There is no shortage of speculation that US department stores are poised to continue declining in the years ahead. Some even believe they could become extinct. However, there is evidence that department stores can revive their proposition with the right strategy

1. Slide 1Slide 1
Pragma Consulting
US Department Store Overview
August 2017

2. Slide 2
Source: American Apparel & Footwear Association; Savills; Pragma Desk Research
0
50
100
150
200
2000 2002 2004 2006 2008 2010 2012 2014
Discount stores
Apparel stores
Department stores
$bn
US Department stores are failing. Executives don’t know why
US: Retail Sales Growth by Channel | 2000 to 2014
There is no shortage of speculation that department stores are poised to continue to
decline in the years ahead…

3. Slide 3
Mainstream views hold ecommerce predominately responsible for the department store
sector’s decline
Source: Mobile Commerce Daily; Slice Intelligence; ComScore; Euromonitor, Forrester, Morgan Stanley Research
2016
19%
2011
11%
Online apparel sales as % of total
apparel sales in the US
3
3
4
4
4
5
8
17
Nordstrom
Macy’s
Victoria’s Secret
J.Crew
Old Navy
Gap
Amazon
Stitch Fix
Share of online apparel sales among
Millennials who shop online
%
Estimated Amazon share of US apparel
merchandise sales | 2015 to 2020F
2017F
11%
2019F
19%
2020F2018F
9%
2015
7%
16%
2016
13%

4. Slide 4
Source: US Department of Commerce
But the department store industry has been in decline for more than a decade, long before the
rise of pure-play ecommerce fashion sites and Amazon’s entry into fashion
Department Store Public Stock Performance 2013-2017
20052004
85
2006
84
2003
91 87
61
80
66
77 71
63
85
65 63
20132008 20142000 2007 20092001
96
2015
61
20122011
59
2002 2010
$bn
Department Store Sales (excluding discount department stores) 2000 to 2015

5. Slide 5
Source: The Nielsen Company (2015); Pragma Desk Research
Furthermore, US consumers appreciate shopping in physical stores…
82% of US shoppers
are most likely to make a
purchase from a physical
store
41% of US shoppers
shop online using a
computer or laptop
12% of US shoppers
shop online using a mobile
device or tablet
…And online pure-players are expanding offline, striving to offer strong omni-channel
propositions
Bonobos’ CEO suggests that the
average transaction size in physical
stores is double that of the online store
2012: “We are going
to shut the company
down before we go
to physical retail” –
Everlane CEO
2016: “There is a set
of customers that
wants to touch
product before they
buy it, and that’s not
something that we
can change, no
matter how much
social media we do.”
– Everlane CEO

6. Slide 6
Over
expansion
Pragma holds a view that the department store industry’s decline has been driven by four
controllable internal key factors:
Discount
addiction
Factors driving a decline in foot traffic to department stores and a decline in sales Factors driving higher sales but lower margin
Failure to
meaningfully
innovate
Lack of
product
differentiation
▪ The wholesale model that
US department stores
operate results in lower
risk inventory strategies.
Stores no longer serve as
destinations to discover
unique or differentiated
brands
▪ Brands historically sold
through department
stores have become more
mainstream through an
increased number of
routes to market (e.g.
own-branded retail
stores, own-branded
online, multi-branded
specialists, multi-branded
ecommerce)
▪ Discounting conditioned
customers to wait for a
sale, due to heavy
discounting during and
post financial crisis
▪ Launch of off-price
branded stores and
acquisition of flash sales
sites, further encourages
traditional customers to
purchase on discount
▪ Lack of product
differentiation and value
proposition has led to
differentiation based on
price
▪ Strategies employed to
maintain customer appeal
did not help the
department store to
evolve and meet
changing customer needs
or differentiate (e.g.
develop seamless omni-
channel)
▪ Initiatives were replicated
across many of the
department stores (e.g.
launch of off-price stores,
acquisition of flash sales
or other ecommerce sites,
launch of private-label)
▪ It is estimated that 25% of
department stores would
need to close for the
industry to return to pre-
recession levels of sales
per sq ft
▪ The US has 23.5 sq ft of
retail space per person,
compared to 16.4 in
Canada and 11.1 in
Australia

7. Slide 7
Online isn’t killing the department store industry. The department store industry is killing
itself. Overexpansion and more conservative merchandise strategies has rendered
historically iconic department stores ubiquitous. They no longer serve as leisure
destinations for consumers to access a curated range of unique product in a stimulating
environment
78% of US shoppers who
spend less in department stores
diverted their spend to other
bricks-and-mortar stores, mostly
specialist brands and off-price
outlets
Lack of interesting products and
services
1
2
3
Source: Verdict Consumer Research; Pragma Desk Research
Top 3 reasons for spending less at
department stores in 2016:
Uninspiring shops
Unpleasant shopping
experience

8. Slide 8
Source: Verdict Consumer Research; Pragma Desk Research
Barneys has transformed itself into a brand that is perceived as a risk taker and a champion of emerging designers. The
CEO defines the business as a “modern luxury specialty store” instead of a department store
Key Initiatives:
▪ Closed nearly half of the estate (23 underperforming
stores) over last 7 years. Currently has 16 full price stores
and 11 outlet stores
▪ Reduced share of off-price channel from 15% to 9% over
the last decade
▪ Focuses on exclusive partnerships and collections (33% of
merchandise is exclusive compared to a chain-wide
average of 20%)
▪ Since 2010, grew comparable sales in the low single-
digits, but hit record gross margin in 2015
▪ EBITDA in 2015 was double that of 2010
“Barneys doesn’t belong everywhere. It belongs in urban,
sophisticated markets. Now we’re left with what matters in terms of
the key markets, and Barneys.com can cover the rest.”
Barneys CEO Mark Lee
“…The merchants focus on things that are more rare, more exclusive and
more special. We just can’t be in that mass arena where everything is on
sale….the team is committed to securing exclusive product and developing
emerging brands at every price point...Without the exclusives and without
doing all of these special things, Barneys is not going to mean anything.”
Barneys COO, Danielle Vitale
Meaningful reinvention to regain relevance in the consumer’s shopping life is necessary to
survive as a department store. Barneys has proven that department stores can thrive with
the right strategy

9. Slide 9
About Pragma

10. Slide 10Slide 10
What we do
Pragma is a
strategic partner
for operators and
investors in retail
and consumer
markets
Strategy
Investor
Services
Commercial
Spaces
Post-Acquisition
Strategy Services,
2016
Consultancy Firm of
the Year, 2015
Best for Retail
Strategy &
Operations, 2016
Commercial Due
Diligence Firm of
the Year, 2014
Performance
Improvement

11. Slide 11Slide 11
Our
approach
We are
insightful and
practical,
operating from
strategy to shop
floor
Experience-led
Evidence-based
• Commercial analysis
• Market research
• Competitive intelligence
• Business modelling
• Pragma experience
• Management understanding
• St Ives Group experience
• Expert networks
Commercial insight & action

12. Slide 12Slide 12
Relevant
Experience
We have
experience with
several relevant
department stores
UK Department Stores EU Department Stores
Non-Europe
Department Stores

13. Slide 13
Retail Specialists
Department Store Experience
Strategy to Shop Floor
▪ We have been operating for almost 30 years and have 40 consultants working solely on retail and consumer
businesses
▪ We have a deep understanding of current consumer behaviours and an informed view of the changing
consumer habits in this sector
▪ We have an extensive understanding of the impact of location on store performance and the related strategic
implications
▪ We have good international experience in this space
▪ Our team comprises a number of retail operators – some of whom are experienced enough to know what is
meant by stock card, having used them in practice
▪ Our operational experience means we know how to successfully plan for and execute change within your
business – not just theorise
▪ The analytical rigour of our analysis will be synthesised with our practical appreciation of retail operations and
how to execute
▪ We have particularly strong, relevant experience of working on complex challenges with independent
department store groups, namely Liberty, Beales and Pearsons
▪ As experts in this sector, our insight and conclusions represent the perspectives of department store owners,
shopping centre landlords, concessionaires and consumers
▪ We have also worked on many projects within your key categories; apparel, footwear, health & beauty,
furniture
Digital Expertise
▪ We have worked on numerous multichannel and digital strategy assignments and have deep sector
knowledge within our team
▪ Our thought leadership in this area is exemplified by our recent client event covering multichannel shopping
behaviours
▪ We regularly collaborate with our sister companies, who provide online platform development and in-store
digital solutions
Why
Pragma?
We combine
commercial
experience,
operational
expertise and
consumer insight

14. Slide 14
Contact Us
Kristin Graham, CFA
Senior Consultant
+44 (0) 20 7902 6888
k.graham@pragmauk.com
Melissa Yeunh
Analyst
+44 (0) 20 7902 6888
m.yeunh@pragmauk.com
For further information please contact: