Retail's Old Guard Lives

After Years of Eroding Business, Department Stores Stage a Comeback

A JCPenney customer makes a purchase at a store in Peabody, Mass. JCPenney and other department-store chains are resurgent. (By J.b. Reed -- Bloomberg News)

Every holiday season needs a comeback story. This year, the honor goes to the long-suffering department store.

For the past two months, department stores have basked in strong sales growth after years of sluggish -- and occasionally downright miserable -- performance. It began with a strong back-to-school season that outpaced all other retail sectors in sales growth. Momentum built in October, with department stores again in the lead. And now industry experts expect them to be among the winners during the high-stakes holiday shopping season.

Someone must have gotten on Santa's good side.

"They're the stellar performers," said Michael P. Niemira, chief economist for the International Council of Shopping Centers, a trade group. "This is good news. It's something that we have not seen for years."

It is a surprising turn of events for a sector whose heyday many thought had long since passed. Department stores were once destinations for a generation of shoppers. They filled entire blocks downtown and made miracles happen on 34th Street.

Then came the suburban mall. Department stores fled cities to take up residence in behemoth shopping centers, unwittingly setting up their slow demise in the process. Customers, especially fickle but influential younger shoppers, began favoring the mall's smaller specialty stores with more current fashions and merchandise -- think Gap, Abercrombie & Fitch, Ann Taylor and Pottery Barn.

Meanwhile, big-box discounters emerged, offering many of the same types of goods as department stores but at much cheaper prices. Wal-Mart and Target siphoned customers away from traditional powerhouses such as Sears and JCPenney.

But early this year, something began to change. Specialty apparel chains faltered with boring merchandise. Discount stores were hit by falling home prices and costly gas, as well as a sartorial misstep or two. And department stores began to catch up.

In September, department stores recorded comparable sales growth, a key measure of retail, of 8.4 percent from September 2005, besting all other retail sectors for the first time this year. In October, they were up 6.2 percent, again beating other sectors. For the holiday season, Niemira predicted that sales growth would be 4.4 percent, compared with a nearly equivalent decline in 2002.

"Department stores have begun to understand what they need to do in the new retail marketplace," said Chris Donnelly, a partner at consulting firm Accenture Ltd.'s retail division. "They've started to kind of change the overall shopping experience to make it more current."

Experts debate the driving force behind the attraction. One theory is that young people are returning after being disappointed by specialty retailers. At department stores they find fashionable private-label brands and DJs spinning music to welcome them.

A monthly survey by marketing firm BIGresearch LLC asks about 7,000 people where they shop most often. In October, 26 percent of women ages 18 to 34 said they go to department stores. That's still lower than the 28.8 percent who said they shop at specialty stores, but it is the largest share department stores have had in two years.