has been taking share from the specialty store sector, which had seen market share growth during the late 1980s and early 1990s," he says.

The department stores' battle for apparel market share with stand-alone and in-line stores is ongoing. Demographic factors, particularly with the aging of the U.S. population, complicate matters. Department stores, notes Stein, could find themselves with another advantage as older consumers search for quality.

"As people age, they tend to gravitate away from the 'throwaway' fashion of many specialty stores toward the higher quality brands found in department stores," he says.

The major players According to NationsBanc Montgomery Securities, Hoffman Estates, Ill.-based Sears and Plano, Texas-based JCPenney command 29 and 18 percent of total department store revenue, respectively. Sears' sales rose 7.3 percent during the third quarter of 1997, the securities firm notes, driven by a 2.2 percent increase in domestic same-store sales.

Meanwhile, JCPenney saw a 7.3 percent same-store decline in its department store sales during third quarter. NationsBanc Montgomery Securities attributes this drop in part to unseasonably warm weather that caused many consumers to defer purchases of fall merchandise, a phenomenon affecting many department store chains in 1997.

Now encompassing divisions that include Macy's, Bloomingdale's, Rich's, Burdine's, The Bon Marche, Goldsmith's, Lazarus and Sterns, Cincinnati-based Federated Department Stores emerged from Chapter 11 in 1992 to command some 12 percent of the market. Stein notes that, after a period of regional chain acquisition, Federated is poised for a bright future.

"Federated is now reinvesting heavily in remodeling its best stores while working to drive down its total cost structure," he says. Federated enjoyed revenues of $15.2 billion in 1996, he notes, with 1997's figure projected at approximately $15.8 billion.

Stein says additional tightening could be in Federated's future. "I think Federated will consolidate its various nameplates down to two or three, which would give them the ability to capitalize on the strong brand franchises such as Macy's and Bloomingdale's." In doing so, he adds, "Federated will be able to achieve additional economies of scale in advertising, marketing and distribution."

With approximately 367 stores operating under names such as Lord & Taylor, Hecht's, and Strawbridge, St. Louis-based May Department Stores Co. has a 9 percent share of the marketplace, according to NationsBanc Montgomery Securities. May recently reported that its sales for the first nine months of 1997 increased 7.5 percent, to $8.14 billion, over the same period in 1996.

In 1997, the company announced a $3.4 billion expansion program that will result in nearly 100 new department stores by the end of 2001. It opened 13 new stores under various nameplates during 1997 alone, with plans to remodel or expand 29 other stores.

Little Rock, Ark.-based Dillard's, with 268 stores in 27 states, has staked out a 5 percent share of the marketplace. The chain's sales for the first nine months of 1997 were $4.56 billion, according to published reports, up from $4.29 billion a year ago. Dillard's has increased its total square footage, with NationsBanc Montgomery Securities projecting growth for the chain at 7.8 percent for 1997.

Up and comers There are some smaller players in the department store wars that are beginning to flex their muscle. According to Mark Marcon, retail analyst with Milwaukee-based Clearly Gull, 1997 will be a year long remembered by Menomonee Falls, Wis.-based Kohl's. "[The chain] really began expanding out of its core Midwest markets, and moved into the Mid-Atlantic, as far north as Philadelphia and as far south as Charlotte, N.C.," he says.

"[The chain] concentrates on the mass middle market with the operating structure of a discounter," says Marcon of Kohl's, explaining that the retailer is a hybrid department/discount store. "They combine that with popular brand names of mass-merchandise department store soft goods."

Meanwhile, Marcon calls Alcoa, Tenn.-based Proffitt's "the consolidator of the department store industry." Since going public in 1987, he says, the department store company has grown to encompass 176 stores in 24 states -- the result of merger/acquisition transactions with Loveman's, Hess, McRae's, Parks-Belk, Younkers, Parisian and Herberger's. The acquisition of Carson Pirie Scott is pending.

According to NationsBanc's Tashjian, Seattle-based Nordstrom is continuing to make strong merchandising moves. "Nordstrom has developed a premier franchise based on service and quality of merchandise while targeting the upper-middle-income consumer," he says. "[The chain has added] some provocative lines, such as Versace jeans, to keep the freshness of Nordstrom stores in place."

Not all players in the department store arena are growing. For example, Chicago-based Montgomery Ward, which claims a 4 percent share of the department store market, recently received approval from a U.S. bankruptcy court to close 47 of its stores in a cost cutting move, according to published reports.

The outlook In the future, the late 1990s may well be viewed as department stores' "good old days." "As a whole, the industry is experiencing good times after the consolidation of a few years ago," says Marcon. "I think that department store chains today are focused more on improving their own operations, and less on trying to steal market share from one another."

The major shakeout in the industry that took place in the 1980s and early 1990s may be over, but, say some in the industry, the writing on the wall suggests continued consolidation. Stein says smaller chains will fall prey to the larger companies with deeper pockets. "Consolidation is a trend that will continue as both weaker chains and smaller, regional players become targets for acquisition by the bigger operators."

Steven Latz, retail analyst with St. Louis-based A.G. Edwards, agrees, noting that the chains that have survived past turmoil remain one step ahead. "They are bigger, smarter and better-capitalized," he says. "The biggest challenge for department stores in the future is to be creative, while maintaining their existing customer base," he says.

This is no small task, says Latz. "A department store drops merchandise categories here and there, which makes it more profitable in the short run," he notes. "But in the long run, a store has to make sure that it doesn't lose too many customers by failing to cater to their needs."

Martin Sinderman is an Atlanta-based freelance writer.

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