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Why Macy's, Kohl's, and Gap Jumped Today

By Jeremy Bowman - Updated Apr 9, 2020 at 3:45PM

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A new Federal Reserve plan had investors cheering these beaten-down retail stocks.

What happened

Shares of Macy's (M 0.00%)Kohl's (KSS -0.36%), and Gap (GPS 0.56%) were all climbing today, seemingly in response to steps by the Federal Reserve to stabilize the economy. Among other moves, the central bank said it would supply liquidity to help support the Paycheck Protection Program, a new loan program designed to keep small business employees on payrolls while stores are closed to stop the spread of the coronavirus. The Fed will also purchase up to $600 billion in loans through the Main Street Lending Program, helping to ensure the flow of credit to small and medium-sized businesses.

While these programs don't appear to directly support larger corporations such as Macy's, Kohl's, and Gap, investors were nonetheless assuaged by the move as it should help grease the economy in the near term, allowing consumers to spend more, and make the recovery smoother once coronavirus concerns begin to fade away.

Macy's stock closed up 11%; Kohl's finished 13.6% higher, and Gap increased 15.8%. 

Three women carrying shopping bags in a mall

Image source: Getty Images.

So what

The announcement from the Fed was enough to overcome another dismal initial unemployment claims report that showed another 6.6 million Americans filed for unemployment last week, bringing the total to more than 16 million over the last three weeks, or roughly 10% U.S. of the U.S labor force. That's a sign of the dire economic crisis that has emerged in the wake of the coronavirus outbreak.

Macy's, Kohl's, and Gap have all responded to the crisis with drastic steps, closing stores, furloughing workers, suspending capital return programs such as share buybacks and dividends, and tapping credit lines to help with liquidity. With millions of square feet in real estate and hundreds of thousands of employees, these retailers are potentially some of the biggest losers in the current crisis as they incur high fixed costs to operate those stores, and they have pledged to continue paying health insurance for now, adding to their costs. Gap also took the step of telling suppliers to stop sending it merchandise for its stores through the fall, which could further squeeze foreign manufacturers struggling to stay afloat. 

In addition to today's move by the Fed, these retailers also seem to be gaining because their stocks fell so sharply in the prior sell-off, and investors still smell value, especially with more signals from the government that it wants to keep these companies, which employ hundreds of thousands of Americans, in business when the outbreak is over. 

You can see from the chart below that all three stocks had fallen by more than 60% at one point during the sell-off that began on February 24.

M Chart

M data by YCharts.

Now what

Prior to the coronavirus outbreak, all three of these companies were solidly profitable but were struggling to grow in the face of rising e-commerce competition and declining mall traffic. Macy's recently introduced a turnaround plan that included closing around 125 stores. Gap had toyed with the idea of spinning off Old Navy, its best-performing brand, and Kohl's has partnered with Amazon, accepting returns from the e-commerce giant in hopes that it would drive traffic to its stores.

All three stocks look cheap based on their trailing results, but these retailers have significant challenges ahead of them even if the outbreak has mostly stopped spreading by the end of the month. Reopening stores and dealing with inventory that may no longer be seasonally appropriate will be difficult, and consumers may still be reluctant to go into crowded spaces, fearing they're not safe. Additionally, stores will likely lose some of the employees they furloughed, which will require rehiring and retraining.

The stocks could move higher on more fiscal and monetary assistance, but I'd be skeptical of a sustained rebound without a clear sign that stores are reopening soon.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Kohl's Corporation Stock Quote
Kohl's Corporation
KSS
$33.06 (-0.36%) $0.12
The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$10.70 (0.56%) $0.06
Macy's, Inc. Stock Quote
Macy's, Inc.
M
$19.96 (0.00%) $0.00
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$143.18 (-0.26%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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