Retail funk: Stores face biggest challenges since recession

NEW YORK -- It's starting to look a lot like the recession redux for retailers.

More than twice as many stores have closed this year as at the same point last year. Bankruptcies are far outpacing last year's rate. Retailers slashed jobs at the sharpest pace in seven years this spring. Retailers collectively could report the biggest drop in first-quarter profits since 2009.

This time, the culprit's not the economy but shoppers, whose habits have changed profoundly and permanently as they shop online more and look for deals. Recent results from department stores such as Macy's, Kohl's and J.C. Penney illustrated the latest damage by the spending shift and the dominance of Amazon.

"The first-quarter reports will show how difficult the mountain retailers will have to climb," said Ken Perkins, president of research firm Retail Metrics LLC. "Things are far better from an economic perspective than before when the sky was falling."

But he said people increasingly are spending on experiences and shopping on phones and tablets, "and stores are facing pressure from off-price stores and Amazon.com."

Perkins estimates the 114 retailers he tracks will see an average drop of more than 5 percent in first-quarter earnings, marking the second straight quarter of declines and third in the last six quarters. But he thinks there's a chance they could surpass a 7.1 percent drop in the fourth quarter of 2013 that would make it the worst quarter since 2009.

Moreover, 22 percent are expected to post losses, the highest percentage since the second quarter of 2009.

And he forecasts nearly half of the retailers will see total sales revenue fall, nearing the level of the last downturn.

The bad news for retail has been relentless of late: The Limited closed all its remaining 250 stores. Payless ShoeSource is shuttering nearly 400 stores as part of its bankruptcy reorganization.

Other chains that have shuttered all their stores or retrenched include Abercrombie & Fitch, BCBG and Wet Seal. Mall anchors such as Macy's and J.C. Penney are closing locations.

And Sears Holdings Corp. has said there's "substantial doubt" about its future, though it has insisted its actions to turn around its business should help reduce that risk.

Perkins said the rash of store closings and job cuts will be a minor burden on the economy. The vast majority of retail workers are paid less than the hourly average earnings per hour of $25, so the effect is far less than losing higher-paying manufacturing jobs, he said.

But Frank Badillo, director of research at MacroSavvy, said he believes the effect will be wider.

"The economic effects tend to reinforce the widening income equality and redistribution that favor 'haves' over 'have nots,' professional class over the working class and urban over rural," Badillo said.

Shoppers such as Martha Shaughnessy, 38, are changing the landscape. The San Francisco resident said she does about three-quarters of her buying -- from household goods to clothing -- online or from her phone. She said even four years ago, it was less than half. She said she likes Instacart for groceries, places such as Zulily for clothing for her two toddlers and Everlane.com for clothes for herself.

"There are certain things like mobile payments that have made it easier to shop online than in person," she said. "It's rare I go to the mall. It's more of an occasion than a habit." She also said she's discovered new brands online.

The National Retail Federation, the nation's largest retail trade group, is sticking with its annual sales growth forecast of 3.7 to 4.2 percent over 2016. But that includes a hefty expected bump of 8 percent to 12 percent from online and other non-store business.

Matthew Shay, the group's CEO and president, said consumers are in good financial shape, given a healthier job market and other economic factors, but acknowledged the industry is more turbulent. He pointed to bright spots such as home-improvement chains and off-price retailers such as TJX Cos., which still are expected to have strong results.

"Retail is not in any long-term danger," Shay said, but "the pace of change is accelerating."

He said stores need to step up their investments dramatically in e-commerce.

Department stores have pledged to do better and adapt, expanding their exclusive merchandise and beefing up their online services.

But they and other clothing-dependent stores have struggled to prove themselves to shoppers.

The clothing sector may be at a tipping point when it comes to online shopping for that category.

Cooper Smith, an analyst at research firm L2, estimates about 18 percent to 22 percent of clothing sales will be online this year. That's a critical juncture.

His research and that from firms such as Boomerang Commerce show when online penetration in a merchandising category hits 20 percent, that's when Amazon steps up its game to seek more of that market.

Analysts said one example is what happened when consumer electronics hit that threshold around 2005, and the liquidation of chains such as Circuit City followed.

Amazon has made a big push into clothing in the last two years, expanding its offerings of high-volume items such as bras, socks, and men's dress shirts, where shoppers don't care about brand names.

"2017 will be the year that apparel e-commerce takes off," Smith said, though he said he doesn't believe the online portion of clothing sales will go higher than 35 percent for reasons that include people liking to try on items.

Shaughnessy said while shopping at Nordstrom -- where she said she still likes to go and has good experiences -- she saw a dress she liked but didn't try it on. She later went back with her 19-year-old stepdaughter and bought it.

"I hadn't stopped thinking about it," she said. "And it was a brand I hadn't bought before, so I didn't know my size, and a new style for me. So I wanted human affirmation that it looked OK."

Stores need to make sure they deliver a better experience when online shoppers come in, said Steve Barr, PwC's U.S. consumer-markets leader.

Many don't have clear signs for online shoppers who come in to pick up online orders.

"Retailers are failing to walk in the shoes of the customer and making it a user-friendly experience," Barr said.