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Why Department Store Stocks Got Clobbered Today

By Jeremy Bowman – Updated May 11, 2017 at 9:23AM

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Macy's and Kohl's issued downbeat sales numbers and the rest of the sector fell along with them.

What happened

Department store stocks were plummeting again Thursday after Macy's (M 3.00%) and Kohl's (KSS 2.88%) delivered weak revenue figures in their first-quarter reports.

The results weighed on peers including Nordstrom (JWN 4.50%)J.C. Penney (JCPN.Q)Dillard's (DDS 3.12%), which also reported earnings Thursday morning, J.C. Penney (JCPN.Q), and Sears Holdings (SHLDQ).

As of 11:54 a.m. EDT, those stocks were down anywhere from 6.1% to 13.8%.

So what

Macy's, which is generally considered the leader of the industry and the quintessential department store chain, set the tone with its report.

A Macy's store in Rancho Cucamonga.

Image source: Macy's.

It was another ugly quarter for Macy's as comparable sales fell 5.2% at owned stores and 4.6% when licensed stores were included. That, along with its recent store closures, pushed overall revenue down 7.5% to $5.34 billion, which missed expectations of $5.47 billion.

Things were even worse on the bottom line as adjusted earnings per share fell from $0.40 to $0.24, well below the analyst consensus at $0.34. In other words, Macy's sales and profits are evaporating much faster than the experts had anticipated. Inventories also rose 4.2% in the quarter, a sign that the company had expected greater traffic. That should also lead to more markdowns in the current quarter.

Nonetheless, CEO Jeff Gennette said results were "consistent with expectations," and the company maintained its full-year guidance of a decline of 2%-3% in comparable sales and EPS of $3.37 to $3.62. Excluding the sale of its San Francisco Union Square men's stores, EPS would be $2.90 to $3.15. That compares to $3.11 a year ago.

Despite the weak numbers, Gennette touted the performance of pilot programs in categories like jewelry and women's shoes, and said it would work to stabilize its brick-and-mortar locations. Macy's continues to open free standing BlueMercury beauty stores and off-price Backstage inside of existing Macy's, while it closes some of its full-line stores.

At Kohl's, meanwhile, the stock was up briefly when the market opened as the retailer beat earnings estimates in spite of weak sales results, but quickly went into the red as investors turned sour on the department store sector.

Kohl's said comparable store sales fell 2.7% in the quarter, a modest improvement from a 3.9% decline a year ago, and overall sales fell 3.2% to $3.84 billion, which missed estimates at $3.9 billion. On the bottom line, however, adjusted earnings per share increased from $0.31 a year ago to $0.39 as gross margins improved and SG&A costs fell and it reduced its share count by 7%. Analysts had instead expected earnings per share to fall to $0.29.

CEO Kevin Mansell said, "We are encouraged by significant improvement in sales and traffic for the March and April period, after a weak February start to the first quarter." He also noted strong inventory management, which led to increased gross margins.

Now what

The latest results make it clear that the headwinds in the department store sector remain strong. E-commerce has removed much of the need to visit all-encompassing stores like these mall anchors, and these retailers continue to lose share to off-price merchants like TJX Companies and fast fashion retailers like H&M and Uniqlo. The structural disadvantages are beginning to look overwhelming, especially as the company mainly sells other brands, rather than proprietary product, that are widely available in other stores and online.

It's clear why these stocks are trading in tandem. The forces affecting them are greater than the individual advantage of any one company. We'll learn more when Nordstrom reports earnings Thursday night and J.C. Penney does Friday morning, but the long-term picture continues to look bleak.

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

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