Why Department Store Stocks Dropped Today


Business News - Opportunities - Reviews



What happened

Shares of department store stocks, including Macy’s (NYSE: M) , Nordstrom (NYSE: JWN) , Kohl’s (NYSE: KSS) , and J.C. Penney (NYSE: JCP) , were down broadly today after Macy’s reported second-quarter earnings this morning. Oddly, Macy’s turned in a strong quarter. But the market seemed to see an opportunity to take profits in the sector as department store stocks have already run up considerably so far this year, and fears about the threat from e-commerce persist.

As of noon, Macy’s shares were down 13.9%, Nordstrom was off 5.6%, Kohl’s stock was down 6.6%, and J.C. Penney was off 9.1%. The other retailers will report second-quarter earnings shortly.

Macy's Herald Square location

Image source: Macy’s.

So what

Macy’s results in the quarter leave little room for complaint, as the company beat expectations on all counts and raised its guidance. Comparable sales on an owned-plus-licensed basis were up 0.5%, but adjusting for the shift in its annual Friends & Family sales, comps were up 2.9%. Overall, net sales were down 1.1% to $5.57 billion, due in part to the impact of store closures. However, that was better than expectations of $5.55 billion.

CEO Jeff Gennette said:

Macy’s Inc. delivered strong performance in the first half of the year, and we are pleased to report our third consecutive quarter of comparable-sales growth. Macy’s, Bloomingdale’s, and Bluemercury all performed well. It is encouraging to see the continued strengthening of our brick-and-mortar business where we saw trend improvements across the portfolio, led by our Growth 50 stores.

A number of recent initiatives, including the expansion of Backstage and Bluemercury stores, seem to be delivering results, while its recent acquisition of Story and investment in tech retailer b8ta also hold promise for future growth as the company adapts to a changing retail environment.

Gross margin improved by 80 basis points in the quarter to 40.4%, and adjusted operating margin also increased, from 5% to 5.7%.  Adjusted earnings per share, which also excludes the impact of asset sales, jumped from $0.37 to $0.59.

Macy’s was also confident enough in the momentum from the first half of the year to raise its adjusted EPS guidance from a range of $3.75 to $3.95, to a range of $3.95 to $4.15, and lifted comps guidance from a range of 1% to 2%, to a range of 2% to 2.5%.

Given the strong performance, the sell-off was puzzling. One cause for concern may have been that the company said that gross margin would be slightly down in the second half of the year, or that broader retail sales are so strong, up 6.4% from the year before, showing that Macy’s is still losing market share and may simply be riding the tailwinds of the strong retail market.

Before today’s slide, Macy’s stock had also jumped 140% from its low last November, before momentum started building after its third-quarter earnings report. Given those eye-popping returns, today’s sell-off doesn’t seem so bad.

Now what

Macy’s is often seen as an indicator for the broader department store sector, as it’s the largest department store chain by revenue. It owns both classic downtown locations and mall anchor stores, and is the parent of the higher-end chain Bloomingdale’s. It’s also the first within the sector to report earnings each quarter.

Both J.C. Penney and Nordstrom are set to report earnings tomorrow, and Kohl’s results are due out next week. Macy’s results don’t necessarily correlate with its peers, as department stores are competitors as well as fellow travelers subject to the same macro trends. The strong retail report and Macy’s results seem to bode well for their underlying financial performance. However, how the market reacts to those results is anybody’s guess after Macy’s slide.

10 stocks we like better than Macy’s
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and Macy’s wasn’t one of them! That’s right — they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Jeremy Bowman owns shares of J.C. Penney. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


Business News - Opportunities - Reviews



Leave a Reply