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Department Store Stocks Hurting: Can This Weeks Earnings Alleviate Concerns?

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This is a big week for retail with some of the largest brick-and-mortar firms releasing Q2 earnings. We have 3 major department store releasing earnings in the next 2 days, all with different market sentiment. Kohl’s (KSS - Free Report) and TJ Maxx (TJX - Free Report) release their July quarter earnings before the bell while Nordstrom (JWN - Free Report) is releasing its results after the bell on Wednesday.

Department stores stocks have been getting hammered in 2019 with the entire space being down over 37%, while the overall retail sector is up more than 16%. July retail sales figures rose .7% from the prior month and 3.4% year-over-year, the biggest gains since March.

Department stores illustrated a top-line decline of 4.3% in the first 7 months of 2019 compared to 2018, while ecommerce saw an 11.9% sales increase.

Macy’s (M - Free Report) was the first of the big department stores to release its July quarter financials. Macy’s results were devastating to shareholders, reporting its worst July quarter sales in 9 years and lowest Q2 profitability in 10 years. Share prices plummeted over 16% on the news.

JC Penney also released its earnings last week and the results further confirming analysts concerns with another quarter in the red.

Dying Department Stores

Why are these big department retailers struggling while the broader retail market seems to be performing on par with the S&P 500?

A generational shift is occurring in society today with millennials now being the largest consumer group. Millennials pride themselves on their ability to achieve their goals with as little hassle as possible and going to a massive, challenging to navigate department store don’t fit that standard.

This next generation of consumption is quickly moving to the World Wide Web. Ecommerce shopping continues to expand at an accelerating rate. Not only do consumers not have to navigate cumbersome department stores, but they can sit on their couch and typically find what they were looking for at a lower price.

Below you can see how top department stores have performed since the beginning of the year.

TJ Maxx (TJX - Free Report)

TJ Maxx appears to be the one diamond in the department store rough. TJX offers something that the other department stores don’t, value shopping at the lowest prices. Millennials are savvy shoppers with a renewed focus on finding value. TJX has seen consistent year-over-year topline growth for over 2 decades, in a trend that analysts are estimating won’t slowdown anytime soon.

TJX analysts are estimating a Q2 EPS of $0.62 on revenues of $9.88 billion, which would represent 6% and 5% year-over-year growth, respectively.

Kohl’s (KSS - Free Report)

Kohl’s is coming off very disappointing Q1 earnings, which plummeted its stock price over 15% in just one day. This instigated analysts to drop EPS estimates across the board.

For tomorrow mornings July quarter results analysts are estimating an EPS of $1.52 on sales of $4.46 billion, which would represent a year-over-year decline of 13.6% and 2.5% respectively.

Nordstrom (JWN - Free Report)

Nordstrom has lost over 57% of its value in the last 52-weeks as the company struggles to compete with online retailers. They have made significant investments into their ecommerce platform, but they are still unable to remain competitive as their earnings begin to toe the line of profitability.

JWN is a big mover on recent earnings with an average price movement of 9.1% over the past 6 quarters (2 up, 4 down). Analysts are estimating an EPS of $0.76 on $3.93 billion in revenue, which would be a marginal year-over-year decline on both metrics.

Take Away

The department store model is a dying breed, but there are still stars in the space that have found their niche like TJ Maxx. Color on how management plans on navigating the rocky waters ahead is going to be crucial for how these stocks perform in the impending July quarter reports. These firms need to successfully pivot their business model to adjust to the shifting consumer.

 

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