Is The End Near For Major Department Stores?
Estimize | May 11, 2016 08:11AM ET
The end of the first-quarter earnings season is approaching and it’s the retail sector’s turn to take center stage. This week, the department stores are on deck, pitting upscale retailer Nordstrom (NYSE:JWN) against middle-of-the road Macy’s (NYSE:M) and discounters like JC Penney (NYSE:JCP) and Kohl’s (NYSE:KSS) for retail supremacy. Shifting spending habits lately have favored the lower-end stores as online retailers have taken the biggest bite from Nordstrom and Macy’s. Also reporting this week is retail sales for April, with numbers expected to rebound following a sluggish March. After the next two weeks we will have a better picture as to how consumers are spending their discretionary income.
The Estimize consensus is calling for earnings of 37 cents per share on $5.94 billion in revenue, 1 cent higher than Wall Street on the bottom line and $20 million below on the top. Compared to a year earlier, earnings per share are predicted to fall 31% with sales dropping as much as 4%. On average, Macy’s stock is relatively flat during earnings season, which is unfortunate because shares are down 44% in the past 12 months.
Kicking things off this week is Macy’s (NYSE:M), out with results tomorrow morning. Despite a nice beat last quarter, Macy’s has struggled to drive growth into positive territory. The holiday season, typically Macy’s strongest, featured a total sales decline 5.3% with a 4.8% decline in comparable store sales. The company primarily blamed the abnormally warmer weather, lower tourist spending and an overly cautious consumer for its fourth-quarter blunders. Nevertheless, Macy’s has undertaken extensive initiatives to propel sales and profitability. The include expanding its off price business, Macy’s Backstage, implementing a new loyalty rewards program and opening more Bluemercury free-standing beauty stores. The company has also begun to explore a REIT opportunity involving its flagship and mall-based properties. Macy’s Herald Square (NYSE:SQ) location alone has been valued over $4 billion and with all its other properties, this number surpasses $20 billion. In the meantime, it will likely be more of the same for Macy’s, which continues to lose market share to online and discount retailers.
h3 Kohl’s Corp Consumer Discretionary - Multiline Retail | Reports May 12, Before Market Opens/h3
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The Estimize community is looking for a earnings per share of 37 cents on revenue expectations of $4.13 billion, right in line with Wall Street on the bottom and $12 million lower on top. Since Kohl’s last report, per share estimates have been cut 8% to reflect an expected decline of 33% on a year over year basis. On average, the stock is a positive mover leading up to earnings but turns negative after results have been reported.
Kohl’s biggest focus lately has been on its new strategic initiative, the Greatness Agenda, designed to drive top-line growth. The Greatness Agenda is a multi-year plan built on five fundamental pillars: amazing product, incredible savings, easy experience, personalized connections and winning teams. The framework has already been successful in turning revenue growth positive for every quarter of 2015. In the second year of the Greatness Agenda, Kohl’s aims on growing its women’s apparel business, launching new formats and distribution channels, and winning new customers, to name a few. While all this sounds great, Kohl’s still operates in a highly competitive industry where it is starting to fall behind. Shares of the department store are down 13.3% year to date while Macy’s, Nordstrom and JC Penney are all positive this year. Meanwhile, comparable store sales of 0.4% last quarter were down from the 3.7% rate it posted in Q4 2014. Lower consumer spending habits, heavy discounting and investments into the Greatness Agenda are expected to adversely impact margins and earnings for the foreseeable future.
h3 Nordstrom Consumer Discretionary - Multiline Retail | Reports May 12, After Market Opens/h3After a significant loss the last 2 quarters, expectations are generally low ahead of Nordstrom’s earnings. The Estimize consensus is looking for EPS of 45 cents on $3.28 billion in revenue, right in line with Wall Street on the bottom line and $7 million lower on top. Since its last report, EPS estimates have been cut 23%, which now predict a 28% loss from a year earlier. Revenue on the other hand is expected to grow 3%, still slower than sales growth from past quarters.
After a dismal holiday season, Nordstrom issued a bleak outlook for fiscal 2016. High-end department stores like Nordstrom have been hit the hardest by changing consumer habits. Those who can afford the top notch brands are now shopping directly from the vendor while other consumers are opting for off-price retailers. This has clearly been the case for Nordstrom, which saw gross profit as a percentage of net sales decline 35% compared with same period last year. However, its off-price business and online sales were the two-fastest growing segments within the company. Nordstrom Rack and Hautelook saw net sales increase 50% while online sales increased 11%. Meanwhile, the sale of its credit card portfolio to TD Bank (TO:TD) coupled with other various growth initiatives should help deliver profitability down the road.
h3 J.C. Penney Company Consumer Discretionary - Multiline Retail | Reports May 13, Before Market Opens/h3The Estimize consensus is looking for a loss of 35 cents per shares on $2.94 billion in revenue, 4 cents higher than Wall Street on the bottom line and right in line on the top. Earnings per-share estimates have increased 13% since its last report and now predict 39% growth from a year earlier. On average the stock is a positive mover leading up to earnings and then turns negative by 2% in the 30-day post earnings period.
This quarter, JC Penney is expected to be the biggest winner among department stores. The low-end retailer crushed the holiday season with reported earnings per share that were 15 cents higher than expectations. The quarter also featured a 4.1% increase in comparable store sales, with additional gains coming from online sales. For 2015 comp store sales grew 4.5%, free cash flow improved by 130% and the company retired $500 million of debt. As a result, the stock is up over 20% since the start of year. Strong numbers were primarily driven by an increased focus on its omni-channel capabilities, expanding its store-in-store Sephora sales and deeper penetration of its private brand. JCP has already indicated that first-quarter profits will come in higher than expected, providing reassurance to investors that worry its turnaround is coming to an end.
How do you think these names will report this week?
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