It’s been a tough time for department stores. Of the companies that have reported second-quarter results, Kohl’s Corp., Stage Stores Inc., Macy’s Inc., J.C. Penney Co. Inc. and Dillard’s Inc. have all posted negative same-store sales. Only Nordstrom Inc. showed positive comparative sales.
To be fair, the same-store sales declines came in better than expected. But investors remain worried, and several analysts turned up the heat on the companies that did not meet expectations — particularly J.C. Penney.
One of the biggest concerns is how these companies are positioned for the critical fourth quarter. Moreover, the primary issue is centered on how retailers — across all channels — are positioned against Amazon Inc. Most analysts are in agreement that physical stores are not going to disappear. But as they transform themselves, the top-of-mind questions for investors and analysts include: What will the financial impact be? Who will be hurt the most?
For some, the off-price sector — despite a bumpy stock performance — may be one of the only apparel segments to thrive.
For now, though, in the department store segment, visibility is critical, at least for one analyst. After Penney’s results, Gordon Haskett analyst Chuck Grom lowered the price target on the stock to $4 from $4.50 and kept a “hold” rating on it, noting that the retailer’s underperformance in the second quarter “only clouds a story that has significant top-line challenges.” Grom described the retailer’s position as being “almost as depressing as being a New York Jets season ticket holder.”
Still, Grom offered some praise for the retailer, given the current market conditions. “All told, we applaud the team in Plano for not ‘resting on their laurels’ and see some potential ‘green shoots’ coming from apparel improvement, but remain uninvolved for the time being and still prefer ‘accumulate-rated Nordstrom’ in the department store vertical,” Grom noted.
Analysts at Telsey Advisory Group downgraded shares of Penney’s to “market perform” from “outperform.” The firm also lowered its price target to $5 from $7. Of concern for the analysts is that “margin pressure appears to have set in, which leads to concerns around the company’s ability to meet its earnings before interest, taxes, depreciation and amortization guidance that had already become vague at the beginning of the year.”
Analysts are eyeing Amazon as one of the biggest threats to maintaining margins. Even the seemingly resilient off-price sector has been scrutinized. In a recent research note, Wells Fargo Securities analyst Ike Boruchow said “on the heels of increased concerns around the Internet/Amazon, investors have recently shunned retailers that specialize in the sale of third party goods (especially those with outsized margins and premium multiples).”
“On top of subsectors like auto parts, grocery, sporting goods and beauty retail, the off-price space has likewise come under pressure the past few months,” he said, adding that since May, Burlington Coat Factory, Ross Stores and TJX Cos. has collectively declined about 14 percent versus the S&P, which is up 3.6 percent.
“In our view, the key difference here is that, unlike some of those other spaces that have seen fundamentals worsen over the past six to nine months, we don’t believe off-price is falling on hard times,” Boruchow noted, adding that he believes the “recent pullback in the stocks is a result of investor concern reflecting that (1) Amazon is a credible and imminent threat to off-price success, (2) off-price market share is decelerating, (3) the off-price return profile is weakening and (4) the aggressive footage growth in the space will become a liability down the road.”
For the near term, Boruchow said the threat posed by Amazon’s Prime Wardrobe might have spooked investors, but said “the off-price space has a sustainable ‘moat’ around their business that [other sub-sectors lack.”
“Not only is the off-price channel the lowest-cost provider of their premium merchandise (20 percent to 60 percent below department store pricing), but a key aspect of the shopping experience is the repeat visits for the in-store ‘treasure hunt’ that renders customers with unique and high-value branded deals — a value proposition that is difficult to reproduce online,” Boruchow said.
Antony Karabus, chief executive officer of HRC Retail Advisory, said in his recent retail analysis report that the notion of discovery and treasure-hunting will be an important differentiator in the market.
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