In Telsey Advisory Group’s latest analysis of the department store segment, the firm sees inventory levels and other “fundamentals” as driving results this year.
Dana Telsey, chief research officer at the firm, also noted the impact of tariffs and tax refunds on retail. With tax refunds, Telsey said early indications “point to a decline in the average tax refund amount.”
Analysts noted that as of the week ending Feb. 8, “the number of tax returns processed is down 10.2 percent year-over-year, while the average refund check is down 8.7 percent year-over-year, potentially leaving consumers with less disposable income heading into the year.”
Telsey said the recent retail sales numbers for the most recent holiday shopping season has dragged down valuations. The analysts said in their report that stocks within its “department store coverage universe are up 3 percent on average, but down 11 percent since mid-November (end of last reporting cycle).”
The firm said that in terms of valuation, stocks are trading at discounts of 17 percent and 11 percent on the trailing 12-month and three-year averages, respectively. “The lackluster stock performance and [contraction] is in response to the channel’s holiday sales performance that proved to be more challenging than anticipated, resulting in elevated inventory in January and the corresponding need for higher markdowns,” Telsey said. “For instance, both Macy’s and Nordstrom’s revised EPS guidance reflects incremental gross margin pressure in [the fourth quarter].”
“More broadly, it appears the retail sector’s holiday performance was a disappointment,” the firm said in the report. The sales figures from the National Retail Federation came in 200 basis points lower than forecast, which Telsey Advisory Group “attributed to a combination of market volatility, the government shutdown, trade tensions and possibly a misalignment of seasonal adjustment factors used to calculate the data.”
As such, Telsey said the firm is keeping an eye on fundamentals such as inventory positions. She said based on the firm’s forecasts, “we expect department stores to exit the quarter with aggregate inventory down 2.1 percent year-over-year compared to an average comparable sales decline of 0.2 percent; at the end of [the third quarter of 2018], aggregate inventory was up 1.9 percent versus comparable sales growth of 1.1 percent.”
Tariffs and the impact of the recent government shutdown could also hurt results and “dampen” company outlooks, Telsey added.