After a strong second half of 2016, the bear case for retailers unfortunately returned. Last week a slew of department stores reported preliminary holiday sales results well below prior forecasts, moving retail stocks considerably lower Thursday and Friday. The skid highlights ongoing industry wide challenges retailers face as more sales move online and squeeze profitability. Online margins tend to pale in comparison to in-store ones as more stores begin offering free shipping with no purchase minimum. Making matters worse, a near certain earnings season blunder in the coming weeks leaves retail stocks vulnerable to a second sell off.
Kohl’s (KSS) made the biggest splash in the parade of same store sales (SSS) reports last week. Shares of the department store slid over 20% on a 2.1% decline in SSS for the final months of 2016. As a result, management cut full year earnings targets to a range of $2.92 - $2.97 from $3.12 - $3.32. Estimate activity for the fourth quarter started to edge lower prior to the news, reflecting the Estimize community’s pessimistic outlook of department stores.
Macy’s (M) suffered a similar fate to Kohl’s after reporting weak holiday sales and cutting full year guidance. Management expects EPS to fall in the range of $2.95- $3.10 well below its prior forecast of $3.15-$3.40. Management placed blame on consumer shopping habits and the multitude of challenges facing retailers for the lackluster report. The company also shed light on its plans to close 68 stores around the U.S., leaving nearly 10,000 employees out of work. Macy’s expects the ongoing closures and restructuring efforts to generate $550 million in annual savings which will be used to build out its online presence, off price concept and beauty retailer.
That said, each additional closing cedes sales to its competitors thereby putting pressure on the top line. Macy’s indicated that the most recent wave of closures would reduce 2017 revenue by about $575 million. The hope is that increasing the number of Bluemercury and Macy’s Backstage locations will gradually offset lost sales down the road.
JCPenney (JCP) and Sears (SHLD) round out the list of departments stores to suffer from weak holiday sales. For JCP, a 0.8% decline in comparable store sales didn’t put any significant stress on full year fiscal 2016 projections. As a discount chain, JCP effectively weathered some of the retail challenges that hurt Macy’s this winter.
More broadly the entire retail space faces a serious threat to earnings from potential policies proposed by president-elect Trump that would drive up the cost of imported goods. Walmart (WMT) is amongst the biggest company to take a hit from the tax proposal. Shares of the big box retailer dropped 1.5% in the past 5 trading days.
The growing list of problems facing the overall retail sector still haven’t impacted Amazon (AMZN). In fact, its dominance was recently solidified after reports verified it was the most widely used online retailer during the holiday season.
For the remaining retailers yet to report, investors shouldn’t expect the future to hold a different outcome.
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Photo Credit: Daniel Mennerich