Y COVER STOR DEPARTMENTDEPARTMENT STORESSTORES

By Timothy Denman

RIS’ unique analysis reveals value-based department stores now dominate the segment with two big exceptions

RIS News unveils the results of its Top 10 Department Stores ranking, a deeply researched list compiled through the examination of seven hard-data metrics that span customer loyalty, so- cial initiatives, employee satisfaction, CEO rating, and financial performance. As the number of publically-owned chains has shrunk over the years, those left standing have had to redefine the category to keep pace with the evolving landscape. Half of the department stores in the Top 10 are committed to offering name brand merchandise at dis- counted prices. The performance of the value-conscious retailers is not surprising, but it is certainly interesting. During the economic downturn shoppers flocked to the off-pricers in search of bargain pricing and stayed loyal to the brands even as the economic landscape improved — creating a sea change in the segment. The Top 10 Department Stores ranking is the second in a series of Top 10 retailer lists RIS News will publish throughout 2014 — next up is apparel retailers in the summer and e-tailers in the fall. Congratulations to all of the members of the Top 10 Department Stores ranking.

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TOP 10 DEPARTMENT STORES

TJX Companies years, has been on a mission to improve its corporate culture and further employee engagement. Executives from Nordstrom visited The off-price department store chain finished in first place more than 40 companies that are known for fostering positive employee in three categories — profit change, W-Score and social relationships to uncover what works and what doesn’t, and invited its strength — helping propel it to the top spot. TJX Compa- own employees to tour Nordstrom headquarters to provide feedback on nies operates the T.J.Maxx, , HomeGoods, Trading Post ways to improve the company. The retailer made significant changes to and HomeSense brands and is universally praised for its well-run orga- its operations, founding an innovation lab, a customer experience center, nizational structure and smart capital allocation. Over its 36-year his- and a tech talent recruitment initiative — powering the brand to number tory, TJX has only endured one year of comparable store sales decline, one finishes in both CEO rating and employee satisfaction. and enjoyed double-digit increases this past year in all three financial metrics examined: stock price, revenue and profit. TJX was late to the online game, acquiring e-tailer Sierra Trading Post in December 2012 Macy’s and launching T.J.Maxx e-commerce in 2013. Despite its late arrival, TJX has a solid online presence, finishing in first place in the social Macy’s is a leader in the department store space and its score metric thanks in no small part to the ability of shoppers to Like, inclusion in the top five is no surprise. What is surprising Tweet and Pin their favorite merchandise. is that the trailblazer of the omnichannel revolution didn’t stand out in any particular category, earning its number four ranking through middle-of-the-road performance in five of the seven metrics ex- Stein Mart amined — the retailer did turn in fourth place finishes in both stock price and social strength. As other American institutions like Sears and Like TJX in the top spot, second-place finisher Stein Mart JCPenney struggle to keep pace in the modern retail environment, Ma- is an off-price department store. But unlike the treasure- cy’s has thrived. Stock price increased nearly 30% year-over-year and hunt like adventure at TJX’s brands, Stein Mart provides its has produced new lifetime highs driven by steady earnings growth and a customers with a more refined in-store experience. Custom- commitment to continuous innovation. Macy’s builds and maintains its ers converged on the chain during the economic crisis in relationship with customers through a mix of traditional and new-age search of lower prices, but got hooked on the brand and never community building efforts including sponsoring the annual Thanksgiv- left — confirmed by Stein Mart’s second-place finish in the ing Day Parade in New York City and producing a web-based reality show meeting-customer expectations metric, W-Score. It is not that prominently promotes the brand. just shoppers that are high on the Jacksonville-based depart- ment store chain — investors are downright giddy over Stein Mart’s amazing 71.9% increase in share price year-over- Stage Stores year. Despite being publically traded, the retailer exudes a family atmosphere that starts at the top with chairman and The retailer operates five brands: Stage Stores, Bealls, CEO Jay Stein, the grandson of the founder. The Stein’s Goody’s, Palais Royal and Peebles. Its 850 stores, like have run the business for over 100 years and have built a many of the retailers in this ranking, offers nationally rec- strong relationship with their employees — evidenced by ognized brands at moderate prices. The department store a second place finish in employee CEO approval and a chain suffered through a disappointing holiday shopping season and saw third place finish in overall employee satisfaction. same store comps fall by 3.4% year-over-year. Sluggish sales helped con- tribute to a 5.1% dip in stock price, but solid guidance for 2014 includ- ing comp projections in the plus 2% range helped push share prices Nordstrom back into the mid-20s. Long-term investors have little to complain about considering shares have increased four-fold over the past five years, and Nordstrom scored in the lower third in all three could continue to rise should the retailer meet its 2014 projections. De- financial metrics — stock price, revenue and profit spite slumping stock performance, the company’s other financial bench- — but was a leader in the other four categories marks are solid and the chain continues to invest in its infrastructure, examined helping propel the department store to embarking on a multiyear POS rollout that will be introduced at 800 a third place ranking. For the past two and a half stores and over 4,300 checkout lanes.

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5/13/14 9:51 AM 19 21 27 39 46 48 53 55 58 62 69 2014 FINAL SCORE TING M AY / J U N E AC- 2.9 3.1 3.5 2.9 2.6 3.3 2.6 2.8 3.1 2.9 TISF TION RA GLASSDOOR EMPLOYEE SA TING 74 86 89 65 49 86 48 48 67 60 RIS NEWS.COM

GLASSDOOR CEO RA 77.9 75.4 76.9 76.3 75.2 61.3 43.3 65.8 74.6 75.7 SOCIAL STRENGTH 88.7% 77.7% 73.7% 70.9% 77.5% 39.9% 62.6% 44.3% 57.3% 76.9% RE W-SCO of Canadians shop the chain at least once a year, the retailer finished in a year, of Canadians shop the chain at least once to last place in social strength indicat- and second last place in W-Score broad customer base. The retailer to fully engage with its ing an inability with shoppers, but it might struggle to build an emotional connection It finished in second excels at creating a rewarding work environment. employee satisfaction thanks in part to its and place in both CEO rating health and wellness programs, career advancement initiatives and com- petitive salaries. Sears Canada has Sears Canada, like big brother Sears Holding Company, prompting red the in are profits and Revenue struggling. been store closings and the sale of prime real estate holdings over the - The real estate sell off has been a boom for sharehold past year. $5 dividends, of nearly in the form profits have been redistributed ers as Although a which contributed to a surge in stock price — a double win. great short-term way to infuse cash into the struggling enterprise, selling depart- off assets is not a sustainable business plan. The 62-year-old ment store chain is restructuring its business model focusing on smaller markets and examining its merchandise assortment to coincide with its small-town direction. * Stock price examained from October 3, 2013 (IPO date) to March 31, 2014 * Stock price examained from October 3, 2013 2.2% 4.5% 8.0% 6.4% 6.6% -6.9% 16.1% 11.7% 14.5% 12.0% - PROFIT CHANGE YEAR-OVER- YEAR 4.7% 3.4% 4.9% 7.1% 3.1% 7.0% 8.9% -7.2% 11.6% 13.3% REVENUE CHANGE YEAR-OVER- YEAR -5.1% 66.8% 19.6% 27.1% 29.3% 71.9% 14.7% 29.8% 18.7% 44.0% STOCK PRICE CHANGE YEAR-OVER- YEAR AILER The retailer has evolved from strictly an outerwear mer The retailer has evolved from strictly an Burlington Stores chant to a one-stop shopping destination, and prides it- chant to a one-stop shopping destination, self on name-brand merchandise marked to 70% below the competition. Customers count on a large assortment Sears Canada Belk Stage Stores Burlington Stores* Canadian Tire Stein Mart Nordstrom Macy's LTY RET SPECIALTY TJX Companies 8 9 5 6 7 2 3 4 1 10 rank Canadian Tire started off as an au- As its name implies, Canadian Tire Over its tomotive parts, accessories and service retailer. 90 years in business the retailer has morphed into a full- fledged department store with apparel, home goods, furni- that 80% fact the Despite automotive. course, of and, ture of designer brands, and Burlington routinely meets those expectations rankings. The once-troubled de- coming in third place in the W-Score partment store chain has pulled itself out of the post-recession mire, with sales on the rise and a $200-plus million IPO under its belt. The off-price department store chain went public in October 2013 and share prices hovered near opening day pricing with little activity until jumping nearly 20% in mid-March on the heels of encouraging 4% comp store increases in Q4. 13.Top10_ris0514_v4.indd 3

Savvy Capital TOP 10 DEPARTMENT STORES Investment Is the Key Ross Stores By Gary A. Williams When we analyzed specialty retailers two months back, we saw stark The value-based department store operates 1,146 Ross Dress for differences between the top 10 and bottom 10 in the category and could Less locations and 130 dd’s Discounts locations. The expanding easily identify the competitive reasons for those differences. We ex- retailer enjoyed double-digit growth in all three financial metrics pected the same when we looked at the top five and bottom five de- examined and finished first in revenue and second in profit -per partment stores. As Lee Corso would say on College Football GameDay, centage change year-over-year. The growth is expected to contin- “Not so fast, my friend.” ue in 2014 with a 4% to 9% projected earnings per share increase. With only small variances for top versus bottom department stores, Despite a disappointing holiday shopping season across the industry and these retailers are unable to generate any significant barriers to make a highly-promotional marketplace, Ross was able to post a record 13.1% their customers feel vested. A few have carved out some competitive operating margin, helping power its economic gains. Based solely on fi- strength, such as Ross with its superior quality/price ratio, but that nancials Ross would have likely made the top three in this ranking, but strength is muted by a lower than average brand trust. This means we its dead-last showing in social strength and near bottom performance must look beyond durable competitive advantages to find the true differ- in employee satisfaction and CEO rating dropped the department ences of the top performing department stores. store chain to the number nine position. We discovered that difference in the retailer’s economic profit to rev- enue (EPR). This metric is often used by value investors to compare how well a company is allocating its capital to generate actual profits from Belk its revenue. The top five department stores averaged 3.4% EPR whereas the bottom five averaged a -2.2% EPR. This 5.6% difference leaves a very Belk turned in top six finishes in all three financial strong clue to how to become a top performing department store: Hire metrics, but struggled in the other four catego- an extremely competent senior executive team since they know how ries explored in this ranking. The nation’s larg- to invest capital to generate returns. This category depends heavily on est family owned and operated department store senior leadership’s ability to be operationally efficient. chain has 306 locations across the South. The This finding also passes the logical test. The bottom three depart- mid-range to upscale department store has been in business ment stores in our rankings are Bon-Ton Stores, JCPenney and Sears for over 125 years but instead of focusing on the rearview it Holdings. All have struggled recently with executive has its sights set squarely on the horizon. Belk is diving head- changes. Want to pick a department store winner? first into the new omnichannel retailing reality and plans to Start at the top. grow online revenue to 10% of sales by 2016. To help power its omnichannel plans Belk is investing in the customer ex- Gary A. Williams is founder & CEO for perience online, growing its customer analytics capability, wRatings. For more information go to rolling out new merchandising and inventory software, www.ratings.com. and integrating operations across all channels. RIS

Methodology To compile the Top 10 Department Stores list RIS News examined the top publically-traded retailers in the segment. Seven key metrics were used to compare the companies: stock price change year-over-year, revenue change year-over-year, profit change year-over-year, W-Score, social strength, Glassdoor CEO rating, and Glassdoor employee satisfaction rating. For stock price change, share price on March 31, 2013 and March 31, 2014 were compared. For revenue and profit change the last two full years of reported financials were examined, in some instances the last two reported years were 2011 and 2012. W-Score and social strength were compiled by our re- search partner wRatings. Social strength is a company’s ability to create long-term and emotional relationships with customers while a company’s W-Score refers to its ability to meet customer expectations. Glassdoor.com’s survey results were utilized for the CEO and employee satisfaction ratings For each category, retailers were ranked from best to worst. The retailer with the best score in a category received one point. A perfect overall score would be seven. After ranking all seven metrics the department store chain with the lowest combined score, TJX, was declared the winner.

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