Department Store Earnings Watch: What to Expect in Q2

Market watchers say the sluggish retail traffic that plagued U.S. department stores in the first quarter may have made its way into Q2 and the evidence will likely appear in upcoming earnings releases.

Macy’s Inc. has already lent credence to the speculation as its second-quarter earnings, released Aug. 12, revealed continuing profits and sales declines stoked by sliding consumer demand and slowing tourism traffic.

In addition to slumping sales at the department store chain — which includes Bloomingdales — Cowen and Co. analyst Oliver Chen pointed out, in an Aug. 12 note, that this is the second consecutive quarter in which Macy’s’ inventory levels outpaced its sales growth.

And Macy’s isn’t the only department with an inventory overage issue.

“The industry exited Q1 with the highest inventory levels — relative to sales — since 4Q13,” UBS Investment Bank analyst Michael Binetti wrote in an Aug. 10 note.

Looking ahead, usual promotional drivers such as back-to-school and tax holidays haven’t been giving department stores much of a jolt either, Binetti cautions.

“We think August is off to a slow start [due to] tax holiday shifts; and contacts suggest a lot of caution in the channel heading into back to school—making department stores’ ’15 EPS algorithms look strained to us,” Binetti said.

Meanwhile, Nordstrom Inc. has emerged as a source of hope for investors betting on department stores — although it too posted lower year-over-year profit in Q1. That loss, insiders explain, was due primarily due to the Seattle-based company’s investments in accelerated store expansions, acquisitions and technology costs.

Binetti designated the chain his top department store pick heading into Q2 while Chen dubbed the firm the omnichannel leader in its retailing class.

Kohl’s Corp. — which is to release its earnings on Aug. 13 — has been another source of concern for market watchers. The firm shouldered FX headwinds and West Coast ports impacts in its most recent quarter.

“We slightly trim our 2Q same store sales estimate to 1 percent and our EPS estimate to $1.17,” Binetti wrote of lowering his expectations for Kohl’s in an Aug. 10 note. “Stock sentiment is very low after a 1Q same-store-sales miss. We think Kohl’s needs a strong 2Q comp — probably at least 2 percent at this point — to convince skeptics its initiatives are gathering enough momentum to be able to lap a tough 3.7 percent compare in 4Q.”

Binetti added that his intra-quarter meetings with Kohl’s management however, highlighted progress on new initiatives — including loyalty, athletic and beauty. Accelerating the momentum behind those initiatives, Binetti said, will be critical to Kohl’s pulling off its 2015 guidance.

Going slightly against the grain, Robert Drbul, Nomura Securities International Inc. analyst, said he’s generally optimistic ahead of major department store earnings releases this week.

“As we consider the current macro operating environment, we believe it is important to note current levels of oil and gas, low levels of unemployment, and an improved housing market—all of which are pointing to a somewhat stable and positive consumer spending environment as we head into the important Back-to-School selling period,” Drbul wrote on July 30.

Drbul said he expects comps to generally improve going into the back half of the year. The analyst said he expects a 4 percent increase at Nordstrom, which reports on Aug. 13, and a 3.5 percent increase at J.C. Penney Co. Inc., which reports on Aug. 14.

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