businessinsight RETAIL REPORT

Department stores have come full circle as prime shopping destinations.

his is Apparel’s second annual Top 10 — a ranking of activities and services — and then shop); to devote more T department stores with at least $100 million in annual sales space to in-store digital offerings (as Macy’s is doing with that are publicly traded on the U.S. stock exchange, by profit digital displays side-by-side with physical product, offering margin for their most recent fiscal years, respectively. Last both a touch and feel, as well as an endless aisle of product year’s inaugural report was subsumed within our annual Top and a way to interact with it); and more space for more 50 (which is a similar ranking for apparel companies, and which physical offerings (such as Macy’s soon-to-be-unveiled acre of has never included department stores, primarily because of the shoe-selling space in its flagship Herald Square location, which vast amount of non-apparel they carry), but this year we’ve is in the middle of a massive $400 million renovation). broken it out and taken a closer look at each of the companies Department stores also have the opportunity to blend herein. popular, must-have national brands with private labels that This report is called The Top 10, but it could just as easily cannot be found anywhere else — a strong defense against be called The Only 10, which explains how both Dillard’s, with showrooming — and that offer a higher margin of profit (a a 7.41 percent profit margin and Sears, with a -7.57 percent strategy pursued by all 10 of the department stores). With the profit margin, can both be found within the same short list. right technology, department stores can also leverage, in Over the years, mergers and acquisitions, a difficult economy, different ways, supply chain webs and other assets that may and other factors have whittled the pool of department store be far more vast than those of their specialty apparel owners to just 10 (although if you added in the various competitors (as Sears has done by launching its own data nameplates, including outlets, of each of these, you’d almost management services company, and as Macy’s is doing by triple that number). setting up almost 300 of its stores to serve as fulfillment A few years ago, it seemed the death knell had sounded for centers). Still, it’s important to note that, like many of their department stores, that there was no place for these bloated specialty apparel counterparts, department stores, including beasts of shopping past in today’s fast-paced, digital, 24/7 Kohl’s and Bloomingdale’s are also shifting, in their new shopping environment. While the department store landscape openings, to some smaller-store formats. has shifted, predictions of its demise couldn’t have been more Relative to profit margin, as a group, department stores still wrong. For those players still on the field, the game has lag far behind the apparel companies in the top quartile of the become one of the most exciting in retail, for both industry Top 50, where profit margins hit as high as 20.78 percent in observers and shoppers. this year’s rankings. Of our Top 10, the first half would have As websites, mobile apps, tablets, smartphones and nabbed a spot on the Top 50, were they to be ranked on that everything else digital continue to proliferate, the role of the chart, while the bottom half — Neiman Marcus, Burlington physical store — albeit a quickly changing one — has never Coat Factory, The Bon-Ton Stores, J.C. Penney and Sears — been more important. For department stores that do it right, were not even close. their larger footprints offer added opportunity to entertain their With so many changes afoot, you can’t help but be excited customer (as J.C. Penney proposes to do with its new Town to see the department store of the future. However it unfolds, it Square concept, where shoppers will gather socially for fun seems safe to say there most certainly will be one.

10 AUGUST 2012 • www.apparelmag.com #1 Dillard’s Dillard’s No. 1 spot in the rankings is slightly misleading because it is the result of a net after-tax credit for non-routine items (it reported one last year as well). Excluding that item, the retailer would have recorded net income of $229 million (vs. $163 million last year) for a 40.5 percent increase in net income and a profit margin of 3.7 percent, which would have placed the retailer at No. 4 instead of the top spot. Still, the 304-store company turned in a solid year. While some other department stores have made a big splash reinventing them- selves recently, Dillard’s has more quietly been focusing on inventory control and expense discipline, while striving to “own” the spot as the destination for an edited merchandise selection of revered national and exclusive brands, supported by outstanding customer care. This focus led to an impressive 4 per- cent increase in comp-store sales and improved gross margin growth by 30 basis points (following increases of 190 and 410 basis points in 2010 and 2009, respec- tively). Increased focus on its online store is highlighted by its new state-of-the- art, 850-000-square-foot Internet Fulfillment Center in Maumelle, Ark.

#2 Kohl’s Jennifer Lopez and Marc Anthony may have untied the knot, but you can still find them together at Kohl’s, where their namesake collections, respectively, launched last September in multiple departments across the store. Brands are exploding at Kohl’s — already this year the company launched Rock & Republic (as the brand’s exclusive U.S. retailer) and Van Heusen; expanded its very successful ELLE and Simply Vera Wang brands into new categories; and this month launches the Princess Vera Wang juniors’ collection — with exclusive and private brands continuing to rise as a percentage of total sales, up 240 basis points to 50.3 percent in 2011, helping to drive Kohl’s 6.21 percent profit margin. Kohl’s store expansion rate has slowed in recent years and, like many of the apparel retailers that ranked in Apparel’s annual Top 50 report, most of the com- pany’s anticipated 20 new store openings this year will be in a smaller format (55,000-to-68,000 square feet vs. 90,000 square feet), which allows the company to take better advantage of opportunistic acquisitions, especially in urban markets. Kohl’s also continues to remodel its existing store base, completing 236 remodels in the past three years with 50 on tap for 2012, a process the company has honed with experience; a typical store remodel now takes just seven weeks — half the time it took in 2007.

#3 The tagline “Modern. Southern. Style.” is just part and parcel of a mas- sive revitalization project going on at the chain that is already pro- ducing strong results for the company with comp-store sales up 5.5 percent and profit margin up 132 points over last year, and which the company is supporting with significant marketing and advertis- ing, including debuting as the title sponsor of the annual college foot- ball bowl held in Charlotte, N.C., in December 2011, which drew more than 58,000 football fans and was televised nationally on ESPN. Game day belk.com sales were up 92 percent with states outside its footprint accounting for 22 percent of total e-commerce sales vs. an average of 10 percent. (Wow, advertising really does work!) Specifically, over a five-year period that began in 2011, Belk is investing approxi- mately $600 million in a number of key strategic initiatives in the areas

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of merchandising, rebranding, e-commerce, store remodels and ner teams trained to work in a collaborative environment where customer service. Just a few highlights: In June, Belk opened a they plan, purchase and travel together, building assortments tai- new $4.5 million 515,000-square-foot e-commerce fulfillment cen- lored to customers by market. They will be aided in their efforts by ter in Jonesville, S.C., to support its growing e-commerce, whose a new Oracle enterprise system providing solutions in areas of pur- sales grew 108 percent, to $72 million, last year. In restructuring chasing, planning, allocation, replenishment, demand forecast- its merchandising and planning organization, the nearly 125-year- ing, pricing and promotion, merchandising, financial planning and old company hired 40 additional planners and formed 59 buyer/plan- size optimization.

#4 Macy’s “We’ve spent the last 153 years building sales up 5.3 percent and online sales up 40 warehouses,” said Macy’s chief stores offi- percent — are: 1) My Macy’s localization, cer Peter Sachse in an interview quoted focused on tailoring the merchandise assort- in The Wall Street Journal. “We just called ment and shopping experience by store; them stores.” In a significant move in the and 2) MAGIC Selling, focused on improv- way it conducts business, the iconic retailer ing customer engagement in stores by train- is supercharging its omnichannel strategy, ing associates to “meet and make a one of three key strategic initiatives under- connection” with every customer. Carving way at the company, by integrating stores, out a balance of fashion and value, 43 per- the Internet and mobile devices to put cent of merchandise sold at Macy’s in 2011 the company’s entire inventory at the was exclusive or in limited distribution, with service of customers anywhere, by equip- 20 percent of sales coming from its private ping 282 of its more than 800 Macy’s stores brands. Just a few upcoming highlights: 1) to pick and ship orders (see “Macy’s Trans- a focus on the needs of its millennial cus- formational Move to Omnichannel,” in the tomers (those ages 13 to 30, the nation’s July issue of Apparel.) It’s a very complex largest generation) with more relevant, fast- move that will allow the retailer better sell- fashion merchandise; 2) the beginning of through of inventory at higher prices, but a four-year top-to-bottom $400 million the successful smaller, carefully edited fash- will also require a hefty investment in back- reinvention of its Macy’s Herald Square ion stores opened in recent years in SoHo room labor. Two other key initiatives con- flagship store, to include the world’s largest in New York City and Santa Monica, Calif.; tributing to a third consecutive year of women’s shoe department, with 39,000 4) the opening of five additional Bloom- significantly improved financial perfor- square feet of continuous selling space; 3) ingdale’s outlet stores, for a total of twelve; mance — including the addition of more a new Bloomingdales’s store in Glendale, and 5) continued adoption of RFID at both than $1 billion in top-line sales, same-store Calif., opening in fall 2013 in the format of nameplates.

#5 Saks The luxury retailer jumped into the flash-sale phe- nomenon last year with its own site, SaksFashionfix, while its marketing also took a creative twist recently as the retailer teamed with NBC’s “Fashion Star,” the reality TV show where budding designers compete by creating collections for Saks, Macy’s and H&M. While Saks is a magnet for wealthy customers — an article in The Wall Street Journal last year shared the tale of one of Saks’ elite personal shoppers and the clients she dresses, most of whom spend between $150,000 to $200,000 with her annually — it has found that lux- ury has a thriving off-price side, and the retailer has been nurturing its 60 Off 5th stores, which it renovated and expanded last year. Saks significantly improved operating results in 2011, driven by strong comps up

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9.5 percent and gross margin rate improvement, as it focused on by integrating ’s in-store and Saks Direct carefully balancing inventories, committing inventory to high- inventory systems. On the fulfillment side, a new advanced potential growth areas, introducing exclusive, limited-distribution robotics system for receiving and fulfilling direct orders at its product and reducing promotional activity to drive more full-price Aberdeen, Md. DC has significantly increased productivity, selling. Like its counterparts, the department store chain is focused improved space utilization and improved customer service, and on its omni-channel strategy (direct sales were up 28 percent in — still short on space — this year the company is expanding its 2011), and as part of a multi-year transformation to support this distribution and fulfillment capacity with a new, 564,000-square- approach has invested in technology to achieve one view of its foot facility in Tennessee. customer across channels, as well as one view of its inventory,

#6 Neiman Marcus In a twist on the old idiom — retail makes strange bedfellows. In just the past month, Nordstrom* announced that it will open Topshop stores inside several of its locations, and Neiman Marcus made headlines when it reported a partnership with cheap chic retailer Target to produce a holiday collection that will be sold at both stores, reflecting a growing trend among retailers to throw out the old rules as they seek to inject excitement into their stores. The collection, with designs from 25 well-known and budding design- ers including Oscar de la Renta, Tory Burch and Derek Lam, will let Target’s fashion flag fly higher while opening a door to a wider audience for Neiman Marcus. Meanwhile, it is working another fashion-forward angle, spreading and updating its Cusp concept — a curated selection of “must haves” from leading designers and up-and-coming names — from a few stores and six free-standing boutiques to all 43 of its locations. Also the owner of two Bergdorf Goodman stores in Manhattan, 31 Last Call clearance centers and a direct-to-consumer business with its Neiman Marcus, Horchow and Bergdorf Good- man brand names, the retailer made its first move into the fast-growing luxury market in China earlier this year with a $28 million investment in Glamour Sales Holding. The privately held e-commerce company should enable the retailer to launch its own e-commerce site (replete with a mix of full-price offerings, editorial content, fashion exper- tise and behind-the-scenes videos) by the end of this year. For the nine-months period ended April 28, profit margin is up 4.52 per- cent, up 150 basis points over the same period last year.

*Nordstrom is not included in this list because it does not file with the SEC under Retail — Department Stores, but rather, Retail — Family Clothing Stores. Nordstrom was ranked #20 in last month’s Top 50 Report.

A ranking of department stores publicly traded on the U.S. securities and stock exchange THE TOP with $100M+ in annual sales by their profit margin for the most recent fiscal year. SALES NET INCOME %% % Profit Profit Last Most % Most Change Margin, Margin, 2012 Year’s 10 Recent Previous Change Recent Previous Net Most Previous RANK Rank Company FY FY FY Sales FY FY Income Recent FY FY 1 4 Dillards Inc. Jan. $6,263.6 $6,121.0 2.33 $463.9 $179.6 158.30 7.41 2.93 2 1 Kohl’s Corp. Jan. $18,804.0 $18,391.0 2.25 $1,167.0 $1,120.0 4.20 6.21 6.09 3 2 Belk Inc. Jan. $3,699.6 $3,513.3 5.30 $183.1 $127.60 43.50 4.95 3.63 4 3 Macy’s Inc. Jan. $26,405.0 $25,003.0 5.61 $1,256.0 $847.0 48.29 4.76 3.39 5 6 Saks Incorporated Jan. $3,013.6 $2,785.7 8.18 $74.8 $47.8 56.49 2.48 1.72 6 10 Neiman Marcus Inc. July $4,002.3 $3,692.8 8.38 $31.6 ($1.8) 1855.56 0.79 (0.05) 7 7 Burlington Coat Factory Jan. $3,887.5 $3,701.1 5.04 ($6.3) $31.0 (120.32) (0.16) 0.84 8 8 The Bon-Ton Stores Inc. Jan. $2,884.7 $2,980.5 (3.21) ($12.1) $21.50 (156.28) (0.42) 0.72 9 5 J.C. Penney Co. Inc. Jan. $17,260.0 $17,759.0 (2.81) ($152.0) $378.00 (140.21) (0.88) 2.13 10 9 Sears Holdings Corp. Jan. $41,567.0 $42,664.0 (2.57) ($3,147.0) $150.0 (2198.00) (7.57) 0.35 *NOTES: Data in Millions; Belk Inc., Burlington Coat Factory and Neiman Marcus are privately held companies that are not publicly traded on the NYSE or NASDAQ; however, they are public reporting companies that file quarterly and annual financial results and other reports with the SEC.

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#7 Burlington Coat Factory #8 The Bon-Ton Stores While it still dominates in coats and outerwear, the value-priced President and CEO Brendan Hoffman, who joined the company retailer has expanded far beyond those categories since it opened in February, said in his letter to shareholders that he is “more its first store in Burlington, N.J. in 1972, with offerings includ- excited about the opportunities before us than I had initially antic- ing ladies’ sportswear, men’s wear, family footwear, baby fur- ipated.” That’s because, despite its disappointing performance niture and accessories, and home decor and gifts, sold in 477 in 2011, Bon-Ton Stores reduced debt by approximately $47 mil- stores in 44 states and Puerto Rico. Still, the weather has a major lion, reduced interest expenses, and pushed forward on sev- impact on the business and the unseasonable warmth in the eral strategic initiatives fleshed out in pilot stores that will be fourth quarter 2011 was the primary culprit responsible for the expanded, initially to 64 stores this year. Additionally, the 272- decrease in earnings and profits. Nevertheless, the company — store retailer is focusing on: 1) Reallocating square footage to which operates under the Burlington, Burlington Coat Factory, highlight high-growth categories such as ladies’ shoes, cos- Baby Depot, Cohoes and MJM nameplates — turned in a 0.7 per- metics and dresses; 2) Increasing its focus on small stores in niche cent comp-store sales increase and in the first quarter of 2012 secondary markets, where competition is generally lower; 3) saw a 5.7 percent sales increase and a 0.6 percent increase in Using traditional and new media channels to communicate a comps, including a particularly strong performance from ladies’ clear and concise message to customers; 4) Reengineering apparel, shoes and accessories. During this year’s fifth annual marketing efforts and more aggressively utilizing new media; Warm Coats & Warm Hearts Coat Drive, a partnership between 5) Growing its e-commerce business by adding resources, with Burlington Coat Factory, One Warm Coat (a national non-profit a goal of doubling e-commerce sales over the next few years to organization dedicated to providing coats to those in need), reach 5 percent of its business; 6) Using its multiple markets and and ABC’s morning news program “Good Morning America,” the banner names (Bon-Ton, Bergner’s, , Carson Pirie drive hit the million-coat milestone — an achievement made Scott, Elder-Beerman, Herberger’s, and Parisian) to possible by Burlington customers nationwide who donated test new ideas; 7) Growing sales through increased penetration gently-worn coats to help those in need. The company’s drop of its private label credit card business; and 8) Continuing to lever- in the rankings reflects a net loss from impairment charges. age expenses by uncovering opportunities to be more efficient.

#9 J.C. Penney If you’ve been trying to keep tabs on the 1,100-store chain over the past year, you couldn’t help but feel a little dizzy. For some time now, to no avail, the 110-year-old retailer has been making incremental changes to try to turn around its fortunes, but it took former Apple and Target executive Ron Johnson, who joined the company as CEO in November, to really shake things up. How his vision will ultimately turn out is still up in the air, but you can’t deny it’s bold. Credited with turning Target into a destination for good design by partnering with Michael Graves, and for devel- oping the well-loved and extremely profitable Apple stores, John- son quickly revealed big plans to completely transform the dowdy mid-market retailer into “America’s Favorite Store.” Making the announcement at a no-holds-barred launch event in January, Johnson revealed a blueprint that includes: 1) a “Fair and Square” J.C. Penney brand identity, logo, look — and brand partner, Ellen pricing strategy reflecting a new promotional cadence that avoids DeGeneres. While Johnson says the transformation is ahead of a relentless series of promotions and coupons; 2) a completely schedule and that “customers love the new jcp,” since its launch, reinvented store centered around a “Town Square” concept, where sales have been lower than anticipated, with customers seemingly the store center will function as a fun, service-oriented gather- confused by the new pricing policy, and Michael Francis, who ing place and will be surrounded by J.C. Penney “brand shops,” joined as president just eight months previously, left the company. focused on tried-and-true J.C. Penney brands (such as IZOD®, Liz But Johnson, who’s known to swing for the fences, seems unde- Claiborne® and The Original Arizona Jean Company®), as well terred, and says he believes the strategic changes underway will as new additions including Martha Stewart® and L’amour nanette result in “improved profitability and sustainable growth over the leporeTM. (By the end of 2015, plans are for every store to host long term.” approximately 100 different “shops.”); and 3) a completely new

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VENDOR VIEWPOINT Lori Kinser, product manager for Factory Xpress, TradeCard

Apparel: Specialty retailers aren’t exactly driving consumers around the globe. What down easy street when it comes to dealing with the are some of the tricks to achieving challenges of running an efficient supply chain, but speedy, accurate delivery while department stores confront a higher level of complexity in minimizing warehousing and this area, typically juggling a greater number of suppliers transportation costs? and departments as well as national and private-label KINSER: More direct ship initiatives brands. How can they get the jump on their supply chains are being deployed overseas to take a bite out of transportation to minimize profit drainers such as stock-outs, costs and time. One major retailer we are working with is markdowns and chargebacks? conducting weekly pick/pack replenishment by store overseas. KINSER: The retailers and brands we work with are asking, They are capturing cost savings by doing more work overseas, “What can we do to be more agile?” They’re pushing for but they’re also becoming more agile by deploying complex pack- initiatives that generate visibility for postponement. They’re and-ship processes at the factory, earlier in the supply chain looking to introduce more pack configurations to better match lifecycle. supply with product demand by location. They’re empowering Reducing tasks at the domestic DC or bypassing the DC their suppliers and trading partners to do more customization at altogether by performing more tasks overseas and shipping direct the source. All of this adds up to an ability to respond faster when is having a major impact on margins for retailers and brands. demands shift and deliveries have to be rushed or modified. More retailers are seeking to leverage mark-for-store goods For example, several of the brands and retailers we’re shipping from source that arrive at the store ready to be placed working with leverage real-time visibility to order status to analyze on the shelf. The trick to achieving speed, accuracy and cost open orders that are “available to modify” and make changes savings is executing in an automated environment that empowers without burdening the factory with excess cost or labor. They the supplier to comply with increasingly complex requirements, know what’s available in the production pipeline and can adjust while adding minimal time and costs to the process. or expedite orders to meet demand. Apparel: How does implementing RFID in the supply Apparel: In the vein of catching more flies with honey chain provide a multiplier effect on the performance of all than vinegar, successful apparel businesses know that of these processes? happy partnerships yield sweeter results. What tools are KINSER: RFID is delivering clear value at the retail level today. available to help increase vendor compliance and forge The improved inventory accuracy delivered by RFID can smooth retailer-supplier relationships? significantly reduce stock-outs leading to improved sales and a KINSER: Retailers and brands today recognize the importance better customer shopping experience. In addition, a clear picture of maintaining strong, healthy relationships with suppliers. We’re of available inventory at all locations is key in supporting retailers’ seeing a pattern of requests for supply chain collaboration omni-channel retail strategies. This level of visibility minimizes solutions that benefit all sides involved. These include tools that the need to carry additional inventories in each channel to ensure automate complex packing or enable handling multitudes of customer orders can be fulfilled. labels needed to direct ship. Cloud technology has changed the As retail adoption of RFID increases, RFID tagging is moving up way supply networks collaborate in this sense, and we’re seeing the supply chain to the source of production. This move presents it cascade down to manufacturers. In some instances, the same opportunities to leverage the tags at source to provide additional solution being rolled out for retail/supplier collaboration is being value. We are speaking with several brands and retailers about used by the supplier to manage their business, communicate enabling the use of RFID tags at their factories to more accurately with multiple factories and generate supply chain efficiency. and efficiently validate packing accuracy to reduce errors that would lead to chargebacks. Ensuring proper tagging and validation Apparel: 24/7 shopping is turning the supply chain at source safeguards the value at retail and enables more efficient into something more like a supply web, with a chaotic flow of product through the supply chain. stream of shipments making their way to DCs, stores and

Vendor Viewpoint is a regular Apparel advertorial feature.

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#10 Sears Holdings If J.C. Penney could benefit from a shot in the arm, Sears needs to induce a medical coma and undergo a full-body operation. A complete transformation is required to turn the company around, and there’s one underway. Let’s hope it succeeds, because the Top 9 is not going to have the same ring to it — and, more importantly, Sears employs 293,000 people. In his letter to shareholders, CEO Edward Lampert stated that throwing more money at marketing and inventory — at a com- pany that already spends more than $1.5 billion on the former and more than $8 billion on the latter — has been proven not to automatically generate sales or profits. To reverse Sears’ continuing poor financial results, the company needs to think differently, and it’s trying to. Trans- forming its disparate businesses under a single management struc- ture is no easy task, and the company is shifting course, separating the management of several of its businesses from its core Sears and Kmart formats, separating parts of its portfolio into separately owned companies, and considering selling others, including Lands’ End, whose sale was reportedly being explored. Addressing con- cerns about Sears’ ability to meet its financial obligations, Lampert reminds that the company possesses more than $20 billion in assets — including massive real estate holdings under its SHC Realty division, one of the largest corporate real estate organizations in the world. In Lampert’s opinion, “Sears Holdings has a profit problem, not a liquidity nor an asset problem.” Fixing the profit problem is key, and the company is working, with varying levels of success, to execute its five-pillar strategy — which includes: 1) Creating last- ing relationships with its customers; 2) Attaining best-in-class productivity and efficiency; 3) Building its brands; 4) Reinventing the company continuously through technology and innovation; and 5) Living its values. While not faring so well on No. 2, the company has made progress in other areas, doubling its Shop Your Way Rewards program in just the past year to tens of millions of members who earn and use points to make purchases across its brands, while the company is also on a mission to implement technology that will make it easier for customers to shop across its Sears Holdings formats and channels. In the first quarter of 2012, Sears posted a $189 million profit, buoyed by the spinoff of smaller-format stores, as the company moves forward with a network of direct-delivery centers designed to provide fast delivery to online shoppers, plans to improve store layout and design, significant additional invest- ment in the Shop Your Way program, and a new wholly-owned subsidiary, MetaScale, that provides data management services, and leverages the resources the company has already invested in building the infrastructure for the data management needs of its more than 4,000 Sears and Kmart stores.

Jordan K. Speer is editor in chief of Apparel. She can be reached at [email protected].

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