macy's earnings season first quarter

Buckle up.

Retailers are about to turn in their first-quarter updates and that sinking feeling felt in most of the industry isn’t going to go anywhere. Macy’s Inc., Kohl’s Corp. and Nordstrom Inc. start things off today, while J.C. Penney Co. Inc. will join in on Friday.

Analysts project Nordstrom will be the only player in that group to show sales gains for the quarter, and all four chains are expected to post lower earnings, adjusting for special items.

The department store-heavy start to the reporting cycle will no doubt make an already dismal fashion retailing scene feel even worse. Outside of off-pricers such as TJX Cos. Inc. and Ross Stores Inc., both of which report results next week, there are almost no signs of strength in the industry.

While the fears of retail’s pending demise are no doubt overdone, there is a broad acknowledgment of the systemic changes sweeping though the industry, with technology transforming shopping and consumer preferences shifting.

“This is not the end of days,” said Craig Johnson, president of Customer Growth Partners. “But for apparel and department stores, it looks very much like the 2008 recession, demand is way down, traffic is down.”

Johnson said the industry has to “right-size,” getting smaller to grow again.

“There’s still too much apparel capacity, physical retail capacity,” he said, noting that what has happened in sections of apparel retailing is now happening at a more macro scale.

“The same thing happened in fast fashion a year or two ago, when Forever 21 ended up with all these two-level, junior anchor spaces that are half-empty today,” he said.

Johnson estimated that retail is about halfway through its “right-sizing,” with big names such as Penney’s and Macy’s already shuttering stores.

What makes the apparel weakness so striking is that it’s come amid a generally healthy consumer environment, with very low unemployment, at least by the official tally. Overall retail sales rose 4.1 percent for January, February and March combined, as sales at apparel and accessories specialty stores fell 2.6 percent and department stores declined 6.6 percent, according to government figures. The areas that were growing included online and other non-store retailers (up 11.2 percent), gas stations (up 14.8 percent) and building and garden supply stores (up 6.4 percent).

Wells Fargo analyst Ike Boruchow said retail stocks are the cheapest they’ve been since 2009, relative to the market.

The up side, if it could be called that, is that investors aren’t looking for too much right now.

Pointing to the companies in the fashion sphere that have already reported results, Boruchow said the only stocks that went down after reports were firms that turned up with “more to worry about” such as Fossil, which saw its stock fall 20.4 percent to $14.44 on Wednesday.

Fossil’s first-quarter sales dropped 12 percent to $78 million, driving net losses to $48.2 million. Sales fell across all the company’s markets and through e-commerce, with declines in traditional watches offsetting growth in the connected watches. Chief executive officer Kosta Kartsotis attributed the tough quarter to an overall “challenging retail environment and a watch category undergoing significant change.”

Boruchow has a “sell” rating on Fossil.

“That’s a disaster,” he said of the company’s report. “You’ve got to be really bad to be going down on [first-quarter reports] right now,” he said.

Investors looking to put money into retail are going toward safe havens, namely the off-pricers.

“They’re taking the market share that everyone else is losing,” Boruchow said. “They’re becoming more defensible businesses with more leverage and scale. On one hand, everybody knows the same thing [making it a less attractive investment], on the flip side, nobody cares that everybody’s there because everyone just wants to be able to sleep at night.”

So retailers might get something of a pass this quarter from the Street, which knows things will be bad. But when will things get better?

“You need to see one thing in order for this thing to shake out,” Boruchow said. “That is stability. If you don’t see stabilization, people aren’t going to stick their neck out, people have been burned so many times.”

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