What happened
Shares of department store stocks, including Macy's (M 1.00%), Kohl's (KSS 3.19%), and Nordstrom (JWN +0.00%), were all moving higher this week as a number of news items pointed to the economic reopening reaching full speed as some states removed all of their COVID-19-related restrictions.
Additionally, several analyst reports showed consumer spending picking up at mall and apparel stores, and the broader gains in the stock market were good news for cyclical stocks like these as well.
As of the market close on Thursday, Kohl's and Nordstrom were each up 11.9% through the week, while Macy's had tacked on 9.8%.
Image source: Getty Images.
So what
First off, Amazon Prime Day seemed to light a fuse under the retail sector. The two-day shopping extravaganza, held on June 21-22 this year, has become a shopping event for most major retailers. They compete to after discounts, knowing that consumers are lurking for deals, much as they are on Black Friday and Cyber Monday.
Data from Edison Trends showed that sales at Amazon were up 32% from last year, likely indicating a lift at other retailers as well. Of the retailers it tracked, it found that Kohl's grabbed a 0.7% share of spending on Prime Day, not too bad considering Amazon dominates the event. Kohl's partnership with Amazon, which includes accepting Amazon returns and having Amazon shop-in-stores, may also give it a benefit from the e-commerce giant's success on Prime Day.
Prime Day is an online shopping event, of course, but brick-and-mortar traffic is key for all three department store chains. That's why the stocks have benefited from the reopenings. Last week, California and New York both removed all COVID-19 restrictions, and several other states have taken steps to ease or lift them entirely. That should be a boon to shoppers eager to hit stores again, and indeed, UBS said channel checks found that retail traffic was stronger than expected. Analyst Jay Sole said he expected strong results from most retailers in Q2 and Q3.
Bank of America also said in a research report on Thursday that clothing stores were booming. For the week ended June 19, sales were up 36% from the same week in 2019, or 13 percentage points better than the week before. Meanwhile, sales at department stores surged 25 percentage points from the previous week for a 16% improvement from 2019. That's the highest mark for department stores since the start of the pandemic, with the exception of a brief spike around the holiday season. Other analysts echoed those findings.
The economic reopening is not the only tailwind for department stores, either. Pent-up demand for clothes as Americans return to work and social functions should also help drive sales at these chains since apparel is their biggest category.
Now what
While Kohl's, Macy's, and Nordstrom should report strong results over the next few quarters, the stocks are already trading more or less where they were before the pandemic started, meaning upside potential may be limited from here. Kohl's and Macy's are both up from the beginning of 2020, while Nordstrom is down 13% after fading following its earnings report last month.
The companies also face other challenges. The mall ecosystem may never return to its pre-pandemic level, as some percentage of shopping has shifted to e-commerce permanently and traffic draws like movie theaters face their own challenges. Macy's also counts on international tourists for about 4% of its sales, which will be hampered until Europe and other parts of the world overcome the virus.
For now, these companies are likely to see strong results with the reopening in full effect, but the structural challenges they faced before the pandemic still remain.
