What’s the Story?

Coresight Research analysts discuss their outlook for their sectors for the 2021 holiday season, with a focus on the directional outlook and themes that they expect to see. In this report, we present the holiday outlook for the US department store sector.

US Holiday Outlook: Department Store Retail

Directional Outlook We expect a strong holiday season this year, with consumers shopping in stores and online. We estimate that major department store retailers will see year-over-year growth in the mid-teens during the holiday quarter—representing a low-single-digit decline versus the pre-crisis 2019 holiday period. Our outlook is based on the following factors:

• At the end of the second quarter of fiscal 2021, revenues at the three major department stores—Kohl’s, Macy’s and Nordstrom, which hold a combined 71.6% share of the US department store sector, we estimate—were up 55.2% year over year, down by only 5.7% compared to the same period in 2019.
• We expect a mid-teens percentage increase in US clothing and footwear spending, year over year, which is favorable for the department store sector, as apparel typically contributes over 50% of revenues for these retailers.

So far this year, department store retailers have reported continued strength in the categories on which consumers focused their spending amid the pandemic, including casualwear and activewear. They have also reported that consumers are increasing spending on clothing and footwear categories for resuming normal life, to restock their wardrobe for a return to offices and in-person events. In the second half of the year, we expect outperformance in occasion wear as consumers buy apparel for holiday events and gatherings. We also expect outperformance in two other product categories:

• Beauty—We expect that the Sephora at Kohl’s shop-in-shop locations, which launched in August 2021, will help boost the beauty category during the holidays.
• Toys—Macy’s announced in August 2021 that it will roll out 400 shop-in-shops in 2022 as part of a collaboration with toy manufacturer Toys “R” Us. The department store retailer launched Toys “R” Us products on its website in mid-August, and the company reported at the Goldman Sachs 28th Annual Global Retailing Conference on September 9, 2021, that its toys business had doubled since the launch. Toys are a big gifting item:A Coresight Research survey undertaken on September 28, 2021, found that around 35% of US holiday shoppers expect to buy toys or games as gifts this year.

Responding to strong consumer demand and a first half of the year, each of the major department stores has raised their revenue guidance for 2021. Going into the holiday season, department stores are reporting that clothing are footwear are the categories most affected by supply chain disruptions. This is a notable potential headwind, as department stores are running lean on inventory coming out of the second quarter; going into the holiday season, having enough inventory to meet demand could be a challenge. However, on the positive side, due to lower inventory levels, the major department stores have been less promotional during 2021 and have reported that plans for this holiday season are less promotional than prior seasons. E-Commerce The department store sector, as with all sectors, saw a tremendous acceleration in e-commerce in 2020: Across the three major US department stores, e-commerce averaged 46% of total sales, up from 28% in 2019. Consumers have begun to shop in stores again: Physical stores sales at the three major department stores grew 79% year over year in the first quarter of fiscal 2021 and 114% in the second quarter—a marked improvement from the 34% year-over-year decline in the fourth quarter of fiscal 2020. Correspondingly, we are seeing a tempering of e-commerce from the highs last year, with a very slight 0.3% decline in online revenue across Kohl’s, Macy’s and Nordstrom in the second quarter of fiscal 2021. However, consumer willingness to shop in-store during the holiday season is uncertain given the spread of the Covid-19 Delta variant. Coresight Research’s US Consumer Tracker consistently finds that roughly two-thirds of consumers are avoiding public places, and our most recent survey on October 4, 2021, found that avoidance of shopping centers/malls has remained relatively flat for three consecutive weeks—at around 38%. This indicates heightened levels of online shopping for the holiday season versus pre-pandemic 2019, although we expect moderation from the high e-commerce levels that we saw during the 2020 holiday season (online sales averaged 46.7% of total sales across Kohl’s, Macy’s and Nordstrom in the fourth quarter of 2020). Three Themes To Watch in the Department Store Sector This Holiday Season

• We expect that the department store sector will promote and leverage BOPIS (buy online, pick up in store), ship from store and same-day delivery services, which were instrumental in helping to drive sales last holiday season. This holiday, Kohl’s has reported that it will be testing self-pickup and self-returns in about 100 stores. Last year, store-based fulfillment accounted for 40% of its online orders, according to the company.
• We expect department store retailers to take advantage of virtual selling channels, including one-to-one digital consultancy, virtual chat and livestreaming; Macy’s and Nordstrom have invested in these services over the past year.
• We anticipate that the 2021 holiday season will be highly competitive, so marketing spending will be key to capturing share of consumers’ wallet—particularly if retailers expect the season to be less promotional than in previous years; they will not be relying on discounts to boost sales. It will be interesting to note which retailers lean most into advertising through digital channels such as social media and the gifts and categories that each department store chooses to promote.