By Kris Rosemann
Department stores continue to drag the broader retail space (XRT) lower in early 2017. Poor sales updates from popular general merchandise stores in the 2016 holiday season are weighing on the majority of the sector, from luxury names down to discount chains. Online retail continues to plunder traffic from traditional brick and mortar retailers as the ‘bricks-to-clicks’ movement has never been more apparent. The drop in mall foot traffic in the fourth quarter of 2016 was the largest such drop in the history of the mall as mall shoppers visited half the number of stores they did in the same period five years ago. Traditional retailers have turned to aggressive discounting, only to see their margins fade and bottom-line expectations come under serious fire.
Macy’s (M), once the poster child for success in the department store space, is now a leader in the department store deterioration. On January 4, the company reported that comparable store sales on an owned plus licensed basis fell more 2.1% in the months of November and December compared to the same period in 2015; comparable store sales on an owned basis fared even worse, dropping 2.7% in the two-month period. The company maintained its expectations for comparable store sales on an owned plus licensed basis to decline 2.5%-3.0% in fiscal 2016, but it now expects to report final results in the lower end of that guidance range with comparable store sales on an owned basis coming in roughly 0.5% below the lower bound of that range. Further, Macy’s cut earnings-per-share guidance to a range of $2.95-$3.10 from previous guidance of $3.15-$3.40.
Kohl’s (KSS) reported similar holiday season results January 4 to those of rival Macy’s. Comparable store sales fell 2.1% in the months of November and December compared to the same period in 2015, while total sales dropped 2.7% in the period. The company also cut its adjusted earnings per share guidance for its fiscal year 2016 to a range of $3.60-$3.65 from $3.80-$4.00. Management cited lower than planned sales in the fourth quarter and expectations for a lower than anticipated gross margin for the full fiscal year due to mix shift and the negative impact of promotional efforts as reasons for the earnings per share guidance reduction.
J.C. Penney (JCP) couldn’t avoid the weakness in the holiday shopping season either as it announced a 0.8% drop in comparable store sales for the nine-week period in November and December on a year-over-year basis January 6. However, the company reported positive comparable store sales for the six-week period from Thanksgiving week through the end of December. J.C. Penney continued the momentum toward profitability it has been able to manufacture in its fiscal 2016, and management reiterated its full-year EBITDA expectation of $1 billion for the fiscal year.
Despite the drop in comparable store sales compared to the holiday season in 2015, J.C. Penney turned in a positive two-year stack in the holiday season. In fact, comparable store sales were 3.1% higher in the most recent holiday season than in the 2014 holiday season. J.C. Penney is still working to recover from the failed Ron Johnson experiment, the poor performance of which is a factor in the positive two-year stacked comparable store sales, but the cutthroat retail environment is doing all that it can to keep the firm down.
The retail space’s woes did not stop with the just the major players; the issues run much deeper than the headline grabbers. L Brands (LB) reported January 5 a 1% drop in comparable sales in the five week period ending December 31 compared to the same period in 2015, which compares unfavorably to expectations for growth of 1.5%. The firm’s performance was pulled down by a 4% fall in comparable sales in its Victoria’s Secret brand, and it now anticipates fourth quarter earnings per share to be near the low end of its $1.85-$2.00 guidance range.
Value-priced fashion apparel and accessory retailer Cato (CATO) also updated on its holiday season January 5, and its results were perhaps the most abysmal of all. Both same-store sales and total sales fell 12% in the five-week period ending December 31 on a year-over-year basis, and management cut its loss per share guidance for the fourth quarter of fiscal 2016 to a range of $0.54-$0.50 from $0.11-$0.07. Store impairment charges and reduced margins were the key factors behind the earnings guidance reduction.
G-III Apparel Group (GIII) cited unseasonably warm weather in the early portion of the fourth quarter, lower traffic, design and merchandising issues in accessories, and an overall weak retail environment as reasons for its poor sales update and fiscal 2017 (ends January 31) guidance reduction. The company had been anticipating positive comparative sales growth in both its Wilsons and Bass retail chains, but it now expects comparative sales to fall by a low-double digit rate at Wilsons and a mid-single digit rate at Bass. Magnifying the sales woes are expectations for a lower than originally anticipated gross margin due to higher than projected promotional activity. As a result, the company expects net sales to be reduced by $20 million and a $0.20 per share reduction in earnings per diluted share. Revenue guidance for the fiscal year has been revised to $2.41 billion, and GAAP earnings per diluted share projections have fallen to a range of $1.21-$1.31.
Pockets of strength did exist in the relatively cheerless holiday season for retailers. Macy’s reported strong performance in activewear and cold weather apparel, fine jewelry, furniture, and bedding in the November-December period, but ongoing weakness in handbags and watches continued to pressure results. Kohl’s management witnessed something very similar in its business as strength in its men’s, home and footwear products was offset by material weakness in accessories (think watches, handbags). J.C. Penney saw strength in appliances, outerwear, boots, toys, and jewelry, but poor performance in women’s apparel continued to weigh on overall results.
Fashion trends have always been inherently difficult to foresee for retailers and investors alike, but it has become increasingly difficult for department stores to effectively capture demand for women’s fashion apparel and accessories, as was evident in the group’s struggles in the most recent holiday season. While the ease, comfort and speed of online shopping is undoubtedly taking a bite out of traditional retail’s pie, changing consumer spending habits are also playing a role in the struggles for department stores to move fashion apparel and accessories. Everyone seems to have an opinion on the spending habits of millennials, but a focus on value seems to be a common trend. Technology is reshaping retail as the first generation of ‘digital natives’ millennials embrace it. An increasing amount of product information and price comparisons are available at our fingertips, and consumers are looking to maximize utility at the lowest possible cost. According