As the major department stores and off-price retailers get ready to report third-quarter sales and earnings beginning next week with Dillard’s Inc., Kohl’s Corp. and Macy’s Inc., retail analyst Dana Telsey of Telsey Advisory Group said in a research note today that the third quarter was likely a tough one for the companies in these sectors.

And though Telsey is not disputing National Retail Federation expectations that department stores will be a key destination for shoppers this holiday, she is forecasting fourth-quarter same-store sales to come in ahead 2.3 percent for department stores, which compares with 4.1 percent last year.

For the third quarter, there were several headwinds. “Although 2015 was expected to be more back-half-weighted in terms of sales and earnings, we believe that [third-quarter] results remained under pressure due to: 1) a tough start to the fall selling season given unusually warm weather; 2) continued weakness in the southern territories related to the slowdown in the oil industry; and, 3) a lack of tourism and spending in key U.S. destination cities,” Telsey noted.

Subsequently, Telsey is bearish on Bon-Ton Stores Inc., Dillard’s and Stage Stores Inc.

Telsey went on to say that an analysis of consumer expenditure data show that retailers in the department store and off-price channels “indicates that demand has actually been a healthy 3 percent year-to-date, with August and September showing year-over-year increases of 2.6 percent and 3.3 percent, respectively.”

“While we are skeptical that these trends translated into positive results for all the department stores, we expect that off-price retailers remained the beneficiary,” Telsey added.

Regarding share prices, the analyst said current valuations “already reflect third-quarter challenges.” Her entire coverage area is down by about 14 percent since the summer, which includes department stores with a 15 percent decline and a 12 percent drop for off-pricers. Telsey said this was likely due to a “reflection of uncertainty around the outcome of sales and earnings within the context of a choppy retail environment.” As such, there are a few bargains out there for investors.

Of note is Burlington Stores, which Telsey has pegged with an “outperform” rating and a price target of $62. Telsey said Burlington, which has been trading at a roughly 10 percent discount to competitors Ross Stores Inc. and TJX Cos. Inc., is an attractive buy for investors “given the company’s runway of growth and the stock’s more reasonable valuation.”

Burlington closed down 1.9 percent at the bell to $49.01.

Nordstrom Inc. is also worth a look. Telsey has a “market perform” rating on the stock, and described it as a “high-quality” investment “for an attractive price.” Telsey has the stock with an $80 price target.

Shares of Nordstrom closed down 0.9 percent to $66.42.


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