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Department stores' performance gap broadens in Q1

The gap widened in the latest round of earnings reports between top-performing department stores and those that have struggled to adapt to changes in the retail industry.

All department stores have had to change with the rise of e-commerce giants such as Amazon.com Inc. that have lured customers away from shopping malls. Some department stores have been more successful than others in countering the shifts in the industry and that difference became stark in the latest round of earnings reports, several analysts told S&P Global Market Intelligence.

Macy's, Kohl's among top-performing stores

Macy's Inc. and Kohl's Corp., posted results for the fiscal first quarter ended May 5 that greatly exceeded analyst expectations and outperformed their peers. Sears Holdings Corp. and Macy's declined to comment for this story. J.C. Penney Co. Inc., Nordstrom Inc., Dillard's Inc. and Kohl's did not respond to request for comment.

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Macy's, with first-quarter adjusted EPS of 48 cents, beat the S&P Capital IQ mean consensus estimate for normalized EPS of 35 cents by 35.3%. Kohl's also reported results that came in well above analyst expectations. The company's adjusted EPS hit 64 cents, 29% higher than the S&P Capital IQ mean consensus estimate for normalized EPS of 50 cents.

Garrick Brown, a retail analyst at Cushman & Wakefield, pointed to strategic store closings and efforts to bolster the department store chain's omnichannel operations for Macy's strength in the last quarter.

Macy's has shuttered 81 locations since August 2016, including seven that the company identified in early 2018. Macy's chose underperforming stores located in lower-tier malls, allowing the department store chain to revamp its higher-value stores, Brown said.

On the omnichannel side, Macy's is testing mobile checkout in stores and has appointed Jill Ramsey, a veteran of e-commerce company eBay Inc., as chief product and digital revenue officer to lead macys.com and the Macy's app.

"I definitely think Macy's moves towards rightsizing and greater investment in their e-commerce platforms are part of the strength of their numbers," Brown said. "And with Ramsey coming in, it's a real sign that the company has taken a serious look at e-comm and how they're rolling that into stores."

Unlike Macy's, Kohl's has not had as much trouble with its real estate, with most of its locations based in better-performing strip malls instead of large indoor shopping malls, said Naveen Jaggi, president of retail at JLL, in an interview.

But the department store chain has still needed to adjust its business in response to the online migration, he said. Kohl's has partnered with Amazon, for example, to accept some return items from the e-commerce giant's customers at select stores.

"You can really see all of this start to pay off," Jaggi said. "Smart moves like this, they get people into stores."

Macy's and Kohl's have another strategy in common — low-cost apparel that offers better deals than those customers can find online. Macy's said it will expand its off-price Backstage apparel stores to 145 in the U.S. in 2018, according to a Feb. 27 Business Insider report. Kohl's has always promoted its lower-priced merchandise.

"That's probably been as big a factor as anything," Brown said. "The off-price apparel sector continues to be white-hot."

The market has reacted to Kohl's strategy, said Steve Dennis, president and founder of SageBerry Consulting, in an interview. Kohl's share price has increased 38.46% since the beginning of 2017.

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Compared to Kohl's, Macy's share price has not been as successful, declining 0.7% in the same period. Investors attribute general malaise in the department store sector to Macy's since it is the country's largest department store chain that is largely based in shopping malls, Dennis said.

"A lot of the market reaction to Macy's has been about the doom and gloom around department stores," Dennis said. "But if you look at Macy's numbers, it is actually outperforming what the market thinks it should do by quite a bit."

J.C. Penney, Sears falter

Analysts are not as optimistic about the performance of other department store chains, either in the long term or in the latest fiscal quarter. J.C. Penney and Sears have seen their stock price tumble since the beginning of 2017. J.C. Penny's share price has declined 71.6%, while Sears has declined 75.46%.

In just the first quarter, J.C. Penney's earnings beat analyst expectations by 6.9% — a much narrower margin than Macy's and Kohl's. The department store chain posted an adjusted loss of 22 cents, compared to the S&P Capital IQ consensus estimate of a loss of 24 cents.

While J.C. Penney has shuttered underperforming stores, the closures are not enough and they are coming too late, Jaggi said.

"J.C. Penney has tried, but it's just not working as well as somewhere like Macy's," he said. "It's a failure to execute, really."

The departure of CEO Marvin Ellison for the top spot at Lowe's Cos. Inc. is also a bad sign for the department store chain, Dennis said.

"The company has been cost-cutting and closing stores for years, but they're just not seeing a strong enough benefit," he said. "And now its CEO leaves. This is not good."

J.C. Penney can act as a bellwether for other department stores commonly found in mid-tier malls, including Dillard's and Nordstrom, which also surpassed analyst expectations by a narrower margin than its better-performing peers, JLL's Jaggi said.

Sears missed analyst expectations by a steep 217% in the fiscal first quarter, at an adjusted loss of $4.79 per share, compared to the S&P Capital IQ consensus estimate of a loss of $1.51 per share. The department store operator consistently tops S&P Global Market Intelligence's list of most vulnerable U.S. department stores and apparel retailers with a one-year probability of default of 25.88%.

Sears continues to shutter stores and sell off assets in what Dennis called "the world's longest liquidation sale." Most recently, Sears said it would close 63 unprofitable stores, down from a previously announced 72 stores, and is exploring the sale of the Kenmore brand and other assets to CEO Edward Lampert's hedge fund.

Brown said the sale of Kenmore and other assets to Lampert could "hasten the end of Sears as we know it."

"The real question, at this point, is how much time does Sears actually have left?" he said.

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