Have Department Stores Fallen Into Value Territory?
Zacks Investment Research | Aug 22, 2019 05:09AM ET
Nordstrom (NYSE:JWN) stock soars following a mixed earnings report last night (August 21st) with shares up more than 16% in today’s trading. Were earnings so impressive that investors and traders rushed to buy scores of JWN or is their more to the story?
Department retail stocks have gotten hammered over the past 52-weeks, with Kohl’s (NYSE:KSS) down over 40% while Nordstrom (NYSE:JWN) , Macy’s (NYSE:M) and JC Penney (NYSE:JCP) are all down over 50%.
What is causing this mass exodus of department store stocks and why were mixed earnings results enough to send JWN surging over 15%?
There is a significant consumer shift occurring in society today that is centered on value and convenience. These massive, seemingly unorganized department stores aren’t meeting the next generation’s consumer needs. In my article, Who Will Survive the Retail Apocalypse? , I touch on retailers that have been able to ride this evolving consumer wave and those that haven’t. In this article, I will focus on department stores and their future in the retail world.
Q2 Earnings
Macy’s Q2 results provoked a devastating blow to its share price as well as its competitors. It missed big on both top and bottom-lines illustrating its worst Q2 EPS in a decade and worst Q2 sales in 9 years. M’s share price has plummeted almost 20% since its earnings release last week. Macy’s poor results was a cautionary tale to investors about the department store earnings to come.
Expectations for these department stores have dropped significantly over the past year with analysts displaying considerable conservatism in their estimates. A big miss on a conservative forecast is going to kill any stock, which we saw with Macy’s. An EPS beat on a stock that has been battered down for the last year is going to release some of the pessimistic sentiment. This is what is happening with Nordstrom.
Nordstrom released earnings last night and had a big EPS upside surprise which sent shares surging, despite a marginal topline miss and lowered guidance. Some of this bounce can be credited to short covering. Short interest on JWN has been growing throughout 2019 and traders decided it was time to cash out.
This week has seasonally low volume due to end of summer vacations, which may also have attributed to the massive upside that JWN experienced.
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Valuation Argument
Nordstrom’s current forward P/E is lowest it’s been since the great recession in 2008. This stock may have been traded down further than its intrinsic value, and all investors needed was a small catalyst (EPS beat) to jump back in. This is likely the same reason that shorts were covering. All stocks, no matter how poor they are performing, have a price in which they become attractive. JWN was (and may still be) in an attractive price range for any value investor, and the 5.6% dividend gives you a little more comfort in purchasing this stock.
Macy’s appears to be trading at its lowest forward P/E ever with its most recent earnings sinking the stock to its lowest price in over a decade. This stock may be trading below its fair value with pessimistic traders and investors keeping it down. I am not rushing to buy shares Macy’s, but there is an argument to be made that this is a value buy, especially when the stock is yielding an almost 10% dividend. Macy’s is not at risk of default yet (though their credit rating is toeing junk-bond levels) and with expectations so low it wouldn’t take much for this stock to get a boost.
Take Away
Millennials have taken over as the largest consuming group, and they are shaking up the retail space. This generation of consumers are increasingly online, and so are their shopping patterns. Millennials are attracted to convenience and value when making a purchase. Big department retailers are unable to provide these attributes.
These department store stocks may have been beaten down enough to once again provide value to your portfolio with significant dividend yields hedging some of the risks of buying into a potentially dying sector.
Department stores have the potential to change consumer sentiment in their favor if they can effectively shift their businesses models. This is easier said than done, but I am confident that some of these department retailers will be successful in this evolving market.
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