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Department Stores Q4 2022 Updates: Glad to Have 2022 in the Rearview Mirror

Thomas Paulson
Mar 10, 2023
Department Stores Q4 2022 Updates: Glad to Have 2022 in the Rearview Mirror

Fiscal Q4 2022 was a disruptive period for department stores. Tailwinds were few and headwinds – substantial, including unprecedented discounting to clear excess inventory of apparel, soft home, and consumer electronics, high inflation impinging on discretionary consumption, and the shift in consumer spending from goods to experiences. With that in context, we would characterize Macy’s and Dillard's results as impressive. Kohl’s and Nordstrom are going through substantial transitions; where they come out is a “wait and see.”


  • Kohl’s offered unprecedented discounts to clear inventory during January. Traffic inflected positive (our data suggests that traffic increased +8%) and comparable-sales were up double-digits. For the quarter, comparable-store sales decreased 7%, but COGS increased 7%, for a +14 point spread. Gross margin declined from 33% to 23% (a -10 point decline, a level of decline that we are hard pressed to recall having witnessed before). However, with inventory per square foot coming in -9% below 2019’s level and inventory turns up to 5.2X, incoming CEO Thomas Kingsbury has now "mostly cleared the shelves" allowing him to put his imprint on the Kohl’s offering. "Mostly" because the commentary implied ongoing discounting pressure will linger through 1H 2023 given assortment misalignment of receipts, especially too much "active", and the consumption behavior we expect to see for that period – the hourglass pattern.
  • Importantly, given the large size of Kohl’s and the intensity of its clearance activity, the activity of Target, Old Navy, and others, there was a material impact on all near competitors, including Macy’s and Dillards. We would characterize the sales and financial performance of Macy’s and others as remarkable in the face of such disruption in the marketplace.
  • In regards to Kinsbury’s imprint, Dave Alves was hired as President and Chief Operating Officer; Alves' pedigree is Bealls Retail Group and T.J. Maxx. Also, Nick Jones was hired as Chief Merchandising and Digital Officer and his pedigree is Marks & Spencer and ASDA. And on merchandise categories, more is going to be done in dresses, home decor, impulse, and gifting. Additionally, Kinsbury seems to want to focus on driving improvement by leveraging operational efficiencies from the off-price playbook and allowing for more fluidity and treasure-hunt in the assortment.
  • Commentary about Sephora at Kohl’s was extremely positive with Kingsbury sharing, “Nearly 8 million of our customers purchase beauty products at Sephora at Kohl's last year, and this will continue to grow in the coming years as we further expand our store presence. In the fourth quarter, our total beauty sales increased 90%. We achieved high single-digits percent comparable beauty sales growth in the 200 Sephora shops that opened in 2021 and better-than-expected sales in the 400 shops opened in 2022…  [we] recently met with Sephora leadership, and one, we both are pleased with the partnership we've built and what has been accomplished in such a short period. Two, we both see immense opportunities to continue to drive sales and profitability in the future. This summer, we'll open another 250 Sephora shops, bringing our total to more than 850 stores featuring the standard 2,500 square foot space. In addition, we are opening 50 smaller formats Sephora shops by the end of this year with a plan to roll out to the remainder of the chain by 2025."


  • As we discussed in early 2023, Macy’s had some wins & losses for Holiday 2022. CEO Jeff Gennette shared, “Beauty, dresses, tailored clothing, luggage and gift giving, outperformed while soft home, active and casual were challenged. We offered freshness in every category and brand, even down trending ones that are still important to customers. Peak holiday selling periods mirrored pre-pandemic patterns, but lulls were longer and deeper. Post-holiday demand for remaining winter and early spring product was stronger than expected and markdowns were shallower than contemplated. Looking back on 2022, we began to see signs of consumer weakness and a shift in category demand late in the first quarter. We adjusted the timing, amount and composition of receipts by channel, category and brand. As macro pressures mounted and industry-wide inventory built on easing supply chain constraints, we bought closer to need, held open-to-buy reserves and bought into areas of strength. We were measured with promotions and markdowns and did not chase unprofitable sales. These actions benefited fourth quarter results…[On 2023] we believe discretionary spend will be under pressure across income tiers and expect the allocation of disposable income to continue shifting towards services and essential goods. Even as consumers reprioritize spend, there is opportunity. With the continued expansion of a hybrid work model, there are more in-person meetings and flexibility for personal travel. We believe the desire to be with loved ones, go on vacation and attend events has not diminished and expect gift giving and occasion-based demand to continue.”
  • Gennette went on to say, ”This year, we will be testing, investing and scaling for sales and margin expansion. In addition to our existing initiatives, including pricing science and data and analytics, we will focus on our 5 primary growth vectors. Number one, Macy's private brand Reimagination; Two, Market by Macy's and Bloomie's off-mall stores; Three, marketplace; Four, Luxury; and Five, personalized offers and communication, which we have broadly described as personalization in the past. We are currently targeting low single-digit annual net sales… beginning in 2024, off an assumption for a low single-digit decline in both metrics this year.”
  • CFO Adrian Mitchell, “We're up 13.6% last year in the first quarter. And this was a point in time when we were effectively--government stimulus was still out there. There was a clear resurgence in terms of return to work, occasion, travel, and there was inventory constraints that we're really beginning to loosen but still a little bit tight at that point in time. As we got into the second quarter, the consumer was still relatively healthy, and inflationary pressures began to intensify as consumers begin to reallocate from goods to services. We saw that pivot begin to kind of pick up and as the supply chains loosened and inventory really flowed into the retail context, the promotional landscape began to intensify. Now as we think about the third and fourth quarters, the macro pressures, the excess inventory surpluses, the continued inflation really created a lot of challenges that you're very aware of as we think about the third and fourth quarters. So as we think about the compare to last year, you have an intensifying period over the course of last year. And what we're saying is that we expect to have more of a recovery as we think about our trajectory from the first quarter to the second quarter as well as targeting sales growth in 2024. And we assume that this growth that we expect in 2024 will remain in a situation where the consumer remains under pressure.”
  • On Market by Macy’s and Bloomies, Gennette said, “these average about 30,000 to 40,000 square feet or roughly one-fifth the size of our on-mall locations. Looking at the five Market by Macy's and the one Bloomie's that have been open for over a year, fourth quarter comparable owned plus licensed sales increased by 8% and 12%, respectively. Off-mall conversion is significantly above mall locations and customer experience scores on layout and neatness of the store, ease of the checkout process and availability of colleagues are 25 to 30 points higher." According to data, off-mall centers have 2.5x more visits than on-mall. "Thus far, we are most successful in centers that include high-traffic concepts like off-price or grocery, where our unique products and brands provide a differentiated option. When opening in existing markets, cannibalization is lower than anticipated and new customer acquisition rates are higher than on-mall. In 2023, we plan on opening four Market by Macy's and one Bloomie's and if new locations continue to outperform, we will look to incrementally accelerate off-mall openings beginning in 2024. With our strong liquidity position, we are prepared to take advantage of opportunities as they present themselves. We are currently evaluating the right number and mix of on-and off-mall locations, our ecosystem and customer are dramatically different today than when we announced our 125 Macy's store closure plan in February of 2020. Since then, we have closed approximately 80 Macy's locations and plan to close another 5 this fiscal year…”
  • "When we look at it in the context of market share gains and new customers, we're really looking at, and white space for us would also be customers that would consider our brands, but don't go to data on them because they don't find or brick-and-mortar, particularly convenient. So there may be places--even though we're in 49 of the top 50 markets, there's many ZIP codes where we don't penetrate because customers are going to off-mall and that's how they're satisfying their needs. That's why we're so excited about what we're looking at in terms of Market by Macy's and Bloomie's. So expect us to continue to fortify that. When we do that, the digital flywheel and the omnichannel business, starts humming.”
  • “It's helping the digital business in those ZIP codes. We are looking for--we're going to be launching new ones in 2023. By the end of the year, we are hoping for a scalable model. If we look at the digital marketplace, so this is one that we launched in September of 2022. We ended the year with 500 brands and also 20 new categories. So aggressive schedule there. We're looking to add 2,000 more brands in 2023 and importantly, we're launching the Bloomingdale's marketplace in the back half of this year. We talked about luxury brands. And so as we mentioned, Bloomingdale's and Bluemercury as well as Macy's Beauty, where we have a lot of luxury offerings…” (There is a synergy happening here between Market by Macy’s and Bloomies bringing Macy’s Inc. into new markets, which is necessary to drive and new dot-com brands/partners which gets Macy’s Inc. broader consideration by consumers and first-party consumer data, which Macy’s Inc then uses to assort the stores.)
  • “[On luxury]--we are bullish on luxury. And this is a share gain for us in terms of going after the luxury opportunities. You have a customer that remains healthy. They have the resources. As I mentioned, they're really spending where there is scarcity and specialness. So the full omnichannel experience is quite important… We are definitely committed to additional market share in--particularly when you think about Bloomingdale's and you look at Bluemercury...We have really want to be that customer's consideration for a multi-brand upscale retail option. We just finished our 150th anniversary at Bloomingdale's and spent a lot of time on content--exclusive content and really developing strong mutually productive relationships with established luxury brands. And this can be approachable to aspirational, a real curated expansion of luxury labels that our customers love. And those are adding new content…and these can have huge effects on overall comps.”
  • In terms of Macy’s Inc. financials, it too suffered gross margin pressure (-300 bps) due to the highly promotional environment. But that clearance activity left them in a liquid and agile state open-to-buy and inventory-wise (inventory is down -18% compared to 2019). Like Sephora and Ulta reported, beauty is a strong growth category leading in both the Macy’s and Bloomingdale’s banners; Bluemercury comped +7.2%. The new off-mall formats Macy’s was +8% (versus -3% for on-mall) and Bloomies was +12% (versus +1% for on-mall).


  • As to Nordstrom, both brands (Nordstrom and Nordstrom Rack) had a softer Q4 2022 as was pre-released results on Jan 19. In describing its customer mindset, Eric Nordstrom said, “We saw customers starting to pull back in late June, primarily in Nordstrom Rack, and this trend continued through the holiday season. Across both banners, the softening trend was more pronounced in customers with lower income profiles.” Given the softening trend, the company increased clearance activity and ended in a better place inventory-wise with levels even to 2019.”
  • Nordstrom also communicated the need to improve the business’ profitability and pay down its debt (net debt/EBITDA is 3.8X). As part of that objective, he announced that they would be winding down their Canadian business. (Recall that Nordstrom recently picked up Ryan Cohen, known to be an aggressive investor, who was the founder of Chewy, investor ambassador of GameStop, and short-term investor in Bed Bath & Beyond.)
  • Nordstrom also noted that the company is taking, “clear actions in 2023 to expand market share and improve our profitability…We are committed to building on [2022’s] successes while delivering on our legacy of service across physical stores and digitally as the customer experience continues to evolve to be even more omnichannel. This is critical to driving engagement and attracting more customers.” These highlighted “opportunities” strongly align with our Holiday 2022 & Beyond Outlook which observed that physical retailers have more opportunity to play to their advantages: excellent in-person service and merchandise that surprises, delights, and trills.
  • The clearance activity at Nordstrom Inc. lowered its gross margins by 525 basis points, putting full-year EBITDA margin at 6.7% (compared to Macy’s at 10.1% and Dillards at 18.8%).
  • Management guided for a challenging first half of 2023, including revenue declining by high-single-digits on a pro-forma basis. Given the revenue decline, Q1 operating profit is expected to be breakeven.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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