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Are Department Store Stocks Really Worth Buying Now?

By Dan Caplinger – Aug 19, 2021 at 1:29PM

Key Points

  • Markets were volatile on Thursday.
  • Retail stocks have generally done well this week, and Macy's and Kohl's chimed in with their latest earnings.

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Investors seem to think the answer is yes -- at least for one day.

The stock market remained volatile on Thursday after a late-day drop the previous day. Investors are still trying to parse through the latest insight from the Federal Reserve's most recent monetary policy meeting, and that sent stocks on a roller-coaster ride. At 12:15 p.m. EDT, the Dow Jones Industrial Average (^DJI 2.16%) was down 48 points to 34,913. However, the S&P 500 (^GSPC 3.08%) gained 11 points to 4,411, and the Nasdaq Composite (^IXIC 4.41%) picked up 64 points to 14,590.

Retail stocks have gotten a lot of attention this week, with some high-profile names reporting their latest financial results. Department store retailers Macy's (M) and Kohl's (KSS -0.99%) weighed in with their reports, and both stocks posted substantial gains. Below, we'll look at what Macy's and Kohl's said and what it could mean for the future of retail.

People shopping at a clothing store.

Image source: Getty Images.

Macy's gives investors a parade

Shares of Macy's were up nearly 18% at midday on Thursday. Investors liked what they saw from the iconic retailer's second-quarter results and what they prompted the company to do.

Macy's bounced back sharply from the worst of the pandemic a year ago, posting comparable sales growth of 62% compared to the second quarter of 2020. Adjusted earnings came in at $1.29 per share, reversing an $0.81-per-share loss in the year-ago period. Macy's has even managed to get back to a longer-term growth trajectory, as comps were up nearly 6% even compared to pre-pandemic levels two years ago.

Especially noteworthy was the fact that Macy's saw strength across the business. Areas like higher-end apparel bounced back from the pandemic-related impacts they suffered a year ago, yet strong performers during the worst of the pandemic, such as jewelry, continued to do well. Digital sales fell back somewhat year over year but remained higher by 45% compared to two years ago, and the digital channel helped contribute to 5 million new Macy's customers.

Macy's rewarded shareholders with a reinstated dividend and announcement of a stock repurchase program. Given how dire things looked 12 months ago, the progress Macy's has made is highly encouraging.

Kohl's bounces back

Meanwhile, shares of Kohl's picked up 7%. The retailer didn't match Macy's, but it still showed it could rebound from tough times during the worst of the pandemic.

Kohl's second-quarter results were above the expectations of most investors following the stock. Revenue rose 31% year over year, while adjusted earnings of $2.48 per share reversed a year-ago loss of $0.25 per share and came in better than forecast. Gross margin levels jumped almost 10 percentage points to 42.5%, and while overhead expenses rose, the pace of their growth was slower than the revenue gains.

Kohl's was also optimistic about the future. CEO Michelle Gass pointed to the ongoing status of its strategic vision, citing "several transformational partnerships that will drive sustainable growth for years to come" on the horizon. The retailer boosted its full-year 2021 guidance and said it would reach several milestones it had expected to have to wait until 2023 to achieve. Specifically, Kohl's sees sales rising more than 20% year over year, with adjusted earnings of $5.80 to $6.10 per share.

With the gains, the two retail stocks have regained their lost ground since the start of the pandemic, but they're still well below their best levels from the past five years. That offers some more room for gains if Kohl's and Macy's can keep challenging e-commerce giants and winning.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Macy's Stock Quote
Macy's
M
$23.49 (%)
Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$34,582.52 (2.16%) $729.99
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
^GSPC
$4,079.64 (3.08%) $122.01
NASDAQ Composite Index (Price Return) Stock Quote
NASDAQ Composite Index (Price Return)
^IXIC
$11,468.00 (4.41%) $484.22
Kohl's Stock Quote
Kohl's
KSS
$32.08 (-0.99%) $0.32

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

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