Publish date:

7 Department Store Stocks: Report Card

Department stores finish up reporting second-quarter earnings. Here's how they stack up.

(Department store sector overview updated with Sears earnings details.)

NEW YORK (TheStreet) -- Department stores, for the most part, reported solid second-quarter earnings, but outlooks remain tepid.

It was fairly easy for these retailers to beat expectations after months of cost cuts and the streamlining of operations. Even just a moderate comeback in sales was able provide sufficiant earnings leverage for the stores.

Still, investors were chiefly focused on managements' outlook for the second-half of the year, as a consumer slowdown in spending once again looms, and severe discounting threatens margins. And, overall, they were disappointed.

TST Recommends

Fitch Ratings predicts department store sales will be up about 1% in 2010 and 2011, better than its previous estimate of a decline between 1% and 2% for the year.

Of course, there will be both winners and losers within the sector. Those department stores that have invested in stores even amid the recession -- improving brands and adding private labels -- and those that have continued to focus on value, will likely come out on top.

These winners will succeed at the expense of those other players that continue to execute poorly, have underinvested, or are unable to invest appropriately in their store base, according to Fitch Ratings. Meanwhile, department store results also set the tone for the retail as a whole, as they kick off the earnings season for the sector.

So settle in and click on for a preview of how department stores fared in the second quarter....

Sears

Sears

(SHLD)

may have cut its second-quarter loss by more than half, but its earnings report was far from optimistic.

The flailing department store lost $39 million, or 35 cents a share, compared with a loss of $94 million, or 79 cents, last year. Excluding one-time adjustments, Sears actually lost 19 cents, one cent more than consensus estimates.

Sears revenue fell slightly to $10.46 billion from $10.55 billion, also short of Wall Street's forecast of $10.62 billion. Same-store sales declined 2.8% at namesake stores and 1.4% at Kmart. This is the first comparable sales decline at Kmart in three quarters, as the discounter was hurt by food sales.

But Kmart's gross margins increased 230 basis points from last year and overall gross margin rose to 27% from 26.5%.

During the quarter, Sears' resumed its share buybacks, repurchasing $272 million of stock.

Saks

Saks

(SKS)

narrowed its loss in its second quarter, as its margins received a boost from more full-price selling.

During the quarter, the high-end department store lost $32.3 million, or 21 cents a share, compared with a loss of $54.5 million, or 39 cents, in the year-ago period.

Excluding charges related to the closing of stores and severance packages, Saks actually lost 13 cents a share, smaller than the 17-cent lost analysts forecast.

Saks revenue grew 5% to $593.1 million, while same-store sales jumped 4.6%. Gross margins increased to 37.3% from 30.3%.

Instead of drastically slashing prices, which weighed on margins last year, Saks has been working with designers to create merchandise that has a lower ticket price.

The company is also cutting costs by shuttering stores, and it announced on Tuesday that it plans on closing its Saks Fifth Avenue stores in Plano, Texas, and Mission Viejo, Calif.

Macy's

Macy's

(M) - Get Report

, no doubt, is the comeback kid.

During the second quarter, the department store earned $147 million, or 35 cents a share, compared with $7 million, or 2 cents in the year-ago period. Last year was impacted by 18 cents in restructuring charges. Analysts were calling for a profit of 29 cents a share for Macy's.

Macy's sales jumped 7% to $5.54 billion from $5.16 billion, while same-store sales grew 4.9%.

Looking ahead, Macy's now expects full-year earnings in the range of $1.85 to $1.90 a share, from a prior outlook of $1.75 to $1.80. Same-store sales are forecast to rise 4.2%, compared with previous guidance of a 3.5% increase.

Macy's has, no doubt, been stealing market share away from underperformers like

J.C. Penney

(JCP) - Get Report

. "

Macy's has been driven by a number of its strategic initiatives, including My Macy's, a centralized organization, continued development of private and exclusive brands, improved associate selling and service skills, and multi-channel integration," Citibank analyst Deborah Weinswig wrote in a note.

Macy's itself noted success in the launch of its Material Girl line designed by Madonna's daughter. With this line, private labels now comprise more than 40% of the company's merchandise.

But even Macy's reiterated sentiment of uncertainty regarding the economy during a conference call with analysts.

J.C. Penney

J.C. Penney

(JCP) - Get Report

has middle-child syndrome. A direct competitor of both Macy's and Kohl's, the department store is losing on both ends.

While the department store returned to profit in its second quarter, it slashed its full-year forecast, citing an "uncertain consumer climate."

J.C. Penney cut its full-year outlook to $1.40 to $1.50 per share, undercutting from prior guidance of $1.64. Its third-quarter guidance also fell short of Wall Street's, as management is calling for 16 cents to 20 cents a share. Analysts are looking for 23 cents a share in the third quarter.

During the second-quarter, J.C. Penney earned $14 million, or 6 cents per share, compared with a loss of $1 million, or break even, in the year-ago period. Analysts were calling for a profit of 5 cents per share.

Sales remained steady at $3.94 billion, but fell short of Wall Street's forecast of $4.01 billion. Same-store sales rose 1%.

J.C. Penney has been trying to remain relevant with an exclusive deal with

Liz Claiborne

(LIZ)

, which rolled out in stores earlier this week, and fashion brand Mango MNG.

But its American Living line didn't pan out as people had hoped, Johnson says. "J.C. Penney still has a lagging image problem," says Craig Johnson, president at Customer Growth Partners. "Customers view them as dated and are visiting mall-based retailers less."

J.C. Penney is also being hurt by off-pricers like

TJX

(TJX) - Get Report

and

Ross Stores

(ROST) - Get Report

, as well as

Target

(TGT) - Get Report

.

Over the last several years J.C. Penney has been the predominate market share donor in the sector, and as a result,

Kohl's

(KSS) - Get Report

and TJX are now larger than the company.

"J.C. Penney is fixable, but it will take some time," Johnson says.

Kohl's

Kohl's

(KSS) - Get Report

reported a 14% jump in second-quarter profit, but its cautious outlook spooked investors.

The value-priced department store trimmed the high-end of its full-year guidance, now expecting a profit between $3.57 and $3.70 a share, compared with prior guidance in the range of $3.57 to $3.75 a share. Wall Street is looking for earnings of $3.76 a share.

Kohl's also expects a late start to the back-to-school season, and as a result it foresees August's same-store sales to fall below its forecast for the quarter. September should come in-line and October's sales will improve, the company said.

During the quarter, Kohl's earned $260 million, or 84 cents per share, from $229 million, or 75 cents, in the year-ago period. Analysts forecast a profit of 82 cents for Kohl's.

Sales grew 8% to $4.1 billion, while its same-store sales rose 5.9%. Online sales surged 50% and contributed 1 percentage points to its total comparable sales.

Like Macy's, Kohl's has also received a boost from compelling private-label and exclusive merchandise, which now makes up 49.1% of its business. It three dominant private-label brands -- Apartment 9, Croft and Barrow and Sonoma -- combined reported a 20% jump in sales in the second quarter, while its Vera Wang, Elle, Fila Sport and Food Network exclusive brands surged more than 30%.

These brands could eventually represent 50% of sales, Stifel Nicolau analyst Richard Jaffe predicts.

Nordstrom

Despite a 39% surge in second-quarter profit,

Nordstrom

(JWN) - Get Report

investors were disappointing, hoping the high-end department store would up its outlook.

Instead, Nordstrom reiterated its full-year guidance in the range of $2.50 to $2.65 a share. Analysts are looking for a profit of $2.62 a share.

During the second quarter, Nordstrom earned $146 million, or 66 cents a share, compared with $105 million, or 48 cents, in the year-ago period. This fell in-line with analysts' estimates.

Sales rose 13% to $2.5 billion, as shoppers flocked to Nordstrom's famed Anniversary Sales in July. Same-store sales grew 8.4%, rising 9.9% at Nordstrom stores, but slipping 1% at Rack outlets.

This marked the fourth straight quarter of both sales and earnings growth and has posted positive same-store sales over the last seven months.

Nordstrom's unimpressive guidance led to a selloff in shares this week, which may present a prime opportunity for investors to buy into the stock, analyst Jennifer Black, of the firm bearing her name, wrote in a note.

"Nordstrom is running with the bulls, and as far as we are concerned has outrun, outserviced and outperformed many of the other retailers," she wrote. "The company has held the golden key for customer serviced for quite some time, and as many retailers struggle to find a way to attract customers into the store to part with their hard earned and very limited funds, Nordstrom has in fact 'created an emotion experience' of shopping."

Dillard's

Dillard's

(DDS) - Get Report

returned to profit in its second quarter, as margins improved due to tighter inventory controls.

During the quarter, the company earned $6.8 million, or 10 cents a share, compared with a loss of $26.7 million, or 36 cents, last year.

Still, revenue slipped 2.7% to $1.39 billion, while same-store sales remained flat. Gross margins rose 3.1 percentage points to 33%, as inventory fell by 6%.

While Dillard's saw a rebound in sales over the past few months, this was primarily due to easy comparisons from last year's depressing numbers. Dillard's also reversed these gains in July when it reported a 3% decline in same-store sales, far worse than the 1.5% gain analysts expected. Besides a few months of positive same-store sales, Dillard's had been on a downward trajectory since 2001.

Fitch Ratings said it remains cautious on Dillard's ability to drive sustainable top-line growth and garner market share in the long term.

"The future isn't too bright for second-tier players," Johnson says.

Dillard's repurchased $77.6 million of stock during the quarter, as part of its $200 million buyback program.

-- Reported by Jeanine Poggi in New York.

Follow TheStreet.com on

Twitter

and become a fan on

Facebook.