Last year was a struggle for both Bon-Ton Stores Inc., which saw profits slide more than 75 percent to $11.6 million, and Gottschalks Inc., which posted a loss $12.4 million. Other department stores, such as Belk Inc. and Dillard's Inc., have yet to weigh in on 2007. But Dillard's has been pressured by New York-based hedge funds Barington Capital Group and Clinton Group Inc., which own more than 5.3 percent of the chain's shares, to improve profitability.
Retailers that are trying to basically replicate Macy's, but on a smaller scale, are creating a "recipe for disaster," said Mike Moriarty, partner and head of the retail practice at management consultant A.T. Kearney.
"At a certain point, scale makes all the difference," he said.
But even a national presence hasn't been enough to shield Macy's Inc., J.C. Penney Co. and Target Corp. from sluggish results. Wal-Mart Stores Inc., the perceived price leader, is faring better as consumers clutch their pocketbooks tighter.
For the smaller department stores, mergers might not be possible for some time.
Matt Katz, managing director at Alix Partners, a restructuring and advisory firm, said he doesn't foresee any consolidation opportunity.
For smaller chains, "Where's the buying power, where's the leverage? Those regional players don't have it," said Katz, noting they are jockeying for attention from producers that have larger retail customers. "They don't get vendors to showcase or launch product in their doors as readily as others."
Citing the tight credit market and turmoil on Wall Street, experts expect difficulty in financing almost any but the smallest M&A deals.
"I don't know that the private equity guys who might fund any consolidation play have the appetite in this market to go after another large retail consolidation," Katz said. "Selling the equity markets on synergies in this [sector], where pricing pressure is paramount, is going to be tough."
In addition to the macroeconomic trends, individual companies face their own set of challenges. Bon-Ton, for example, has more than $1 billion in debt after its acquisition of the Carson Pirie Scott chain, and Gottschalks derives more than 80 percent of its volume from California, which has been hit particularly hard by the housing crisis.