The retail industry has vastly underperformed the market, with department stores falling 20% year-to-date versus the S&P 500's 11% gain during the same time. But Morgan Stanley analysts said there might be some temporary relief on the horizon.
Department stores' average comp sales will likely fall 2.3% in second quarter earnings reports, presenting upside from the first quarter's 3.3% decline and contributing to a "less bad" narrative for the industry during the second quarter.
Morgan Stanley said investors should avoid new "underweight" positions in retail as stocks are poised to "squeeze higher" in the near term, but remains steadfastly cautious on retail. Investors who have shorted department stores stocks year-to-date might be wise to temporarily cover their positions, though, Morgan Stanley said.
For the long term, Morgan Stanley remains cautious given department stores propensity to remain structural share donors to ecommerce and off-price retailers. That share loss will be compounded by apparel price deflation and wallet share loss.
But in the near term, sequential comp sales acceleration could propel stocks up. A February income tax refund delay didn't repeat in the second quarter, so retailers like Kohl's Corp (KSS) and J.C. Penney Co (JCP) with exposure to lower income customers are set to benefit most.
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Short term catalysts for "less bad" retail comps moving forward this year include the back-to-school rush in the first half of August and cooler weather through the end of the fall.
That's good news for J.C. Penney as it braces for a rocky second quarter financials report. Even without the income tax refund weighing on sales, J.C. Penney could report sagging earnings that could bring its stock price down.
J.C. Penney shares are down over 33% year-to-date. The company is looking for a new CFO after Edward Record left to "pursue other interests" last month. Closing stores have resulted not only in weaker foot traffic, but also in increased costs associated with employee severance packages.
Sales have slowed in 2017. When the company reported weak comps for the first quarter, J.C. Penney shares sank to its lowest level since 1972. The stock has recovered almost 4% since J.C. Penney shares reported first quarter performance. It's set to release second quarter figures August 11.
Morgan Stanley said J.C. Penney should see a 1% decline in comp sales, marking a stronger performance than the first quarter's 3.5% decline in same store sales, but still indicative of slowing sales. Analysts forecast a 4.9% decline in overall sales for J.C. Penney year-over-year.
J.C. Penney stock traded down about 1.5% mid-morning.
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