Is All Hope Lost for Department Stores? Why Moody’s Says the Prospects Are ‘Bleak’

Moody’s is feeling down on department stores.

The credit rating agency today slashed its outlook for the sector citing ongoing top-line disappointments in the space.

“Despite a very healthy consumer and heavy spending to improve inventory efficiency and online capabilities, department stores rang up a disappointing third quarter close on the heels of a very bleak first half,” Christina Boni, Moody’s senior credit officer, wrote in a client note, adding that the firm cut its operating income growth forecast for the sector again, to a 20% decline in 2019 versus its previously forecast 15% decline.

While Boni anticipates that department stores will “remain among the worst performers of retail” into 2020 — describing prospects as “increasingly bleak” — she said she expects sharp declines in the space to abate significantly in the New Year, with operating income stabilizing at a 1% projected decrease.

Department stores have taken investors on a roller coaster ride for the better part of three years as its key names teeter between glimmers of hope and signals of demise.

The third-quarter had been a mixed bag for most of the sector’s players — with Kohl’s and Macy’s citing unseasonably warm fall temperatures for their disappointing results as Nordstrom’s performance painted a more positive picture of the sector. Nordstrom’s this month, filed Q3 earnings per diluted share of 81 cents, trouncing Wall Street’s forecasts of 64 cents earnings per share. The chain’s revenues, at $3.67 billion, were in line with analysts’ bets.

Macy’s, meanwhile, slashed its fiscal year guidance after posting on Nov. 21 its first Q3 same-store sales decline in two years. Nevertheless, its adjusted earnings per share of 7 cents topped analysts’ expectations of a break-even point while revenues were down 4.3% to $5.17 billion, versus Wall Street’s bets of $5.32 million. Its same-store sales dropped 3.5%.

JCPenney signaled it had some turnaround potential when it posted a narrower-than-expected third-quarter loss on Nov. 3 and upgraded its full-year outlook. The firm saw its adjusted net loss per share improve 37.5% to 29 cents, far better than Wall Street’s bets of a 55-cent loss. Still, the beleaguered retailer posted revenues that decreased 10.1% to $2.38 billion, while adjusted same-store sales were down 6.6%.

A shopper heads into a J.C. Penney store, in Seattle. Black Friday has morphed from a single day when people got up early to score doorbusters into a whole season of deals, so shoppers may feel less need to be outHoliday Shopping Black Friday, Seattle, USA - 24 Nov 2017
A shopper heads into a JCPenney store in Seattle.
CREDIT: Shutterstock

Kohl’s on Nov. 19 logged adjusted diluted earnings per share of 74 cents, well below Wall Street’s forecast of 86 cents. Profits dropped to $123 million, compared with $161 million the previous year. Same-store sales, which grew 2.5% in the same quarter last year, increased slightly by 0.4% this Q3, versus expected growth of 0.8%. Like Macy’s, it also slashed its guidance for the year.

For struggling retailers, preliminary Thanksgiving weekend results had signaled that the holiday season was off to a solid start: According to Salesforce, global online sales saw a 15% gain to $768 billion during the unofficial holiday season kick-off weekend. But Moody’s suggested today that the competitive landscape has yielded an “extremely promotional” environment during the all-important holiday season.

“Fewer days between Thanksgiving and Christmas relative to last year could exacerbate the promotional environment,” Boni added. The weakness at mainline department stores comes as off-price retail players TJ Maxx, Marshalls, Burlington and Ross have managed to eke out steady gains by leveraging their generally lower prices on branded wares and a thrill of the hunt/find environment.

Despite Moody’s negative outlook, department stores looked to end the trading day in the green on Monday. As of 4 p.m. ET, Macy’s was up 2.2% to $15.48, Nordstrom advanced 3.6% to $38.91, Kohl’s was up 3.3% to $48.71, and JCPenney had gained 1.8% to $1.15.

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