Dive Brief:

• Department stores as a sector have made tangible progress in stoppering sales declines and adjusting to a new world of e-commerce, according to a recent report emailed to Retail Dive from debt rating firm Moody’s that followed a string of earnings releases in the sector.
• While the major players all posted relatively improved comparable store sales, Kohl’s and Nordstrom led the pack with higher operating profit performance, which Moody’s analysts led by Christina Boni attributed to strong loyalty programs that helped the retailers build relationships with their core customers. Macy’s, the analysts noted, is trying to follow suit with a new loyalty program set to roll out in October, as 50% of that retailer’s business comes from just 10% of its customers.
• But there is much work to be done, as the retailers close stores and study their footprint and inventory closely, as well as manage the variable cost structure of e-commerce sales. Beyond that, the analysts write, the "focus remains on securing brands and categories that resonate with the customer as inventory management remains critical to success."

Dive Insight:

As some of the clouds over department stores lift, the most recent spate of quarter two earnings have shown some clear leaders in the pack. "Results at Kohl's and Nordstrom's were in stark contrast to Dillard's and J.C. Penney," Moody’s analysts write.

In a period marked by rising discounts and inventory, Dillard’s last week reported a net second quarter loss of 58 cents per share widened from 35 cents per share for the prior-year period and badly missing FactSet analyst estimates cited by MarketWatch for 18 cents per share.

Moody’s analysts pointed out that Dillard’s operating income declined $46 million and gross margins declined 235 basis points, as the retailer "was forced to clear excess inventory." Others also pointed to Dillard’s inventory problem. "From our recent visits to stores, we still believe that Dillard's has an inventory problem," GlobalData Retail analyst Håkon Helgesen said in a note to emailed to Retail Dive. "Most departments are crammed full of stock and feel oppressive. As much as choice can be a good thing, Dillard's simply has too much of it; the result is that it is exhausting for consumers to sift through all the options available."

Meanwhile J.C. Penney managed an increase in net sales by 1.5% from the prior-year period, but a rash of store closures and liquidations weighed on the company’s margins more than managers expected. To the consternation of Wall Street, the retailer posted a loss 16 cents per share larger than analysts anticipated.

Even as J.C. Penney pointed to a strong start to back-to-school sales and its expansion into appliances, Neil Saunders, managing director of GlobalData Retail, described Penney’s performance as "underwhelming" in comments emailed to Retail Dive. "While we maintain the company is moving in the right direction, the lack of progress on profit and same-store sales both highlight that the turnaround program is a long-term endeavor that will take some time to deliver," he said. 

While those retailers struggle, Nordstrom is quickly becoming the darling of the sector. Along with its loyalty program, the retailer has also benefited mightily from its off-price Rack chain. The brand's net sales rose 9.8% and same-store sales rose 3.1% in Q2.