Retail earnings are approaching and shares of Kohl’s KSS and Nordstrom JWN could be ready to pop, Morgan Stanley analysts say, based on several data points.
Easy sales comparisons against 2019, warmer-than-usual weather and leaner inventory are three pillars leading the analysts to expect better-than-expected results for department stores.
These stocks have been beaten down of late, with investor expectations low after a poor holiday showing, which included heavy discounting.
Morgan Stanley’s Kimberly Greenberger sees the “potential for a spring rally” for department stores after they report, she wrote in a note.
“Q1 2020 appears off to a good start, with warmer year-over-year weather driving early demand for spring merchandise,” she said.
“Our store checks also suggest leaner inventory coming out of 2019, a signal that department stores have worked through a portion of overhang and a positive for first-half 2020 merchandise margin.”
Gross margins at year’s end were pressured by the heavy discounting.
The easy sales comparison comes as 2019 saw poor same-store-sales and overall revenue growth for the business. The 2019 result followed a difficult comparison with 2018, when consumer spending jumped due to President Donald Trump’s tax cuts.
Strong industrywide results in the coming quarter could be coupled with affirmed or even higher full-year guidance, Greenberger wrote.
Specifically, Kohl’s and Nordstrom could be set to spike.
Kohl’s, Menomonee Falls, Wis., is down 10% in 2020 to date, while the broader market has risen a bit more than 4%. After a not-excellent holiday quarter, Kohl’s management is guiding for fourth-quarter same-store sales growth of just 0.5%. Analysts are expecting the metric to come in at 0.4% for full-year 2020.
But “despite lowered guidance… we expect January traffic to pick up to help [comparisons] slightly accelerate to meet the lower end of management’s current Q4 guide,” Greenberger said.
Kohl’s is now trading at 9.8 times next year’s earnings, below its 5-year average of 11.6. Sales have been hit by competition from Amazon AMZN, which has prompted heavy discounting, hurting gross margins. Operating margins have also fallen to below 7%, and most recently an increase in wages has pressured margins. Importantly, these are longer-term headwinds. If wages continue to rise at the same clip they have, operating margins will, on that basis, remained pressured. As for the Amazon effect, not only may sales volumes be pressured as e-commerce remains a growth business, but so will pricing, hurting gross margins, making the operating margin outlook even less stable.
As for Nordstrom, the Seattle chain’s shares have been flat year to date.
After a rough holiday quarter, analysts polled by FactSet are looking for a 1.2% increase in comparable sales and 1.1% in the full year.
The key for Nordstrom’s year ahead: It hasn’t yet provided guidance, but the easy comparison against the year earlier indicates Nordstrom may guide “contributively” for the full year of 2020, Greenberger says.
Nordstrom is also facing the same sales and margin pressures related to e-commerce and wage increase that Kohl’s faces. But Nordstrom is also trading at an earnings multiple, 11.8, below its five-year average of 14.9.