By David Moin
with contributions from Kellie Ell
 on January 9, 2020
J.C. Penney store

While many retailers glided smoothly through holiday 2019, it was still a tough stretch for some.

On Thursday, J.C. Penney Co. Inc. and Kohl’s Corp. reported that their comparable sales for the two-month holiday period declined, 7.5 percent and 0.2 percent, respectively. The results came a day after Macy’s said its comp sales for the holiday period fell 0.6 percent.

And L Brands Inc. said holiday comps fell 12 percent at Victoria’s Secret.

The results from J.C. Penney and Kohl’s underscored the continuing challenges facing department stores. They’ve been beset by sluggish sales in most women’s fashion categories, and by consumers shifting some spending to e-commerce sites, in particular Amazon, and perceiving better values at off-pricers. Department stores are criticized for not innovating fast enough to keep up with the competition and changing times.

The department store sector “continues to underperform as alternative channels continue to resonate more favorably with consumers and gain share,” said Christina Boni, vice president and senior credit officer at Moody’s Investors Service. “Holiday performance suggests department stores will need to change more rapidly in 2020 to maintain their market position.”

“The key issue is that department store market share is down from 9.5 percent in the mid-Eighties, to 5 percent in 2005 and is now only 1.2 percent. And it is still overcapacitied,” said Craig Johnson, president of Customer Growth Partners.

While department stores lag, big-box discounters such as Walmart, Costco and Target, off-pricers T.J. Maxx and Burlington, as well as Best Buy, certain specialty retailers such as Lululemon and Williams Sonoma continue to shine.

Overall, the retail industry experienced a healthy holiday 2019 season. Gains are estimated at around 4 percent on average, though profitability isn’t expected to be commensurate due to the pervasive price promoting. A precise picture of retail performance will emerge as retailers report fourth-quarter profits in February and March.

The Dallas-based, $12 billion J.C. Penney saw its stock tumble 10.8 percent to $1.07, on Wall Street Thursday after the company reported that its comparable-store sales for the nine-week period ending Jan. 4 decreased 7.5 percent. But when excluding the impact of dropping major appliances and no longer carrying furniture in its stores, comparable sales for the holiday period fell 5.3 percent. J.C. Penney still sells furniture online.

J.C. Penney reaffirmed its guidance for 2019, expecting comparable-store sales to range from minus 8 percent to minus 7 percent. Excluding the impact of exiting major appliances and no longer selling furniture in the stores, comparable-store sales are expected to range from minus 6 percent to minus 5 percent. Cost of goods sold, as a percent of net sales, is expected to decrease 150 to 200 basis points compared with last year, adjusted EBITDA is seen exceeding $475 million, and free cash flow will be positive.

It was also a bad day for Kohl’s, which saw its stock fall 6.5 percent to $46.15 after the $20 billion chain reported holiday sales.

“Throughout the holiday period, we remained focused on serving our loyal customers and engaging with an increasing number of new customers. We are managing the business with discipline and we expect to deliver on our earnings guidance for the full year,” said Michelle Gass, Kohl’s chief executive officer. “We continue to see momentum in key areas including our digital business, active, beauty and children’s, and solid performance in footwear and men’s. This was offset by softness in women’s, which we are working with speed to address.”

Gass added: “As we look ahead, we are committed to driving innovation and bringing new experiences to both our existing and new customers.” Kohl’s has been aggressively forming new kinds of partnerships including with Amazon. Shoppers can pick up and return Amazon orders at Kohl’s stores. The arrangement was initially exclusive but now some other stores also provide the service, drawing some traffic away from Kohl’s.

Based on the holiday performance, Kohl’s now expects its fiscal 2019 diluted earnings per share to be at the low end of its previously announced guidance of $4.75 to $4.95. This guidance excludes $0.22 per diluted share related to the extinguishment of debt and impairments, store closings and other costs in the first nine months of 2019.

Kohl’s will issue fourth-quarter results on March 3 and host an investor day on March 16 in New York.

Though posting a negative comp for the holiday season, the $25 billion Macy’s managed to beat expectations, and its chairman and ceo Jeff Gennette noted that selling trends improved during the holiday season, though still negative, down 0.6 percent for the November-to-December period. The comp figure included owned and licensed sales. On an owned basis only, Macy’s comparable sales for the holiday period slipped 0.7 percent.

“Macy’s Inc.’s performance during the holiday season reflected a strong trend improvement from the third quarter,” Gennette said on Wednesday. “Our digital business and Growth 150 stores performed well.” Macy’s Growth 150 stores are those units where the retailer has been investing the most in improving assortments and service to capture greater levels of business.

“Additionally, customers responded to our gifting assortment and marketing strategy, particularly in the 10 days before Christmas,” Gennette added. “The entire organization committed to delivering holiday 2019, and it showed up in our execution.”

The company said Wednesday that 28 Macy stores and one Bloomingdale’s store will close in the coming weeks.

Macy’s operates 645 Macy’s department stores and 35 Bloomingdale’s full-line department stores. In the 2016-17 period, Macy’s closed 100 full-line department stores. In 2015, Macy’s closed 41 stores.

There were also layoffs triggered at Bloomingdale’s this week. Bloomingdale’s timed its cutback with its move to Long Island City in Queens, N.Y., this month into The Jacx, a massive new 1.2 million-square-foot office development on Jackson Avenue, referred to as a campus. Bloomingdale’s is relocating all its New York City-based corporate and support colleagues to Long Island City, involving about 1,000 employees. It is believed that some top executives will maintain offices at the 59th Street flagship in Manhattan.

Macy’s will move some functions as well to The Jacx. Macy’s Inc. will host an investor day on Feb. 5 at the New York Stock Exchange where management will discuss growth plans, the three-year strategy, and cost reductions, including possibly additional store closures and further personnel cuts.

At L Brands, sales for the nine-week period ending Jan. 4 were $3.9 billion, compared with just over $4 billion the same time last year. The company’s overall comparable sales, which includes Bath & Body Works and Pink as well as Victoria’s Secret in its portfolio, fell 3 percent during the same period.

Victoria’s Secret’s current quarter-to-date, merchandise margin rates are down, driven by increased promotional activity, an overlap from last year’s sourcing costs and misses in bras and sleepwear, the firm said.

“The miss to expectations was driven by casual sleepwear, as sales and margin dollars increased in sexy sleep[wear],” the company said in a statement.

The company lowered its fourth-quarter EPS guidance as a result from $2 a share down to $1.85.

But investors didn’t seem to mind. The stock increased 4.5 percent to $18.96 due to the strength of the Bath & Body Works business. Comparable sales at the Bath & Body Works business increased 9 percent during the holiday shopping season on top of the 14 percent gain the same time last year.

“Holiday sales were at the high end of expectations with strong customer response to key promotional days,” a company statement said, regarding Bath & Body Works.

L Brands is also seen as a value buy right now by some investors, which could have furthered added to its stock jump. Bank of America analyst Lorraine Hutchinson recently upgraded the stock to a “buy” rating thanks to the “inexpensive valuation, a high-dividend yield, strong and growing Bath & Body Works business and potential for stabilization at Victoria’s Secret.”

Wells Fargo senior retail analyst Ike Boruchow echoed Hutchinson’s statements. His firm has an “overweight” rating on L Brands stock.

“In spite of VS reporting its worst holiday ever, there is no change to our thesis as we continue to believe there’s significant value in the optionality within the [L Brands] portfolio,” Boruchow wrote in a note. “Investors were on the sidelines waiting for VS to get their holiday 2019 out of the way, [the buy side was anticipating very weak results, which they received], and investors may now be ready to step in. VS has become so challenged that now more than ever there should be [an] elevated focus on strategic alternatives for LB.”

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