What happened

Retail stocks including Bed Bath & Beyond (NASDAQ:BBBY)Macy's (NYSE:M) and Nordstrom (NYSE:JWN) took a dive Tuesday after Kohl's (NYSE:KSS) kicked off department-store earnings season with a troubling third-quarter earnings report. Kohl's, which is seen as a bellwether mid-market mass merchandiser, dialed back its earnings guidance sharply for the year, and also came up short on the top line. 

As a result, Kohl's stock fell 19%, while Bed Bath & Beyond, Macy's and Nordstrom dropped 7%, 11%, and 6% respectively. The SPDR S&P Retail ETF (NYSEMKT:XRT), which tracks the sector, was off 2% for the day.

A blurry image of people flowing up and down a mall escalator.

Image source: Getty Images.

So what 

Retail stocks often see their share prices move in tandem during earnings season, as the companies are subject to similar forces inside and outside the industry, including e-commerce disruption, tariffs on China, worries about a recession, and declining mall traffic. So it wasn't surprising to see other retailers fall on the Kohl's report.

Kohl's itself said comparable sales ticked up 0.4%, below expectations at 0.8%, and overall revenue slipped 0.1% to $4.36 billion, missing estimates at $4.4 billion. What was more troubling was that profits fell sharply as gross margin narrowed from 37% to 36.3% and selling, general and administrative expenses rose from 29.7% to 30.7% of total revenue. Adjusted earnings per share fell from $0.98 to $0.74, which was considerably worse than the analyst consensus at $0.86.

Management seemed to blame the lower profits on "strategically increasing our investments," but investors were skeptical, especially since this was the first quarter that management had expanded its partnership with Amazon nationwide, which was expected to drive an increase in traffic. 

Kohl's guidance was not encouraging either, as the company slashed its full-year adjusted EPS guidance from $5.15-$5.45 to $4.75-$4.95, though it did not offer a specific explanation for that change. That forecast, however, seems to spell a challenging holiday quarter for the retailer.

Not surprisingly, Kohl's competitors were down on the news. Any number of factors could have contributed to Kohl's weak profits, including price competition, a more price-sensitive consumer, or more intense competition from Amazon and off-price retailers.

Bed Bath & Beyond, Macy's, and Nordstrom are all facing their own distinct challenges. Bed Bath & Beyond is in the midst of a restructuring and turnaround effort after activist investors moved into the stock, and it got a new CEO earlier this month, Mark Tritton, who was previously Chief Merchandising Officer at Target. After a multi-year sell-off, Bed Bath & Beyond is up a whopping 76% over the past three months on hopes for a turnaround, and the stock jumped when Tritton was named as the new CEO.

Macy's has been one of the worst performers on the S&P 500 this year. The company slashed earnings guidance, and there have been doubts about its ability to stay relevant -- its strategy seems to be muddled, and profits are falling. Nordstrom shares, meanwhile, have also rallied in recent months as the opening of its new flagship store in New York was greeted with applause, but its recent earnings reports have shown comparable sales falling and the company struggling to grow online sales, which had long been one of its strengths.

Now what

Looking ahead, both Macy's and Nordstrom will report third-quarter earnings on Thursday of this week, with Macy's release coming out in the morning and Nordstrom's after hours. For Macy's, analysts are expecting $5.32 billion in revenue, down from $5.4 billion, and earnings per share at just break-even, compared to $0.27 a year ago. At Nordstrom, the market is looking for revenue of $3.67 billion, down from $3.75 billion, and sees EPS slipping from $0.67 to $0.64. Bed Bath & Beyond is on a different calendar from most retailers, and won't report earnings again until January.

If there's a silver lining in Kohl's report, it's that its results should lower expectations for Macy's and Nordstrom, making it easier for those stocks to pop on their earnings reports. However, a strong quarter for both those stocks does seem less likely after Kohl's disappointing numbers.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.