Wall Street’s patience runs thin with retailers

The last time Macy’s increased its sales, Donald J Trump had not started running for president and the Chicago Cubs still had not won a World Series in more than a century.

For more than two years — 10 consecutive quarters, to be exact — that storied retailer has reported declining sales.

Traditional department stores like Macy’s have been trying to reinvent themselves, shedding stores and expanding their e-commerce operations to try to compete with Amazon and other online retailers. But this week, Wall Street’s patience with such turnaround efforts wore thin, amid a string of unsettling earning reports by brick-and-mortar retailers.

After Macy’s reported another sales decline in the second quarter on Thursday, its share price fell more than 10 per cent.

On Friday, J C Penney shares hit their lowest price in a decade, falling 16 per cent after the company said its profit margins had softened more than analysts had expected. Kohl’s also fell on Friday after it reported earnings. And some analysts expect Sears to report a third consecutive double-digit decline in same-store sales for the second quarter.

Before releasing secondquarter earnings this week, the retailers had raised Wall Street’s hopes that the industry was showing signs of a comeback. “The expectations were getting higher that maybe things were starting to improve,” said Paul Lejuez, a retail analyst at Citigroup. “But the results didn’t meet those expectations.”

When J C Penney announced on July 10 that its chief financial officer was leaving, the company said that it expected to report “significantly improved top line results this quarter versus the first quarter.”

Other glimmers of improvement appeared across the department store industry. Foot traffic in malls was still down, but not as much as in previous quarters. Credit card data, which investors scour for clues about the retail sector, showed more people shopping in big department stores.

That brightening outlook put pressure on a group of investors — mostly hedge funds — that have been shorting retail stocks, or betting that the share prices will fall.

The retail sector is the second most actively shorted industry in the stock market behind the software and internet sector, according to S3 Partners, a financial analytics firm. And short bets on retailers have increased 18 per cent since January 1.

Short sellers have kept up their warnings. In one recent article, a hedge fund manager compared the fallout of the retail downturn to the collapse of the subprime mortgage market in 2007.

Other investors and industry specialists have dismissed such apocalyptic warnings as overblown. While some of the weaker companies with large debt loads may collapse, stronger brick-and-mortar retailers — not just Amazon — will take market share, these people say.

“This is going to be the best of times for retailers that are well capitalised,” said Burt P Flickinger III, managing director of Strategic Resource Group, a retail consulting firm.

Then came the actual secondquarter results this week. J C Penney said its sales rose in the quarter, but its gross profit margins were far lower than what analysts had predicted.

The company was hit particularly hard because it is more indebted than many retailers and has been losing money.

Like Macy’s, J C Penney has been selling many of its stores. But analysts say the quality of its real estate is not as high as that of Macy’s, which has prime locations in New York and San Francisco.

Traditional department stores like Macy’s have been trying to reinvent themselves to try to compete with Amazon and other online retailers