Shopping carts outside a Target department store in Woburn, Massachusetts, USA 25 October 2017. Target Corporation is the second largest discount retail store in the United States to Walmart, and is traded on the NYSE as TGT.Target department store in Woburn, USA - 25 Oct 2017

The holiday doubts started early this year — before the Thanksgiving feast was even laid out.

Retail stocks sold off sharply and helped lead a market rout Tuesday as solid third-quarter sales from bulwark chains did little to allay investor concerns ahead of Black Friday and the holiday shopping rush.

Off-pricer TJX Cos. Inc. drove comparable sales up 7 percent last quarter as Target Corp.’s comps gained 5.1 percent and Kohl’s Corp. rose 2.5 percent — increases that would have been cheered at another moment and hailed as a both decisive bounce back and a sign of momentum headed into Christmas.

But the bullish comeback narrative that helped drive retail stocks higher this year is now showing signs of cracking.

Investors are fretting over inventories, gross margins, earnings, sales projections and more as they wonder how profitably retailers can operate in the digital age and how long they can keep growing.

It’s a Catch-22 for some. Target, for instance, showed good growth, but has investors worried that its spending to transform its business will weigh on margins.

Brian Cornell, chairman and chief executive officer of Target, tried to set the bar.

“Our business is thriving even as we transform our business,” he told analysts on a conference call.  “As we’ve said previously, we believe that this year will establish a stable benchmark for our operating margin rate over the longer term as we achieve a balancing point between the rate pressures and opportunities of operating an omnichannel retail business.”

But investors wanted more, from Target and the rest of the sector, even the fast-growing off-pricers, and moved away en masse.

Among the hardest hit were Target, down 10.5 percent to $69.03; Ross Stores Inc., 9.4 percent to $82.64; Kohl’s Corp., 8.9 percent to $64.45; Qurate Retail Inc., 6.9 percent to $21.16; Dillard’s Inc., 6.4 percent to $62.65, and TJX Cos. 4.4 percent to $46.82.

The Dow Jones Industrial Average closed down 2.2 percent, or 551.80 points, to 24,465.64, giving back most of its gains for the year.

 

Target Corp.

Target continued to grow in the third quarter and is in rapid transformation mode, but it wasn’t enough for Wall Street Tuesday.

The company’s stock tumbled by more than 10 percent, in part because earnings per share rose to $1.09 — 3 cents shy of the $1.12 per share analysts expected.

Revenue advanced 5.6 percent to $17.8 billion and net income shot up 30.2 percent to $622 million, but gross margin rate declined to 28.7 percent compared with 29.6 percent a year earlier.

Prior to the start of the holiday season, Target’s digital sales rose 49 percent in the third quarter, “far outpacing the industry and the vast majority of our peers,” according to Cornell.

“We’re poised to benefit from far greater scale across all initiatives,” Cornell said. “Growth is being driven by small format locations opening in dense, urban locations and on college campuses. These stores have high productivity, allowing them to deliver strong financial returns, while allowing Target to serve a guest we wouldn’t have served in the past.

During a conference call, retail analysts zeroed in on the erosion of the gross margin rate, which Target attributed to higher supply chain costs driven by growth in digital fulfillment costs and other expenses tied to holiday-related inventory receipts compared with last year, partially offset by the benefit of merchant initiatives.

 

Kohl’s Corp.

Investors looked straight past better-than-anticipated third-quarter numbers from Kohl’s Corp. and zeroed in on the chain’s forecast.

The company projected adjusted EPS this year of $5.35 to $5.55 and while that was an improvement on prior guidance, the midpoint was below the average analyst estimate of $5.51 and sent its stock price down nearly 9 percent.

The company cited steep holiday shipping costs and the fact that the season would be promotion heavy as the traditional bricks-and-mortar retailers battle it our with the online crowd for sales as reasons behind the outlook.

Nevertheless, Randal J. Konik, an equity analyst at Jefferies, brushed off concerns, writing in a note to clients that he was still keen on the company.

“We aren’t concerned as the guide still appears conservative, the consumer is strong, and we expect continued market share gains ahead,” he said. “We are buyers given traction in proprietary brands, share gains from peer closings, thoughtful traffic-driving partnerships, omni initiatives and favorable off-mall real estate.”

Kohl’s third-quarter net income tallied $161 million, up from $117 million a year earlier. Sales were 1.3 percent higher at $4.63 billion.

“The backdrop around the consumer indicators are positive. They have been all year. So there is certainly no reason to believe that will change as we head into the holidays,” ceo Michelle Gass said.

 

Off-Pricers

A momentary slip on Wall Street doesn’t mean the off-price channel isn’t growing — it’s expanding faster than ever.

The TJX Cos. Inc., parent to T.J. Maxx and Marshalls, and Ross Stores Inc. both reported earnings Tuesday that topped last year’s figures.

TJX’s third-quarter income totaled $762.3 million, up from $641.4 million a year earlier. It was also the 17th-consecutive quarter the company saw customer traffic increase at its T.J. Maxx and Marshalls stores.

“Our strong third-quarter results demonstrate the fundamental strength of our off-price treasure hunt,” Ernie Herrman, TJX ceo and president said.

Meanwhile, Ross’ profits for the quarter rose to $338.1 million, up from $274.4 million in the same quarter a year earlier.

Still, both TJX and Ross updated their fourth-quarter guidance with more cautionary outlooks, causing shares to slip.

Simeon Siegel, specialty retail and apparel analyst at Nomura Securities, said the fundamentals at off-price retailers have not changed; the sentiment has. His firm remains positive on both TJX and Ross.

“The ability to see improvement in your share prices is a very hard thing at year-end,” he said. “Right now, it feels like the risk was asymmetric. The whole world is red.”

“The fear from investors was that if the off-price channel becomes larger than the full-price channel that you’d have a tremendous amount of demand, but you wouldn’t have supply that could match it,” Siegel said. “That inherently does not make sense, because the off-price takes the leftovers from full price. But the inventory bill suggests that they have plenty of supply and we see that they have plenty of demand.”

Retail Stock Struggles

After a solid run-up this year as the landscape improved, some of the oomph has come out of retail stocks this month.
Oct. 31 Nov. 20 Change
Nordstrom Inc. $65.77 $50.99 -22.5%
Target Corp. $83.63 $69.03 -17.5%
Kohl’s Corp. $75.73 $64.45 -14.9%
TJX Cos. Inc. $54.74 $46.84 -14.4%
J.C. Penney Co. Inc. $1.47 $1.29 -12.2%
Macy’s Inc. $34.29 $31.95 -6.8%
Walmart Inc. $100.28 $94.16 -6.1%
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