The market loves department stores. Should you? The question has become far more urgent now that Hudson's Bay Co. has announced a $2.9-billion deal to buy Saks Inc., giving some life to the stodgy HBC brand.
There is of course a lot of fretting about the long-term health of department stores these days, given their advanced age, their inability to trap the excitement of e-commerce and, well, their image of empty aisles and elevator music. They are easily dismissed as lumbering behemoths next to the nimble creativeness of smaller, edgier retail formats.
Sales back up these concerns, to some extent. According to The Economist, sales at U.S. department stores in 2012 were still 10 per cent below levels seen before the financial crisis.
The stock market is entertaining a considerable amount of optimism, though. The S&P 500 department store index, which includes J.C. Penney Co. Inc., Nordstrom Inc., Macy's Inc. and Kohl's Corp., has been dazzling investors throughout the economic recovery. The index is up 240 per cent from its low in 2008 and has risen 19 per cent so far this year, despite J.C. Penney's bellyflop. Saks, which isn't a member of the index, has performed even better during the recovery, rising an astounding 900 per cent since 2009.
Even HBC, whose shares began trading in Toronto late last year following an initial public offering, is hardly a disaster. Sure, they are roughly unchanged from their $17 debut in November, but idling over an eight-month period is far from ugly when you're making a long-term bet. Here, the market is simply taking a wait-and-see approach.
The idea that the department store concept is dying, then, isn't being reflected in the stock market. Part of the attraction is real estate, where investors have become enamored with the valuable holdings of major retailers, who have shown an interest in spinning off the land beneath their stores into real estate invest trusts, or REITs.
And part of the optimism is related to a belief that department stores can make themselves better – either leaner and more efficient, or more relevant to the modern consumer.
This side of the issue faces big obstacles though, in that consumers have shown themselves intolerant of sweeping changes at big stores. J.C. Penney tried to remake itself under the leadership of Ron Johnson, formerly Apple Inc.'s retailing chief. Mr. Johnson introduced a new logo, eased up on product promotions and added in-store boutiques in an attempt to make J.C. Penney look jazzier. The result: Sales collapsed and Mr. Johnson was shown the door earlier this year.
HBC's attempt to reposition itself is different, of course. Rather than remaking itself, it is adding higher-end retailing with its Saks acquisition, which will bring Saks Fifth Avenue to Canada, not long after selling most of its lower-end Zellers stores to Target Corp. HBC is talking up the acquisition for its $100-million in annual savings within three years.
But the challenge is similar: Department stores are battling e-commerce threats from the likes of Amazon.com Inc. along with trendy upstarts, giving them a level of support that isn't easy to see. And, in Canada, department stores are facing a wave of established American retailers that are setting up shop in Canada, raising the competitive environment even further.
Given the relative strength of department store share prices, the stock market is suggesting that these challenges will be overcome. But if success is already baked in, you have to wonder what the upside is.