Midprice Retailers Struggle To Compete

As the gap between America's middle class and the wealthiest 1 percent has widened, luxury retailers and discounters continue to grow, while midprice brands are struggling to compete.

June's same-store retail sales rose only 0.1 percent, below forecasts, and demonstrated a sharp contrast among various types of retailers. Luxury shop Nordstrom Inc. (NYSE: JWN) had one of the largest gains of the month, at 8.1 percent, and Saks Inc. (NYSE: SKS) rose 6 percent. Discounters Ross Stores Inc. (Nasdaq: ROST) and TJX Co. Inc. (NYSE: TJX), parent of T.J. Maxx and Marshalls, were both up 7 percent.

Meanwhile, midmarket Costco Wholesale Corp. (Nasdaq: COST) was up only 3 percent and Kohl's Corp. (NYSE: KSS) suffered a 4.2 percent drop.

Luxury is fine because rich people have money and can spend, said Paul Swinand, a retail analyst at Morningstar Inc. When the waves are really rocky, the guy with the best ship cuts through.

But just catering to the wealthy is not enough. Swinand credits Seattle-based Nordstrom for a smart expansion plan that consistently moves clothing inventory. Although it is known for its high-end brands, Nordstrom has grown during the recession through discount Nordstrom Rack stores and plans to open 15 more each year, according to the Seattle Times. The 111-year-old company, which is still largely controlled by descendants of founder John Nordstrom, reported a $683 million profit on record revenue of $10.5 billion last year, and record earnings per share of $3.14.

When it comes to selecting more luxury stores, Nordstrom is focusing on top markets. Last month, the New York Post reported that Nordstrom would open its first full store in New York, in Extell Development's future tower at 225 W. 57th St.. The store will open in either 2017 and 2018 and will be the company's first full location in the city. There is currently a Nordstrom Rack in the Related Companies' 60 E. 14th St. building on Union Square.

“New York City is and has remained an island unto itself in terms of the retail landscape, said Robert Cohen, president, southern California, of retail brokerage Robert K. Futterman & Associates. While other strong urban markets, including Miami, Chicago, Los Angeles and San Francisco, have recently seen an uptick in rents and leasing activity, New York City, which led the U.S. out of the recent recession, remains the most active and appreciating retail market by far.

When you look at the luxury matrix around the country, there aren’t many areas for growth. New York City has been a place where brands can justify opening multiple shops strategically, added Cohen, who has experience working with H&M, John Varvatos and Old Navy, as well as a Nordstrom concept store in Manhattan's Soho.

Another 100-year-old brand has been struggling to evolve. J.C. Penney Co. Inc. (NYSE: JCP), now helmed by former Apple Inc. (Nasdaq: AAPL) retail chief Ron Johnson, has tried to wean customers off its discount structure, instead offering what it calls everyday low prices. But the Plano, Tex.-based department-store chain, which doesn't report monthly sales, lost $163 million in the first quarter as customers appeared to close their wallets in response to the changes. The company's president, Michael Francis, formerly of Target Corp. (NYSE: TGT), resigned abruptly in June.

J.C. Penney will continue its evolution, Johnson has vowed, despite lackluster job growth and global financial turmoil. But as Morningstar's Swinand put it in a June research note, Changing consumers' view of a brand is never easy.