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Online Retailers Pressure Department Stores’ Financials



Growing importance of online channels

In an update released by the NRF (National Retail Federation) in August 2016, about 31% of back-to-school shoppers—compared to 27% in 2015—indicated that they would complete the rest of their shopping online. According to NRF, this percentage is a survey high.

The 2016 NRF survey also indicated online channels as the third-most-preferred destination for back-to-college shoppers. About 40.3% of back-to-college shoppers would prefer to do the rest of their shopping online, while 42.2% and 41.7% of shoppers would prefer to complete their shopping in discount stores and department stores, respectively.

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Digital savvy department stores

Department stores have been enhancing their online channels to mitigate the impact of intense competition from Amazon (AMZN). From same-day delivery to enhanced features on their mobile apps, department stores are working on various strategies to improve consumers’ shopping experience. Based on rankings compiled by benchmarking firm L2 and released in August 2016, Nordstrom (JWN) tops the Digital IQ Index with a score of 152. Macy’s (M) brands Macy’s and Bloomingdale’s rank second and sixth in L2’s digital IQ Index. Kohl’s (KSS) and JCPenney (JCP) rank third and fourth in L2’s Digital IQ Index for 2016.

Improving online sales

To boost its online sales, JCPenney launched a new mobile app in fiscal 2Q16, which ended on July 30, 2016. This app will allow the company to take advantage of the significant surge in its mobile traffic. Also, JCPenney completed the chain-wide roll-out of its buy online and pick up in the store same-day facility.

Back-to-school shoppers are looking for enhanced features offered by online channels. According to the NRF survey, 89.4% of the customers surveyed indicated that they would take advantage of the free shipping service. Also, 54.2% of shoppers were keen about the buy online and pick up in the store same-day facility. About 10.2% of back-to-school shoppers said that they would like to use the same-day delivery facility. Established players like Macy’s are already offering expedited shipping, buy online and pickup in the store, and same-day delivery options in many markets. In 2Q16, Nordstrom made several improvements to its mobile app including features that enable customers to shop for items based on a visual search.

These improvements to online channels will likely boost department stores’ sales. Together, Macy’s, Nordstrom, Kohl’s, and JCPenney account for 0.6% of the iShares Russell Mid-Cap ETF (IWR).

In the next part, we’ll discuss analysts’ expectations for department store sales for fiscal 3Q16.


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