Old-guard retail businesses are back in the crosshairs
NEW YORK (Reuters) – A glance at the US stock market’s main measure for the health of retailers suggests all is well among those companies in the business of peddling stuff directly to consumers.
After all, the $1.16 trillion S&P 500 retail index has climbed nearly 13% this year to a record high, roughly double the 7% gain by the full S&P 500.
That stalwart performance, however, has been delivered almost entirely by a clutch of new “retailers” that now account for more than half of the value of the index: Amazon.com Inc., Netflix Inc. and Priceline Group Inc. Moreover, it masks a broad slump in shares of traditional retailers having their lunch eaten by disrupters such as Amazon, in particular.
In fact, when the retail index’s big three gainers are excluded, the group’s aggregate value has gained a lackluster 1.3% this year and is some 8% shy of its high-water mark two years ago.
Against that backdrop, this week brings a fresh look at how that old guard of retail is holding up and whether a turnaround in their flagging share performance might be in the offing.
First-quarter earnings reports from Macy’s Inc., Nordstrom Inc., Kohl’s Corp. and J.C. Penney Co. Inc. are expected to be sobering. But they could shed some light on whether wrenching turnaround plans launched by some of them, including thousands of layoffs, are starting to bear fruit.
Overall corporate earnings for the first quarter have been strong, with growth for the entire S&P 500 pegged at 14.7% from a year earlier, the best since 2011, according to Thomson Reuters data. But the consumer-discretionary sector, which includes department stores, is expected to show just 3.9% growth, although that is up from an estimated 1.4% a month ago.
“The consumer for the most part seems okay. Not everywhere,” Citigroup chief US equity strategist Tobias Levkovich said.
But sales are expected to be middling for the department-store chain names. Analysts caution, however, that traditional retailers may no longer be a true measure of consumer health because people have new ways to spend.
“There will probably be a knee-jerk reaction the wrong way when we hear some of those larger retailers come out and say foot traffic in the mall is terrible,” said Art Hogan, the chief market strategist at Wunderlich Securities in New York. “Hopefully we don’t start assuming that because people aren’t going to Macy’s, the consumer is dead.”
Far from it. The government’s main measure of the health of consumer spending, the monthly retail-sales report due on Friday, is expected to show overall retail sales snapped back in April after two straight declines.
Of the big four retail names set to report this week, only Nordstrom is forecast to post an increase in earnings per share – and that by just 2.8%, according to estimates from Thomson Reuters I/B/E/S.
Macy’s profit per share is seen sliding 13.5%, and Kohl’s is expected to drop 6.4%. J.C. Penney, which posted its first quarterly profit in three years in last year’s fourth quarter, is seen sliding back to a loss.
“There’s a lot of headline risk attached to retailers, so we’re not a big fan of owning a lot of the brick-andmortar mass retailers right now,” said Nathan Thooft, a senior managing director at Manulife Asset Management in Boston.
Indeed, all four of those reporting this week have lagged both their own peer group and the wider market so far this year. While Nordstrom is at least in the black with a modest 2% gain, Macy’s and Kohl’s have both tumbled about 19%. J.C Penney, no longer a member of the S&P 500 retail group, has plunged 34%.
As Manulife’s Thooft puts it: “The valuations are starting to get interesting, but at the same time you can’t dismiss the fact you have the Amazons of the world and the shift of the consumer to be able to purchase more and more items online.”