Why Department Stores Are Off To A Tough Start In 2016

Macy's store in Herald Square
Macy's flagship store in NYC's Herald Square.
Courtesy image.

Slow traffic and steep markdowns are a bad combination.

Unfortunately, for department stores, this has been the ongoing reality since mid-2015. With analysts lowering their sales and growth forecasts for big chains such as Macy’s Inc., Nordstrom Inc. and Kohl’s Corp. into the new year, hopes for a quick rebound are dissipating.

On Monday, Cowen & Co. analyst Oliver Chen lowered his earnings-per-share (EPS) estimates and price targets across the department stores in his coverage area based on “weak traffic, poor weather and deep promos.”

Chen said he is particularly concerned about Macy’s. The firm struggled for several consecutive quarters in 2015 with declining sales and profits as internal and macroeconomic factors (FX pressures, slowing tourism) dragged down margins.

Given weak traffic throughout holiday, unfavorable weather, weakness among key handbag partners (i.e., Michael Kors) and national brands (i.e., Ralph Lauren, Tommy Hilfiger, etc.), stronger USD impacting tourism, satellite imagery traffic weakness, and aggressive promos at Macy’s, we’re lowering our estimates,” Chen wrote. “Our store checks in the mall, discussions with industry experts and monitoring of promos showed Macy’s has the most inventory and deepest markdowns in the department store channel.”

Chen also lowered EPS estimates for Kohl’s and Nordstrom, citing warm weather as well as store-specific concerns. At Kohl’s, Chen suggested the current assortment of “Star Wars”-licensed product may not have had the same level of demand that Disney’s “Frozen” garnered. Meanwhile, Chen remains mostly upbeat on Nordstrom — which has generally performed better than many of its peers amidst the retail slowdown — maintaining that the store is his top pick in the space.

Nomura Securities International Inc. analyst Robert Drbul said that in December alone, his Department Stores & Broadlines group — comprised of J.C. Penney Co., The TJX Companies Inc., Ross Stores Inc. and Nordstrom — saw an overall sales decline of 5.9 percent.

The group slumped 12.3 percent overall in 2015; in Q4 (calendar year), the group declined 10.7 percent, Drbul noted.

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