7 Department Store Stocks: Earnings Preview
NEW YORK (
) -- Department stores third-quarter results will be a mixed bag, with
Macy's
(M) - Get Report
kicking things off this week.
The third-quarter presented several challenges for the space, including warmer weather, a weak macro environment and consumers spending closer to need. In September, clothing and department stores were among the only categories that saw declines in retail sales.
Back-to-school spending, which will be included in third-quarter earnings reports, was fueled by last-minute shopping and heavy discounts, which could hurt those who weren't prepared, says IBISWorld analyst Toon van Beeck.
Of course, the spending environment is better than in 2009, which means every department store should see an increase in earnings. The question is who will beat expectations and who will fall short?
"We believe that performance in the third quarter has given retailers the necessary underpinnings to be cautiously optimistic this holiday season, especially with the election behind them and QE2 on the horizon that could lead to improved consumer confidence," Citi analyst Deborah Weinswig, wrote in a note.
Looking ahead to the fourth quarter, Weinswig expects same-store sales will accelerate despite challenging comparisons.
Here's a look at how department stores are poised heading into third-quarter results....
Macy's
Macy's
(M) - Get Report
has been the standout of the department store sector and is poised to report the strongest results of the sector.
Following its October same-store sales gain of 2.5%, the department store hiked its profit expectations for the second half of the year. Macy's now forecasts earnings between $1.50 and $1.55 a share, from prior guidance of $1.45 to $1.50.
Macy's also expects fourth-quarter same-store sales up between 3% and 4%. This means second-half comparable sales should come in up 3.3% to 4%, compared with previous estimates of an increase between 3% and 3.5%.
The company said that in the third quarter same-store sales grew 3.6%, while total sales during the period rose 6.6% to $5.82 billion.
"While we experienced some softness in sales early in October given the unseasonably warm weather, we ended the month with a strong trend going into the holiday selling season," CEO Terry J. Lundgren said in a statement.
That statement came after Macy's reported a strong back-to-school selling season, boosted by sales of its Madonna "Material Girl" line.
The My Macy's localization initiative continues to be cited as a driver of improved in-store execution.
In October, the company declared a regular quarterly dividend of 5 cents a share, which will be paid on Jan. 3 to shareholders of record on Dec. 15.
For the third quarter analysts are predicting earnings of 3 cents a share on revenue of $5.55 billion, reversing last year's loss of 3 cents a share. Macy's is scheduled to report results on Nov. 10.
Shares of Macy's have rallied 50% since the beginning of 2010.
J.C. Penney
J.C. Penney's
(JCP) - Get Report
has been trying to reinvent itself, with new exclusive brand introductions like
Liz Claiborne
( LIZ) and MNG by Mango, as well as its Sephora shop.
It's also worth keeping an eye on the retailer's home category, as Weinswig believes there is an opportunity for J.C. Penney to regain market share in this area.
In October, J.C. Penney reported a 1.9% decline in same-store sales, but noted strength in jewelry, luggage and houseware sales. Analysts had expected comparable sales to rise 1% during the month.
Analysts are looking for earnings of 18 cents on revenue of $4.25 billion when the company reports on Nov. 12. J.C. Penney reported a profit of 11 cents in the third quarter of 2009.
J.C. Penney caught activist investor William Ackman's attention in October, as the hedge fund manager of
Pershing Square Capital Management
purchased a 16.6% stake in the company. This makes Ackman J.C. Penney's largest shareholder, surpassing
Vornado Realty
, which owns 9.9% of shares.
Ackman's move incited J.C. Penney to adopt a shareholder rights plan to protect against a hostile takeover. The poison pill will last one year, and dilute Pershing or Vornado's stake if either attempt to acquire more shares.
Shares of J.C. Penney are up 20% since the beginning of the year.
Kohl's
Kohl's
(KSS) - Get Report
hit a speed bump in its third quarter, a turn that has prompted significant discussion over the future of the company.
After reporting a disappointing decline in October same-store sales, the value-priced department store said it now expects third-quarter profit at the low-end of its guidance. Kohl's is looking for earnings in the range of 57 cents to 58 cents a share, from prior outlook of 57 cents to 63 cents a share.
Kohl's said it found errors in its accounting for leased properties, and as a result, expects to incur a charge of up to $25 million, or 5 cents a share, to correct the errors. This will not affect any other previously reported period.
But if you take out this accounting error, IBISWorld analyst Toon van Beeck says Kohl's third-quarter results should still be reasonably good.
"The company has performed so well, it is having a hard time continuing this outperformance, but we don't see the company is in a bad shape and still think it is one of the top players out there," he says.
Analysts are calling for a profit of 63 cents a share on revenue of $4.29 billion.
In October, Kohl's reported a 2.5% decline in same-store sales, missing Wall Street's view of a gain of 2.3%. Chairman, President and CEO Kevin Mansell said unseasonable weather hurt results during the first two weeks of the month, but was partially offset by better sales during the second-half of the month.
For the holidays, Kohl's will hire 41,000 seasonal employees to keep up with demand, a 21% increase over 2009.
Nordstrom
The luxury sector has been leading the retail recovery, and
Nordstrom
(JWN) - Get Report
continues to outperform.
In October, same-store sales gained 3.4%, better than the 2.7% increase Wall Street predicted. This marked the 14th consecutive month that traffic rose.
Nordstrom said its strongest categories in October included jewelry, dresses and women's shoes, while sales grew the most in the Northwest and Northeast, while California stores remained weak.
Shares of Nordstrom have gained 12% since the beginning of the year. The stock has 10 buy ratings and 11 hold ratings by analysts.
Saks
Saks
(SKS)
is a stock to own heading into third-quarter earnings.
The high-end department store has made a remarkable recovery from last year's lows, as it reduced its promotional activity year-over-year and managed inventories conservatively.
In October, Saks reported an 8.1% surge in same-store sales, significantly ahead of analysts forecast.
Saks has been in the process of shuttering underperforming stores, which should also boost its profitability going forward.
Weinswig is expecting earnings of 5 cents a share, ahead of Wall Street's estimates of 2 cents. She is also forecasting 200 basis point gross margin expansion due to more full-priced selling.
Investors are taking notice. Italian businessman Diego Della Valle upped his stake in the high-end retailer in October, paying $29.4 million for 2.9 million shares.
Dillard's
Dillard's
(DDS) - Get Report
could be poised to miss third-quarter expectations.
The mid-tier department store said its third-quarter revenue fell below Wall Street's expectations when it reported October same-store sales last week. During the quarter Dillard's total revenue rose to $1.32 billion, but missed forecasts of $1.36 billion.
October same-store sales fell 1%, which comes on top of an 8% plunge in October 2009.
Dillard's is slated to report earnings on Nov. 15 and analysts are expecting a profit of 5 cents per share, compared to a loss of 3 cents in the year-ago period. The company has beaten estimates in three of the past four quarters.
Shares of Dillard's have soared 52% to since the beginning of the year.
Sears
If
Sears
(SHLD)
performs well in the third quarter, it could be a good gauge for how other second-tier retailers will perform this holiday season, van Beeck says.
Sears has been aggressively promoting heading into the holiday selling season, in an effort to keep up with competition from dominant players like
Wal-Mart
(WMT) - Get Report
and
Target
(TGT) - Get Report
.
The company already began offering pre-Black Friday sales this past weekend, and said it will remain open for the first time ever on Thanksgiving Day. Sears stores will be open from 7 a.m. until noon.
Analysts are looking for a loss of $1.07 a share on revenue of $9.96 billion when Sears reports third-quarter results on Nov. 18.
During the quarter, Sears said it will sell $1.25 billion in notes in a private offering. The proceeds will be used to repay debt and fund working capital expenditures and for general corporate purposes, including share buybacks and pension fund obligations.
--Written by Jeanine Poggi in New York.
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