What did happen to the department stores? Why did something so basically American, so quintessential to the shopping experience during these days between Thanksgiving and New Year's become so irrelevant, and in such order?
It's not an easy question to answer because so many of the difficulties were self-inflicted and, like Tolstoy said at the beginning of Anna Karenina, "all happy families are alike," here obviously speaking of Walmart (WMT) , Target (TGT) , and Costco (COST) , and "each unhappy family is unhappy in its own way," there speaking of Macy's (M) , Kohl's (KSS) , Sears (SHLDQ) , and J.C. Penney (JCP) , the last two now too small to even scrutinize. But it must be answered, especially on a day when Goldman Sachs (GS) cuts Macy's to an outright sell, just when you used to be thinking to shop there and buy the stock.
Tis the season to delve in so here's goes:
First, Amazon (AMZN) is not the fault of Macy's or Kohl's or Nordstrom (JWN) or any other store, but it is, in the end, the single biggest predator in the Valley. The prices are too low, the convenience, too high, to beat Amazon on a regular basis unless you do something so special that it can draw you to the store, turn the brick and mortar into an asset.
None of the traditional stores has been able to do that. It's just an unfair competition against the death star. Walmart and Target have been able to leverage their brick and mortar assets and have kept Amazon at bay, but they have become engines for shopping through trial, error and reinvention. Walmart's been able to do it because the family stands behind the CEO, Doug McMillon, as he tries new things including the purchase of Jet.com, which he snagged for $3.3 billion and has shaped their competitive offering. Two years ago Target bought Shipt for $550 million which gave them the footprint for their same day pick-up that has boosted online sales beyond their wildest dreams. Both acquisitions were ridiculed at the time. Both may have saved the companies.
Two, women would rather try things on at home than at the department store. In my coroners' inquest I keep coming back to something that wasn't' thought about a half-dozen years ago: the ease with which you can return product online has made trying on something at home a staple of one's life. Dressing rooms, it appears, are atavistic and often thought to be dangerous, or at least risky, by shoppers. I have been querying people all weekend about their experience returning Amazon goods at Kohl's - a new initiative that seems quite popular - and shoppers seem to enjoy the 25% off coupon Kohl's gives them - but it almost seems like the final Trojan Horse wheeled into the department store. Sure, some respondents bought goods at Kohl's they didn't anticipate - that's a win, but still it does seem like Amazon's the real winner in the end because it's another reason why you can try things on at home, not at the store. Only shoes - with their inelastic size - still shop well at the mall.
Three, Wall Street enticed many brick and mortar stores to do the wrong thing with their balance sheets. Macy's bought back more than 100 million shares in the last seven years yet its market cap has gone from $14 billion to $4.6 billion. It's got a debt hangover of $4.7 billion, a lot of which can be attributed to the buyback. Kohl's took share count down from 271 million to 157 million in seven years while the market cap went from $11.3 billion to $7.3 billion. It, too, has a big slug of debt that can be attributed to the buyback. Had these companies spent that money developing on line strategies they might have become much more relevant.
Four, the mall has crushed Macy's. Most malls are run by real estate investment trusts. They are simply trying to raise rents every year to please Wall Street. They are not partners, so to speak, unless they are run by truly inventive CEOs. The structure of a mall is just wrong for today's shopper and the mall's mostly unappetizing. They work for the most expensive of goods for novel ideas like Lululemon (LULU) , which reports this week and I think will be a good number. The shopping center has more going for it, but the department store still must still leverage its real estate to online and convenience and most don't have the capital.
Five, the department stores can't afford to help customers as they used to. Long lines, sloppy aisles, empty registers, these are all common complaints of about most of the mall department stores.
Finally, the cellphone. The cellphone gets better every year. It is now a one stop mall. Whoever has the lowest price wins in a handheld mall that is really linked to the delivery services of UPS (UPS) , FedEx (FDX) or Amazon or the pick-up at Target and Walmart, the easiest of the stores. Phone will only get better, delivery faster. The result? The debacle can only accelerate, the demise hastened, happy new holidays.
(Kohl's, Amazon and Goldman Sachs are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells KSS, AMZN or GS? Learn more now.)