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Are famed department stores fading?

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May 16, 2016
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Earnings season for first quarter 2016 is still in play. Currently, department stores are experiencing Mr. Market’s dark side. Prior to heading to the company specific numbers, here are some ‘macro’ numbers concerning consumer spending.

I observed how monthly retail numbers were often reflected upon by the finance media so as to see how the American consumers are doing. I assume that the more the consumer spends, the better it is for the retail industry. I used the U.S. Census Bureau data, which can be found here.

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*(p): preliminary estimate. Data used were retail sales excluding food services and motor vehicle sales.

Reviewing the chart above did not give me any doubts that the retail industry was experiencing any difficulties. Sure, monthly figures may be down quite a bit, but comparing these numbers from a historical data (as shown in the chart below) would show that there was indeed growth.

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(Monthly retail sales back in the 2005 to 2006 compared to the recent time frame of 2015 to 2016)

Dissecting these numbers may be quite challenging, but overall and historically (past decade), motor vehicle sales usually have contributed a quarter to the total retail sales numbers. This, followed by food and beverage, and general merchandising sales, which both contributed somewhere between the mid-teens. General merchandise store sales, on the other hand, contributed in the low teens. Finally, clothing sales had kind of contributed somewhere in the 5% to 6% number.

Apparel numbers

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Narrowing down to the apparel industry, I figure clothing and accessory sales numbers the most appropriate retail numbers to observed.

Using the Bureau’s data and in hindsight, I still do not see any troubling figures here. Moreover, the clothing and accessories sales industry actually had more poor monthly growth numbers somewhere in late 2013 and mid-quarter 2012.

Despite these findings, first quarter sales figures provided by the big three department chains below showed disappointing growth year-on-year.

Company specific numbers

I will outline here what announcements have occurred for the past week or so in some famed retail stores, at the same time I’ll provide the corresponding share price movement among with other details.

Macy’s (M, Financial)

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Macy’s announced its 2016 first quarter earnings on Wednesday. The company claimed it had negative 7% growth in sales. First quarter comparable sales declined by 6%. Comparable sales or same-store sales is a statistic used in retail industry analysis that compares the sales of stores that have been open for at least one year. Further, Macy’s reported a 40% reduction in profits year-on-year. As a result, Mr. Market punished its shares by 16% since earnings announcement until May 14.

Nordstrom (JWM)

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Nordstrom announced its first quarter earnings on Thursday. The company claimed a 1.01% growth in sales, with a 64% reduction in profits. Comparable sales store growth in Nordstrom was reduced by 1.7% year-on-year. As a result, Mr. Market punished its shares by 13.4% post-earnings announcement to date.

Kohl’s (KSS, Financial)

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Kohl’s also announced its first quarter earnings on Thursday. Sales of the company had slumped by 3.7% compared to last year’s, with comparable sales stores declined to 3.9%. Kohl’s profit fell by 87%. In return, share price reacted downwards by 7.65%.

Some more numbers

Department store balance sheet quick check; debt levels (as of recent earnings filing):

  • Macy’s had a total debt of $7.6 billion with a debt to equity ratio of 1.8.
  • Nordstrom had a total debt of $2.78 billion with a debt to equity ratio of 3.18, and a free cash flow of -$34 million.
  • Kohl’s had a total debt of $2.9 billion with a d/e ratio of 0.55, and free cash flow of $-37 million.

Clearly, even without indicating the traditional valuation numbers (price to earnings, price to book) most of these financial numbers are already unattractive and would probably discourage any conservative investor to initiate any long-term position as of the moment. Nevertheless, Macy’s is currently trading at P/E 10x, Nordstrom at P/E 14x and Kohl’s at 10x.

Taking the market price performances, the three aforementioned department stores had averaged a year-to-date return of negative 19%, with Kohl’s having the worst performance at -25%. Despite these good range of pullbacks, I do not find any value in any of the three companies as of the time being.

An assumption

If the big department stores above demonstrated poor first quarter 2016 performance collectively, one must assume that apparel stores must also exhibit the same bad results in their upcoming earnings releases. Correspondingly, apparel stores are to announce their first quarter numbers by next week until June. Here are some of the dates as sourced out from Nasdaq (Nasdaq.com):

May 17: TJX Companies.

May 18: Victoria’s Secret (L Brands) and Urban Outfitters.

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(Vita Sidorkina. Source)

May 19: Ross Stores and Gap.

May 25: Guess? June 8: Tailored Brands. June 14: Lululemon.

Besides these important apparel stores, the big discount stores are also to announce their first quarter earnings in about the same time frame.

May 18: Target. May 19: Wal-Mart. May 25: Costco. May 26: Dollar General.

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(Wal-Mart Truck)

While these data are to be released in the coming months, it’s interesting to see how online sales have been able to hurt most brick and mortar retail store chains’ sales. As it turned out, online sales have been growing and had been contributing to the overall retail sales numbers.

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(Source)

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(Source)

Accordingly, Amazon (AMZN) has been the crème de la crème of conducting the e-commerce business. Further, Amazon blew past analysts’ expectations in its recent quarterly filing in April. Amazon had recently demonstrated that it has been able to consistently deliver positive profit numbers, in the last four quarters.

Amazon’s product sales (online) contributed 70% in its total sales at $20.5 billion, a 20.5% growth. Amazon’s profit grew from -$57 million to $513 million. That is more than 500 times year-on-year growth. No wonder Mr. Market has Amazon’s shares at a P/E ratio of 292. Amazon has recently achieved its all time high of $717.93 a share on Wednesday. Amazon currently has $8.2 billion, or a debt to equity ratio of 0.56.

In addition to this, Warren Buffett (Trades, Portfolio) recently praised Amazon’s legendary CEO Jeff Bezos saying that he has "changed the world" in a big way.

Meanwhile, closing lower sales contributing stores seems to be the next move of the brick and mortar stores, unfortunately. According to Fortune, Walmart will close 269 worldwide; J.C. Penney’s will shut down 40 stores; Macy’s may close 25 to 40 of its stores; Target aiming to put out 23.

In the meantime, conservative investors should be on the watch of these trends (retail sales, profit, and debt numbers) and reflect whether the low P/E ratios of the traditional brick and mortar retailers are worth the risk.

*All photos were taken from Google Image (unless mentioned otherwise), graphs and charts were done by author.

Happy investing!