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Macy's and Kohl's Upgraded Because Covid Isn't a 'Death Knell'

An analyst at Jefferies says Covid-19 is 'not the death knell ' and upgrades Macy's and Kohl's to buy.
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Declaring that "Covid is not the death knell," a Jefferies analyst upgraded department store operators Macy's  (M) - Get Macy's Inc Report and Kohl's  (KSS) - Get Kohl's Corporation Report to buy on Friday on expectations of increased discretionary spending in 2021.

Shares of Macy's were up 2.64% to $10.69, while Kohl's was up 2.28% to $39.85 in trading Friday.

Analyst Stephanie Wissink raised her price targets on Macy's to $14 from $9 and Kohl's to $47 from $23.

"We believe Covid has altered consumer behaviors and hastens the need for transformational thinking among legacy retailers," Wissink said in a note to investors. "Structural headwinds exist, especially rising costs to operate with higher penetration of online (40%) vs. historic (25%) and labor inflation."

Retailers have been forced to shutter their stores or open on a limited basis due the coronavirus pandemic.

Macy's, the analyst said "needs to aggressively seek improved merch margins and reduce the expense burden at both the field and corporate level - early evidence of both. Real estate CAN be an asset, but needs to be fully reimagined in ways that inspire foot traffic."

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Macy's has its work cut out to reinvigorate traffic, the analyst said, but "the bar has been reset much lower than initially expected and recent quarters suggest directional improvement in fall rate.

Last month, Macy's posted a narrower-than-expected third-quarter loss. While she doesn't expect a recovery to 2019 sales, the analyst doesn't see Macy's "suffering permanent losses to the magnitude assumed."

Kohl's, Wissink said, has the opportunity to reengage and drive deeper loyalty with upgraded merchandising and partnerships; cost tightening in tandem would enable EBITDA recovery more quickly.

Post-Covid, the analyst said she sees the bar for retail experiences being elevated in that "there needs to be something compelling experientially for a consumer to shop in-store." 

"For KSS, partnerships with more national brands and category leading merchandisers  (such as Sephora in beauty) are steps toward ensuring the shopping experience justifies the trip," Wissink said. "

With 65 million annual active customers and 30 million loyalists, Kohl's, the analyst added, "maintains an attractive gateway for emerging brands, but needs to up the cool factor to draw younger, next-gen shoppers."