For the past several years, it seemed as though Amazon had a death grip on the entire retail industry.
Stock of big-name stores that were portfolio staples for decades began to sell off due to low demand, and people weren’t sure what would happen next.
But this fear is beginning to go away, as the retail industry seems to be catching a second wind.
Specifically, I’m referring to department stores, which had been forgotten by investors as Amazon began to provide a better and more convenient way to shop: online.
As a result, investors couldn’t sell these retail stocks fast enough, and the prices began to factor in a worst-case scenario.
But over the past six months, big department stores have outperformed the market due to a couple of impressive quarterly earnings reports and a much-improved outlook.
The Consumer Confidence Index
A common forecaster for consumer spending is the Consumer Confidence Index.
The index, which is run by The Conference Board, tracks overall sentiment from households across the country, surveying them on items such as business conditions and employment.
In the most recent survey, the amount of people who said business conditions were good and jobs were plentiful went up, while the number of people who said business conditions were bad and jobs were hard to get went down.
More people also expect wages and overall employment to grow, which suggests that people will have more money to spend.
The most recent monthly reading, which was released February 28, gave the index a 130.8 rating, the highest point since November of 2000.
It’s also the seventh time in the past nine months that the index has exceeded forecasts, a good sign for future consumption.
The Consumer Confidence Index proved to be accurate during the holiday season of 2017, which was a breath of fresh air for the retail industry.
The market rewarded the impressive holiday quarter last week, when the four largest department stores in the United States, Kohl’s, Macy’s, Nordstrom and Dillard’s, all reported earnings.
On February 27, Macy’s reported earnings and exceeded expectations on earnings per share, a key metric for valuing stock prices.
It was Macy’s third straight quarter of beating Wall Street’s forecasts, reporting earnings 40% higher than the prior year.
It also reported positive same-store-sales growth for the first time in three years, as it continues its strategy of closing stores that are underperforming.
That also cuts down on overhead costs. So even though Macy’s reported total revenue growth is just 1%, the reduction of big overhead costs made it possible for its bottom line to grow 40%.
Dillard’s also reported earnings on February 27, boasting a huge quarter where it exceeded revenue expectations by $70 million and profits by $29 million.
The profits that it reported actually exceeded Wall Street expectations by over 55%, something that you rarely see in the market, especially in a beaten-down sector like retail.
As a result, the stock has surged by 25% over the past week. And if Dillard’s can keep putting together good quarters, the rally is far from over.
Nordstrom Inc. (NYSE: JWN) and Kohl’s Corp. (NYSE: KSS)
On Thursday, Nordstrom and Kohl’s both issued their quarterly earnings reports.
Nordstrom was the only company on this list to fall short of profit expectations. But it had the highest revenue growth of all at 11% year-over-year, which beat expectations by $37 million.
In fact, the $4.6 billion it made in the fourth quarter was the most in the company’s history. As a result, the stock rallied about 6% on Friday.
And lastly, Kohl’s may have had the best report of all.
It beat Wall Street expectations of revenue, earnings per share and cash flow. It had the most steadily high growth of all from its top line (revenue) to bottom (net income/earnings), reporting a 9.2% increase in revenue and a 30% increase in earnings.
Kohl’s same-store-sales growth of 6.3% was also extremely impressive, setting a company record since it started recording the growth back in 2011.
Retail’s Big Comeback
So, as you can tell by the impressive growth of these four companies, retail, specifically department stores, are making a comeback.
As more people become employed and make more money, consumer spending will go up, especially at stores like these.
All of these companies are also making an initiative to expand their online businesses in order to keep up with Amazon. In fact, in 2017, department store online sales rose 17%.
Going forward, particularly in the next few quarters, keep an eye on these stores to continue to exceed expectations.
Regards,
Ian Dyer
Internal Analyst, Banyan Hill Publishing
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