What happened

Shares of department store chains including Macy's (NYSE:M)Kohl's (NYSE:KSS)Sears Holdings (NASDAQOTH:SHLDQ), J.C. Penney (NYSE:JCP), and Urban Outfitters (NASDAQ:URBN) were falling Thursday after retailers began reporting holiday sales. Strangely, Macy's and J.C. Penney both reported solid growth numbers, but stocks still fell nonetheless in what appeared to be a "sell-the-news" moment as retail stocks had rallied over the past month in anticipation of a strong holiday season.

As a result, department store stocks were down broadly Thursday morning. As of 11:09 a.m. EST, Macy's was off 4.7%, Kohl's was down 3.9%, Sears lost 6.4%, Urban Outfitters gave up 4.9%, and J.C. Penney was down 2.4%, after trading as low as 8% earlier in the session.

A woman holding several shopping bags

Image source: Getty Images.

So what

J.C. Penney said comparable sales for the nine-week period ending Dec. 30 rose 3.4%, its fastest growth clip in several quarters, as home, beauty, and fine jewelry led the way. Comparable sales also improved in apparel, particularly women's and kids, and e-commerce sales increased by double digits.

Penney maintained its previous full-year guidance of adjusted earnings per share of $0.02 to $0.08 and comparable sales between -1% and flat. That may have pushed the stock lower as investors were hopeful the company would raise guidance. Still, shares were up in pre-market trading, indicating the market was initially satisfied with the report.

Macy's also saw comparable sales growth over the holidays with comps up 1% on an owned basis and 1.1% on an owned-plus-licensed basis. CEO Jeff Gennette called the performance "solid" and said it would report positive comp sales for the quarter, breaking a streak of 12 straight declines. Digital sales grew by double digits in the period.

Separately, Macy's also said it would close 11 stores, four of which were previously disclosed, make staffing adjustments including lowering the headcount in some stores, raising it in others, and streamlining non-store functions. Management said those decisions would result in $300 million in annual cost savings, though it would also incur a one-time charge of $160 million.

Finally, Macy's raised its full-year EPS guidance, which takes the recent tax bill into account, from $3.38-$3.63 to $3.59-$3.69, and narrowed its full-year comparable sales guidance range on an owned basis from -2% to -3% to between -2.4% and -2.7%.

Now what

Considering that both J.C. Penney and Macy's had reported comparable sales growth in the holiday period and that Macy's raised its guidance, the sell-off across retail stocks was surprising. The best explanation may be that retail stocks had run up so much in the past month that investors had simply become overenthusiastic about a turnaround based on momentum from the holiday season. Macy's shares, for instance, were up 18.7% from Nov. 28 to Jan. 2, while Kohl's had jumped 22.5% and Urban Outfitters was up 13.5%. That rally was based mostly on anticipation of strong holiday sales, so it's not surprising to see some of the air coming out now.

As Macy's decision to close stores and J.C. Penney's uninspiring guidance shows, these department store chains still face many of the same problems they did before as e-commerce is taking away share from brick-and-mortar chains and traffic at lower-end malls is declining.

Kohl's should report holiday sales as soon as Friday, and Urban Outfitters' report should be due out shortly as well. Sears, meanwhile, remains in its own unique funk that could force bankruptcy as soon as this year.

Despite the sell-off weighing on the sector today, J.C. Penney and Macy's reported solid holiday numbers that should encourage retail investors and bode well for the coming year.

 

Jeremy Bowman owns shares of J.C. Penney. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.