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 (NYSE:JCP) earnings release to learn it wasn't a good quarter. None of the five second-quarter highlights management cites relates to sales or earnings -- not an encouraging start.
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
Nordstrom (NYSE:JWN) reported sales in line with expectations. But with comps down 6%, the company succeeded only in predicting its own decline.
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
Macy's (NYSE:M) is having relatively more success than its department-store rivals, but its numbers are still nothing to write home about. Comps were down 2.1%, a half-point better than the first quarter. Operating income grew $9 million, or 3.6%, but this year's second quarter included $21 million fewer unusual expenses. On a net-net basis, I call this quarter flat to down slightly -- not bad given the state of the industry.
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 (NYSE:AEO), Pacific Sunwear (NASDAQ:PSUN), and Zumiez (NASDAQ:ZUMZ), are still trading at extraordinarily low earnings valuations. J.C. Penney is the lowest at 9.0 times trailing-12-month earnings, with Macy's on the upper end at an 11.6 multiple. As I suggested last week in regard to Kohl's (NYSE:KSS), Foolish investors who believe lower gas prices will translate into some holiday cheer might consider nibbling on these issues.
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