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No Relief In Sight For Battered Department Stores

Posted: Jul 18, 2008 08:13 AM by Eugene Bukoveczky

Tickers in this Article: M, JPM, JWN, JCP, KSS

Shares of mid-range department store Macy's (NYSE:M) got a boost following an upgrade from JPMorgan Chase's (NYSE:JPM) retail analyst Charles Grom earlier this week. Grom bumped his recommendation on the company up a notch to 'neutral' from 'underweight', and that prompted a one-day buying blitz that saw Macy's shares jump almost 5%.

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Unfortunately, a lone analyst upgrade won't cure the deeper problems that ail this sector.

Macy's Shares Hit by Credit Crunch Fears
That upgrade came hard on the heels of a form 8-K filing with the Securities and Exchange Commission by Macy's CEO Terry Lundgren, in which he declared that the company was "financially sound" given its recent $650 million debt issue and access to $2 billion in bank lines. Concerns that the company was facing a credit crunch have caused the shares to lose nearly one-third of their value since last May, with more than 18% of that loss coming in the last three trading sessions prior to last Monday's upgrade-inspired rally.

Consumers Cut Back on Discretionary Buying
While this upgrade may have gone some way to stem fears of an immediate financial crisis at Macy's, it hardly amounted to a full throated bullish call on a company, or subsector, that continues to face the headwinds of slowing mall traffic and declining discretionary purchases. Consumers are simply not hitting the department stores the way they used to, not when they have more important things to buy like food and gasoline. (If you're feeling the squeeze, every time you fill up your car check out Getting A Grip On The Cost Of Gas.)

The latest sales numbers sum up the bad news. According to data compiled by Thomson Reuters Estimates, department stores were the worst-performing subsector of retail in June, with sales down 3.8% versus a year ago, worse than the consensus estimate of a 3.2% decline. Individual store results were no less bleak. For the May/June period:

Macy's sales were off 1.9%;
Nordstrom's (NYSE:JWN) were down 5.9%;
J.C. Penney (NYSE:JCP) sales dropped 3.3%, and
Kohl's (NYSE:KSS) fell 2.1%.

Given results like this, it's no wonder that the shares of J.C. Penney, Nordstrom, Kohl's all recently hit new 52-week lows.

Stimulus Check Effect Set to Fade
Investors are probably making the right call at this juncture. The latest overall retail sales data shows, the 0.1% increase in June was the smallest since February, and it could be an early indicator that the "sugar rush" stemming from the tax rebates is be fading. As of July 4, $86.1 billion of the planned $110 billion in stimulus checks had already been mailed out. That suggests that there's going to be quite a bit less discretionary cash available during the critical back to school season that the department stores are counting on.

The Bottom Line
The odds look high that we'll see another round of disappointing sales during August and September for the department stores. Despite their sold-off levels, it's still far too early to jump into these stocks.

Learn to shop for investments at your next trip to the mall, in our related article Analyzing Retail Stocks.

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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