Macy's, Kohl's feel brick-and-mortar squeeze as customers go online

Despite years-long efforts and billions in investments, department store chains Macy's and Kohl's continue to feel the brick-and-mortar squeeze in their quarterly earnings reports.

Macy's, which is currently executing a broader digital transition, reported a steep revenue decline and a drop in same-store sales despite beating profit estimates. The Cincinnati-based retailer said it had earnings of 23 cents a share on revenue of $5.28 billion, down 6.1 percent. Analysts had expected profit of 19 cents a share and revenue of $5.31 billion.

Macy's continues to struggle with brick-and-mortar, with sales at stores open for more than 12 months dropping 3.6 percent. On the bright side, Macy's said it had a double-digit jump in online sales for the 33rd straight quarter.

"We had another very strong solid sales performance in the third quarter with double-digit growth, and we anticipate that digital will contribute strongly in the fourth quarter as we know our customers are increasingly transacting both online and in our stores," said Macy's CEO Jeff Gennette, on a call with analysts.

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In the meantime, the retailer is relying on tighter inventory management to preserve profit margins and growth in its loyalty program to lift sales in the fourth quarter. To fuel more gains in digital, Macy's said it has improved search engine optimization and shifted more media spend to online channels. Macy's has also made improvements to the functionality and user experience on its mobile app, with Gannette noting that the company expects "mobile shopping on Macy's to be very big this holiday season."

Gannette also stressed the importance of the company's loyalty program, which is a key element of Macy's turnaround effort called the "North Star" strategy. In a nutshell, Macy's is trying to target its best customers with exclusive loyalty perks. Gannette noted that just 10 percent of the retailer's top-spending customer base accounts for roughly half of its sales.

Meanwhile, Kohl's reported that net income plunged 20 percent in the third quarter, while comp sales increased a modest 0.1 percent. Elsewhere on the balance sheet, Kohl's said third quarter revenue was $4.33 billion on earnings of 83 cents a share, compared to estimates of $4.30 billion in revenue on earnings of 72 cents a share.

Kohl's said online sales increased 15 percent for Q3, and the company continues to grow the percentage of online orders that are fulfilled by stores.

Kohl's has been looking at ways to merge ecommerce perks with in-store operations as a way to lure more shoppers through its doors. The retailer recently landed a deal with ecommerce giant Amazon to sell its branded devices within designated "experience spaces" inside of select Kohl's stores.

On Thursday, Kohl's CEO Kevin Mansell said the company saw positive traffic momentum in the first half of the year, but remained fairly mum on the Amazon partnership.

"The objective from our perspective is very simple and very straightforward," Mansell said on a call with analysts. "We believe both of these tests have the potential to drive incremental traffic to our stores, which as you know is our number one priority."

More broadly, Kohl's is focusing on technology improvements to drive growth across its entire business. The company is advancing its use of data and analytics to improve its marketing strategy and personalization efforts. Operationally, Kohl's has invested in building out its fulfillment infrastructure and moved much of its technology to the cloud.

"At the same time, we're innovating with new smaller store concepts, rightsizing some of our stores with other retailers and piloting concepts like our initiative with Amazon," Mansell said.

It's been a difficult few years for the retail industry, with store closings and bankruptcies now commonplace. Macy's and Kohl's are making obvious omnichannel and digital pivots, but the pervasive Amazon storyline remains the elephant in the room. The ecommerce giant is pushing into new markets and disrupting incumbents, forcing the retail establishment into a constant state of catch-up. Neither Macy's nor Kohl's is going to be an Amazon killer, but both brands are trying to thread together enough physical and virtual touch points to compete.

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