Retail stocks slide, strong consumer spending didn’t boost holiday sales enough

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January 10, 2019 12:45pm NYSE:XRT

Retail Sector

From Lauren Thomas & Lauren Hirsch:  Investors sour on retail stocks after Macy’s released disappointing holiday sales.

  • Investors sour on retail stocks after Macy’s released disappointing holiday sales.
  • At Kohl’s, holiday sales rose 1.2 percent, much slower than it did in the previous year.
  • Target fared better, with holiday sales growth of 5.7 percent that topped its 3.4 percent gain in the prior year.

A strong U.S. consumer wasn’t enough for department stores to counteract broader challenges facing the industry and investors’ high expectations for the holidays.

Shares of the country’s biggest department stores tumbled Thursday, led by disappointing holiday results delivered by the biggest department store in the U.S. by market cap, Macy’s.

Macy’s said holiday sales disappointed in sportswear, sleepwear, jewelry and cosmetics, and it now expects no growth in net sales for fiscal 2018, instead of its previous projection of an increase of 0.3 to 0.7 percent. The news put Macy’s stock on track for its worst day ever, falling by nearly 19 percent by early afternoon.

“Macy’s we thought … was the best of the worst,” Stacey Widlitz, president of SW Retail Advisors, told CNBC.

“But the divide between the survivors and the struggling is every year getting deeper and deeper,” she said. And department stores are struggling more than other retailers to maintain any sales momentum, as more purchases are taking place online and brands that typically have received prime placement in department stores are investing more in their own sales channels.

Kohl’s on Thursday said holiday sales rose 1.2 percent over the previous year, a steep decline compared with growth of nearly 7 percent during the same time a year before. Shares of the Wisconsin-based department store fell by about 7 percent.

Meantime, Target fared better, with holiday sales growth of 5.7 percent that topped its 3.4 percent growth in the prior year. But it kept its fiscal 2018 outlook constant, potentially a disappointment. Its shares fell by nearly 4 percent.

Shares of J.C Penney fell 6.3 percent, while shares of Dillard’s fell about 5 percent.

The bar for department stores was high this year, despite the broader decline the industry has been facing. Shoppers are headed to the mall less frequently and opting to buy directly from brands like Lululemon, rather than in stores. Those pressures have driven down the percentage of retail purchases that occur in North American stores from 14.5 percent of all retail purchases in 1985 to 4.3 percent, according to Neil Saunders, managing director of GlobalData Retail.

Investors, though, have seemingly been investing optimistically in department stores. They were heartened last year after most major department stores beat rock-bottom expectations set by the prior year. The industry in 2017 was just beginning to find its feet amid the rise of online shopping in a slump some labeled “the retail apocalypse.”

“We’ve had a reset, and markets have been so volatile that in 2019 there is a lack of clarity after the optimism entering 2018,” said Telsey Advisory Group CEO Dana Telsey. “The beginning of 2019 was perfect: perfect weather, inventories got leaner, tax benefits helped.”

In 2019, laying the groundwork for a turnaround will not be enough. Department stores will need to deliver sales growth, even after last year’s strong boost. Retailers like Macy’s and Nordstrom that have been investing in their e-commerce business to help compete against online rivals will need to show the fruits of their labor and a move to profitability.

“The theme of 2019 is margin,” said Telsey.

The SPDR S&P Retail ETF (XRT) was trading at $43.42 per share on Thursday afternoon, down $0.89 (-2.01%). Year-to-date, XRT has declined -3.62%, versus a -2.97% rise in the benchmark S&P 500 index during the same period.

XRT currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #4 of 41 ETFs in the Consumer-Focused ETFs category.

This article is brought to you courtesy of CNBC.

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