Department Store Stocks: Risky Business - TheStreet

Department Store Stocks: Risky Business

Department stores ranks as some of the least financially healthy retailers, according to a new survey.
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NEW YORK (TheStreet) -- Department stores rank among some of the least financially stable retailers.

Stacking up nearly 160 publicly traded retailers, Consensus Advisors, a boutique investment firm, discovered that not even one department store could hold its own in the top 25% of all retailers when it comes to financial health.

The firm's 2010 Retail Health Rating survey studied companies over a five-year period, looking at irgrowth, asset utilization, pricing power and balance-sheet strength -- as well as more esoteric metrics, such as store cannibalization, modified interest coverage, gross margin volatility and margin-adjusted inventory turn.

Even

Kohl's

(KSS) - Get Report

, which

ranks best in class

among department stores, doesn't crack the top 50.

"I'm not surprised department stores don't fall within the

top 20 in terms of financial health

," Consensus Advisors CEO Michael O'Hara says. "The sector has slower inventory turns, historically holds more debt on its balance sheets, has a mature store base, which means there isn't a whole lot of growth opportunities, and were forced to deeply discount merchandise amid the recession."

Another benchmarking study conducted recently by IBISWorld revealed similar results. The market research firm measured department stores based on their revenue volatility, market share, growth rate and net income in 2009.

Overall, IBISWorld has a 6.57 risk score on the department store sector, with 1 being the least risky and 9 the most. In comparison, it currently ranks the economy at just under 6, meaning the department store sector as a group is a more risky investment than the economy as a whole.

"Department stores are finding it difficult to change the consumers' perception and are still losing out to some of the discount mass merchants and online channels," IBISWorld analyst Toon van Beeck says.

Indeed, high-end department store

Saks

(SKS)

received one of the lowest rankings of the segment, falling in the bottom 5% on the Retailer Health Rating and coming in last in three of the four metrics measured by IBISWorld.

Consensus Advisors credited Saks' dismal score in its study to its divestiture of assets over the last five years. In 2005, Saks sold off Profitt's and McRae's department stores to Belk, thus slashing their revenue by more than half. The impact of these divestitures hurt their overall score since the Retail Health Rating is so heavily skewed toward growth prospects.

Saks' shortcomings were further magnified by the fact that the remaining business is solely focused on the luxury consumer, a demographic that was severely impacted by the recession.

Dillard's

(DDS) - Get Report

falls in the bottom 25% in the Retail Health Ranking, and is below the industry average in three out of the four metrics studied by IBISWorld.

Sears also raises concerns, van Beeck says. Despite its massive market share, Sears is unable to utilize its size to beat the competition. In the first quarter, Sears was one of the few retailers still reporting a decrease in profit.

The department store falls below average when it comes to revenue volatility and net income, and while it is above the sector average in terms of revenue growth, that number is still negative.

Macy's

(M) - Get Report

has made some noteworthy improvements over the past year, but it still lags considerably among some of its competitors and is among the most volatile when it comes to swings in revenue, according to IBISWorld.

Like many department stores, Macy's historically devoted more focus to high-margin items, rather than growing its top line, says Kenneth Stumphauzer, analyst at Sterne Agee. But with its My Macy's initiative, the company is beginning to tailor merchandise to local markets, a strategy that helped it achieve profitability in its first quarter.

The two standouts of the sector are Kohl's and

Nordstrom

(JWN) - Get Report

, which achieved above average results in market cap, growth and net income, according to IBISWorld.

Overall, IBISWorld is still forecasting a 1.5% decline in revenue for the department store sector in 2010, as department stores will still have to convince consumers to shop in their stores, even when spending fully rebounds.

-- Reported by Jeanine Poggi in New York.

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