Retail stocks are slowly but surely becoming the elephant in the room, the silent liability that threatens what otherwise is a record-breaking bull market in the major indices.
That silence was momentarily shattered last month when Bloomberg reported an unexpected slowdown in revenue from major U.S. retail stocks in June of this year. Most retail categories showed a drop in demand, leading to a decline in personal consumption to the tune of 0.3% against May. Economists, on the other hand, were forecasting gains of the same amount.
The fortunes of retail stocks very much traces the path of the popular exchange-traded fund SPDR S&P Retail (XRT) — which includes a broad list of department stores in its holdings.
Year-to-date, the ETF of retail stocks is in the black … but just barely, at 1.1%. Since the beginning of April, the XRT fund is down more than 4%, a victim of choppy swings in the markets as well as pronounced bearishness over the past 60 days.
While some retail stocks — in particular, online outlets and service providers — have shined brightly, the markets have punished several others. With four department stores releasing earnings results this week, which one can rise above the muck?
Dillard’s (DDS)
Contrary to its premium brand image, Dillard (DDS) is one of the worst performers among retail stocks this year, down a steep 22% year-to-date. To put this number into perspective, DDS stock has only netted 1.8% in the markets since January of last year. Adding to the pain is the general consensus that American consumers still aren’t allocating their discretionary income towards retail purchases — a side effect of a labor market still in recovery.
Historical earnings performance for DDS stock provides no rational basis for imminent relief. In the past four earnings reports, only one — for the third quarter of fiscal year 2015 results — met or exceeded Wall Street expectations. DDS stock is on pace to suffer an 8% loss in the markets over a trailing 52-week period.
Beating expectations for Q2 FY2016 — with a release date scheduled for August 13 — will be a very tall order. DDS stock has fundamentally suffered from a two-pronged attack: declining sales and rising costs. Furthermore, forward momentum for DDS stock has clearly dissipated. No longer can investors count on the general trend of DDS stock moving higher one month after earnings data were released: DDS stock imploded spectacularly after Q1 FY2016.
The markets are avoiding DDS stock like the plague, and for good reason. Look for earnings to disappoint and for investors to continue the mad rush for the exits.
JCPenney (JCP)
On the decidedly less chic spectrum of retail stocks resides JCPenney (JCP), which represents a bit of a conundrum for financial analysts. Despite a long-term debt level that is currently three times the amount of shareholder’s equity, JCP stock continues to impress in the markets.
JCP stock is up 27% YTD, which is very nearly the inverse opposite of DDS stock. However, JCP stock has largely moved sideways over the last 90 days, which piques a lot of interest for their upcoming Q2 results, due at the end of this week.
JCP stock’s earnings performance can be divided into two distinct sectors: pre-February 2014 and post-February 2014. Between May of 2012 and December of 2013, JCP stock missed net income targets seven times in a row. Since the release of Q4 FY2014 results on February 26, 2014, however, JCP stock has beat earnings expectations 5 times and missed just once.
Will that momentum be enough to score another win for Q2 FY2016? JCP stock has a very significant headwind in the form of reduced consumer confidence, a situation made all the more difficult with fierce competition among retail stocks in general. In addition, JCP stock has been very volatile following the last three earnings reports, averaging losses of 13.25% in the month after each earnings report.
The see-saw action might make JCP stock holders nervous, regardless of the upcoming Q2 results. But combined with consumer weakness heading into earnings, JCPenney seems poised to underdeliver.
Kohl’s (KSS)
Shareholders of Kohl’s (KSS) have witnessed one of the more comical trends among retail stocks this year. On April Fool’s Day, KSS stock found itself up almost 30% from the start of 2015. Then began a correction in the markets, slowly at first, but eventually melting down in mid-May. Now, KSS stock finds itself completely flat for the year.
The department store’s upcoming Q2 report — scheduled before the opening bell on August 13 — is very much a coin toss. Over the past seven earnings releases, KSS stock has missed Wall Street consensus three times, although recent momentum is bullish with the last two earnings exceeding expectations.
The questions is whether Kohl’s can steal market share from its competitors and thereby drive revenue growth, which has been flat on an annualized basis over the past three years.
Investors, who have been largely positive on KSS stock since the beginning of 2013, are demonstrating serious concern in recent trades. Over the past 10 earnings reports, KSS stock has mostly swung in an upward direction a month following release, averaging 1.5%. However, a month after the Q1 FY2016 release, KSS stock stumbled nearly 3% in the markets.
With the difficulties affecting most department store retail stocks, the action in KSS stock hardly inspires confidence, suggesting that investors may want to wait before engaging this opportunity.
Macy’s (M)
Although lacking the market sex appeal of JCP stock, Macy’s (M) stock has rewarded long-term investors quite nicely over the years. M stock is easily one of the more stable names among retail stocks, and that sentiment remains more or less true in 2015 despite a rather anemic YTD-performance of less than 3%.
Against performance ratings over the past 13 earnings releases, M stock is the strongest investment featured on this article, with 10 reports exceeding Wall Street consensus. The one caveat is that the last four earnings releases have included two underperforming reports.
Also, from a financial perspective, M stock is doing just enough in terms of top-line sales to keep shareholders happy, although the longer-term implications of this ho-hum performance remain to be seen.
With Q2 FY2016 results set to be disclosed on August 12, M stock investors will be banking on prior consistency in the markets. In the previous 13 earnings reports, M stock generated average returns of 2% one month after each report. And despite the mixed earnings results in the past four reports, M stock popped up an average of 4.6% a month after each release.
Therefore, the recent technical picture of M stock — a series of higher highs and higher lows — confirms the overall bullishness that investors have towards the upscale department store.
M stock will face increasingly stiff competition from online retail stocks but for now, investors will likely benefit from riding the current trend.
As of this writing, Josh Enomoto was short JCP.
