The ancient Greeks blamed hot, sultry summer days on Sirius (also known as the dog star). To appease the rage of Sirius, they would sometimes sacrifice a brown dog in hopes of bringing cooler weather. Being a dog lover, I wouldn't recommend such a drastic (and downright weird) approach. But judging from the second-quarter results for mall retailers, it's clear that many of them hope a change of season will push shoppers out of their dog-day doldrums.
J.C. Penney treading water
You don't need to read very far into J.C. Penney's
Comps dropped 4.3%, operating income slipped 180 basis points, and earnings per share fell 36% shy of last year's mark. Management basically wrote off the year back in March, noting a difficult retail environment that wasn't likely to improve anytime soon.
These days, J.C. Penney is playing a waiting game, carefully managing expenses and inventory -- both remained flat from the year-ago second quarter. One ray of light on the call was a hint that back-to-school sales are off to an encouraging start.
Nordstrom lowers guidance
Gross margins dropped 168 basis points, amid what management dubbed a highly promotional sales environment. Net earnings slid 21%, but earnings per share of $0.65 were down only 8.5%, helped by 15% fewer shares outstanding; management has aggressively bought back shares.
Nordstrom is following a path similar to J.C. Penney's, rigorously controlling expenses (down 5%) and inventory (12.8% lower than last year per foot of selling space).
Management sharply lowered full-year guidance, following a familiar pattern this year for Nordstrom. Comparable-store sales are expected to continue their mid-single-digit decline, and margins aren't expected to improve much.
Macy's is hanging in there
The company is working hard to slim down its overhead and put more decision-making power in the hands of local operators. I agree with the idea of making the stores more responsive to local customers, but consolidation costs have been high -- $113 million in unusual charges so far this year, with another $35 million to come in the second half.
I've read suggestions that Macy's may not survive this economic downturn, but I don't necessarily agree. Its debt-to-total capitalization of 51.3% is a bit high, because of the merger with May Department Stores, but that figure's still slightly improved from a year ago. Free cash flow for the first six months of 2008 is about $300 million to the good, and management has temporarily suspended share repurchases. The company successfully issued $650 million in senior notes this quarter.
Buy, sell, or hold?
I don't expect the world to suddenly turn rosy for the troubled department-store sector. This holiday season will likely be difficult, with fierce competition for consumers' limited discretionary dollars. But the stock market is a leading indicator, and shares of these three players have rallied from their second-quarter lows lately. That may suggest the worst is behind us.
Despite the rally, these department stores, like many specialty retailers including American Eagle
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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, but doesn't own shares of any of the companies mentioned in this article. No animals were harmed in the making of the Fool's disclosure policy.