In The Headlines

Large Department Store Chains Rethink their Focus on Apparel

Consumers are spending more on experiences, from travel to a meal out, which is chipping away at sales of tangible things, like clothing. And when shoppers do buy apparel, they are gravitating to off-price retailers such as T.J. Maxx and Nordstrom Rack, and fast-fashion chains like H&M, which churn out runway knockoffs and sell them for a large discount. Consumers are also buying more fashion from the nation’s online juggernaut: Amazon is expected to eclipse Macy’s as the largest apparel retailer in the U.S. by 2017, according to Cowen & Co. This perfect storm of factors is threatening the very heart of the department store model: apparel, the sector’s biggest business.

Department stores have long served as a draw to fashion brands showcased in expensive shops from the Calvin Kleins, Ralph Laurens, and Tommy Hilfigers of the world. But that model does not seem to be working these days. For one, designer brands are not as important as they once were, as logo fatigue has set in, and shoppers can easily—and are increasingly more interested in—putting together a unique look from the many shopping choices online. The fashion brands themselves are beginning to react to the change. Designer Michael Kors, for one, is reducing its department store distribution to improve profit margins, just as Ralph Lauren and Tory Burch cut jobs, restructuring their businesses amid an evolving shopping landscape.

Disruptions in the retail ecosystem are causing department stores to rethink how they work with vendors. The department stores are being made to consider reducing the massive amount of space they devote to clothing, according to Oliver Chen, retail analyst with Cowen & Co. Today, department stores lack sufficiently differentiated, compelling merchandise to consistently resonate with consumers, including those younger, coveted Millennials. And moving full-price apparel at a department store has become tougher now that consumers can instantly check the price of widely distributed brands from their smartphones. And there are “good, low-cost alternatives like H&M and Zara that have changed the game, in part by how quickly they get new products to store shelves,” he said.

What is more, department stores have long commanded markdown allowances (money for product that does not sell) from their vendor partners. But as the low-margin apparel business, where deflation is a constant issue, remains tough, vendors are facing unique challenges, Chen noted. It has prompted many to expand their business via alternative retail channels that sell through themselves, like off-price chains. Indeed, the off-price sector has been the biggest beneficiary of department store apparel woes.

Shoppers are increasingly indulging in the thrill of the hunt from combing the disheveled-yet-surprising-and-frequently-refreshed clothing racks of stores like T.J. Maxx, the behemoth of the sector. As of 2014, Burlington, Nordstrom Rack, Ross Stores, and TJX generated about 8.4%, $29.7 billion, of the clothing and footwear sales in the U.S., according to Scott Tuhy, vice president at Moody’s Investors Service. The credit rating agency expects that share to approach 10% by 2018. Now both Macy’s and Kohl’s are jockeying for a piece of the off-price action with their new small-format Backstage and Off-Aisle spin-off concepts, respectively.

But the department stores still have to address the problem of rejuvenating business in their full-line stores. To do just that, department stores are turning to categories such as beauty, in-store services, and even food. In addition to shedding stores, Macy’s has been tinkering with its format by testing new concepts that point to a shift away from apparel. During the holiday season, it began testing Best Buy consumer electronics shops in 10 stores. And last year, the retailer bought freestanding beauty chain Bluemercury, which it will expand to 100 stores by mid-year, and bring to four, the locations Macy’s has in-store shops. J.C. Penney, in the throes of a turnaround, is also turning to non-apparel businesses to drive growth. The moderately priced chain aims to accelerate the expansion of Sephora beauty shops in its stores, while moving the concept to the more prominent, “center core” area. It is also modernizing and rebranding its hair salons via a partnership with InStyle magazine.

Chen said in a Cowen & Company research note: “Our industry consultants believe department stores will eventually devote less space to women’s apparel, and more to other categories, which tend to be more productive, including home, beauty, wellness, and electronics.”

Citations

1. http://onforb.es/1PkeK31 – Forbes

Walmart Closes Stores to Streamline Its Operations

GWal-Mart Stores, Inc. plans to shutter 269 stores, the most in at least two decades, as it abandons its experimental small-format Express outlets and looks to streamline the chain. The move by the largest private employer in the U.S. will affect about 10,000 jobs domestically at 154 locations, according to a statement issued by the firm. Overseas, the effort will eliminate 6,000 jobs and includes the closing of 60 money-losing stores in Brazil, a country where Wal-Mart has struggled. The plan will affect less than 1% of its total square footage and revenue, the company said.

Chief Executive Officer Doug McMillon took the step after reviewing the chain’s 11,600 stores, evaluating their financial performance and fit with its broader strategy. The move also marks the end of its pilot Wal-Mart Express program, a bid to create a network of small corner stores to compete with dollar-store chains and drugstores. Wal-Mart will continue its larger-size Neighborhood Markets effort, though 23 poor-performing stores in that chain will also be closed. The company is still expanding its footprint in the U.S., adding 69 new stores and 6,000 jobs in January alone. “We invested considerable time assessing our stores and clubs and don’t take this lightly,” McMillon said. “We are supporting those impacted with extra pay and support, and we will take all appropriate steps to ensure they are treated well.”

Wal-Mart shares have lost 29% of their value over the past 12 months, dragged down by slow growth and profit declines. “Some investors may be disappointed that the cuts are not deeper, said Brian Yarbrough, an analyst with Edward Jones. “I don’t think this is enough to move the needle,” he said. “I think they need to exit some markets totally and close a lot more than they are closing.”

The shutdowns will reduce earnings from continuing operations by about $0.20 to $0.22 a share, the Bentonville, Arkansas-based company said, with as much as $0.20 cents of that coming in the fourth quarter. Twelve of its massive supercenter stores, which employ an average of about 300 people, will be shuttered. Most of the closings will occur by the end of the month. Last year, Wal-Mart shut three supercenters.

The closing of the smaller-format stores signals a retreat for Wal-Mart from one of its main efforts to try to boost slowing U.S. sales. When the company introduced the stores in 2011, the aim was to attract shoppers who didn’t want the hassle of going to a sprawling supercenter to pick up a carton of milk after work. Other retailers, including Target Corp., have also been making a push into smaller stores. The experiment seemed to be working. As recently as 2014, Wal-Mart announced plans to open an additional 90 Express stores and touted their “solid” sales growth. But the company said today it was planning instead to focus on the mid-sized Neighborhood Markets, which are about the size of a grocery store, and its supercenters, which sell everything from avocados to windshield wipers. The closings are good news for dollar store chains, which had the most to lose from Wal-Mart expanding its small format, said Yarbrough.

McMillon had signaled to investors that he was considering closing some stores during the company’s investor meeting in October. Still, the move does not mean Wal-Mart is reducing its overall U.S. stores, the retailer said. It plans to open 50 to 60 supercenters in the U.S. this year and 85 to 95 neighborhood markets, which are about the size of a typical grocery store. That is a slightly slower pace of growth than the 115 it added in 2014.

Wal-Mart has come under increased pressure to cut costs after giving a gloomy profit forecast for the next fiscal year. Earnings are expected to decrease 6% to 12% in the year ending January 2017. Sales have not been growing fast enough to offset the billions of dollars that Wal-Mart is spending on higher wages for its workers and improvements to its website.

Citations
1. http://bloom.bg/1P4nxvU – Bloomberg
2. http://cnnmon.ie/1PwUJGS – CNN Money

The Good News Is . . .

• Mortgage application volume increased 21.3% last week versus the previous week on a seasonally adjusted basis, according to the Mortgage Bankers Association. Mortgage applications to purchase a home increased 18% from the previous week, seasonally adjusted, and were 19% higher than the same week one year ago. This signals an increase in potential home buying at the start of the year. New listings usually begin to increase just after the holidays.

• Regions Financial Corp., a leading department store retailer, reported earnings of $0.21 per share, an increase of 40.0% over year earlier earnings of $0.15 per share. The firm’s earnings topped the consensus estimate of analysts by $0.01. The company reported revenues of $288 million, an increase of 31.5%. Management attributed the company’s results to strong growth in loans, deposits and customer accounts.

• In the largest China-Hollywood deal to date, conglomerate Dalian Wanda Group Co., has agreed to acquire production and finance company Legendary Entertainment for $3.5 billion in cash. The deal announced Tuesday in Beijing significantly expands Wanda’s presence in the global entertainment business, as it now owns one of the largest independent movie companies in Hollywood. It previously acquired AMC Entertainment Holdings Inc., the second-largest cinema chain in the U.S., and owns theaters and makes movies in China. Working with Wanda, Legendary will likely produce more movies in China, and it will now have an ally getting its movies released in the country despite the government’s quotas on imported motion pictures.

Citations
1. http://bit.ly/1W7pWpk – HousingWire.com
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1Ozuxvh – Regions Financial Corp.
4. http://on.wsj.com/1UM6ZXK – Wall Street Journal

Planning Tips

Guidelines for Spousal IRA Contributions

Generally, individuals who are unemployed are not allowed to contribute to retirement accounts such as IRAs because they do not have eligible compensation. However, there is an exception for individuals with spouses who are employed and meet certain requirements. The employed spouse is allowed to make an IRA contribution on behalf of a non-working spouse or a spouse who has little income. These contributions are referred to as “spousal IRA contributions.” Below are some guidelines for making spousal IRA contributions. Be sure to consult with your financial advisor to determine if spousal IRA contributions are appropriate for your situation.

Eligibility – To make a spousal IRA contribution, you must meet the following requirements:
• You must be married.
• You must file a joint income-tax return.
• You must have compensation or earned income of at least the amount you contribute to your IRAs.

Age Limit – If you decide to fund a traditional IRA for your spouse, he or she must be under age 70½ for the year for which the contribution is being made. No age limits apply to Roth IRA contributions.
Compensation limit – While there is no cap on the amount you may earn in order to fund a traditional IRA, this is not so for a Roth IRA. You may contribute 100% of your compensation or the tax year’s IRA contribution limit, whichever is less, to your IRA. Bear in mind that the contribution limit that applies to you also applies to your spouse. IRA contributions must be made in cash (which includes checks). Securities, including mutual funds and stocks, may not be used to make an IRA participant contribution. It is not required that your full contribution amount be made in one payment. Contributions may be made in small amounts until your goal or limit is reached. In fact, you may make a year’s IRA contribution even after you have filed that year’s income tax return, providing you meet the April 15 deadline for making the contributions.

Deductions – If you do not participate in an employer-sponsored plan, such as a 401(k), you will be able to deduct the full amount of your spousal IRA contribution. If you are covered by an employer-sponsored plan, your ability to deduct your spousal IRA contribution depends on your income and your tax filing status. If you are able to deduct your spouse’s Traditional IRA contribution, but not the Traditional IRA contributions made to your own Traditional IRA, you may decide to fund a Roth IRA for yourself instead, if you are eligible to do so.

IRAs must be held separately – Unlike your regular checking or savings account, your IRAs cannot be held jointly. The IRA you establish for your spouse must be in his or her name and tax identification number. Similarly, any IRA you establish for yourself must be established in your name and tax identification number.

Citations
1. http://1.usa.gov/1QgkIHa – IRS
2. http://bit.ly/1KlAFFP – The Motley Fool
3. http://bit.ly/1Jbmt7p – Investopedia
4. http://aol.it/1PAkwhs – DailyFinance.com
5. http://bit.ly/1ZuCSWn – Money Girl
6. http://bit.ly/1ROfLae – MoneyCrashers.com