What: US department stores have reported concerning quarterly results, calling in for new decisions and strategies.

Why it is important: All eyes are on Macy’s, which has managed to increase their operating profit with a smaller store base, including smaller stores as well.

Department stores, including Kohl's, Macy's, and Nordstrom, reported declining sales in their recent quarterly earnings calls. The bad news was largely expected, which is why department store stocks did not fall dramatically after the reports. All three retailers reported a pullback in consumer spending across all income levels, with lower-income shoppers being hit harder. To clear out inventory, the stores relied on discounts, which hurt their gross margins. Also, Macy's and Nordstrom reported concerning trends from their credit card businesses, including higher credit usage, slower repayment rates, and increasing bad-debt levels.

Off-price giants Ross Stores and TJX expanded roughly 17% and 20%, respectively, while department stores saw a 3% decline in sales last fiscal year compared to 2019. In order to react, department stores are looking for solutions, including refocusing on their business model and reviewing the size of their stores.

Macy's and Nordstrom are already moving towards a smaller but more profitable business model, with Macy's having a smaller store base and Nordstrom winding down Canadian operations. Kohl's new CEO is pushing for existing initiatives to boost profits, such as adding Sephora shops inside stores and expanding the activewear assortment.

Macy's stock trades at a premium over Nordstrom and Kohl's, indicating investor appreciation for the smaller, more profitable model. A scale-back might be the only thing that fits department stores in the current consumer climate.

For US department stores, scaling down might be the future