Why Department Store Stocks Crashed in May

By Markets Fool.com

What: Shares of Macy's , Nordstrom , J.C. Penney , and Kohl's tumbled in May after all four department stores reported extremely weak results.

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Company

May Stock Performance

Macy's

(16.1%)

Nordstrom

(25.7%)

J.C. Penney

(16.1%)

Kohl's

(18.6%)

Data from S&P Global Market Intelligence.

So what: Macy's suffered a 5.6% comparable-store sales decline during the first quarter, with total revenue slumping 7.4% year over year. The company closed 41 stores in 2015, which drove a portion of that decline. Macy's sales of $5.77 billion missed analyst estimates by $180 million, adding to a string of revenue misses that began in early 2014.

Macy's is somewhat unique in that it relies on international tourism to drive a meaningful portion of its sales. The company stated that double-digit spending reductions by international visitors in major tourist markets weighed on its results, adding to the woes created by generally weak demand for apparel. Macy's earnings per share slumped 34% year over year during the first quarter.

Nordstrom had a better quarter than Macy's, posting a comparable-store sales decline of just 1.7%. Revenue grew by 1%, driven by new-store openings, and the company's off-price stores posted solid results. Off-price comparable sales rose 4.6% year over year, with total sales jumping 11.6%, while full-price comparable sales declined by 4.3%.

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This mix shift toward off-price sales, along with increased markdowns and higher costs associated with severance and the company's growth initiatives, put major pressure on Nordstrom's earnings. The company reported EPS of $0.26, down 61% year over year, and $0.20 below the average analyst estimate. Nordstrom's poor first-quarter results led it to slash its guidance for the full year, with the company now expecting comparable sales to be flat, plus or minus 1%. EPS is expected to be between $2.50 and $2.70, down from a previous range of $3.10 to $3.35.

Prior to the first quarter, J.C. Penney had reported 10-straight quarters of year-over-year comparable sales growth. That streak ended when the company announced a 0.4% decline in comparable sales during the first quarter. Total revenue slumped 1.6%, to $2.81 billion, missing analyst estimates by $110 million.

J.C. Penney posted an adjusted EPS loss of $0.32 during the quarter, an improvement compared to a $0.57 loss during the prior-year period, and $0.06 better than analysts were expecting. The company is still operating at a severely depressed level of sales following steep declines in 2012 and 2013. While J.C. Penney maintained its full-year guidance calling for comparable-sales growth between 3% and 4%, gross margin is now expected to improve by just 10-30 basis points, down from previous guidance calling for a 40-60 basis point improvement.

Coming off a decent holiday quarter, where comparable sales rose by 0.4%, Kohl's reported a surprise 3.9% drop in comparable sales during the first quarter. Total revenue of $3.97 billion fell 3.7% year over year, about $160 million below analyst expectations. Kohl's pointed to a weak sales environment, which prompted the company to increase markdowns in order to keep its inventory in check.

These markdowns led Kohl's adjusted EPS to decline 50% year over year, to $0.31. Gross margin fell by 140 basis points year over year, to 35.5%, and while operating expenses declined slightly, revenue fell much faster. Kohl's still expects to hit its previous earnings guidance for the full year, which calls for EPS between $4.05 and $4.25 adjusted for one-time charges. Given the decline in the stock price following the company's results, investors don't seem to believe that.

Now what: The big question is this: Was the sales weakness experienced by the entire department-store industry during the first quarter just a one-off? Or does it mark the beginning of a trend that will persist for multiple quarters? Retail sales, in general, have been solid, but department stores seem to be losing out to other types of retailers.

Macy's and J.C. Penney are facing the deepest problems. Macy's reported comparable sales declines throughout 2015, and in January, the company announced major layoffs after a dismal holiday season. The first quarter offered no sign that Macy's had figured out how to turn its business around.

J.C. Penney, on the other hand, faces the daunting challenge of needing to grow its sales substantially during the next few years in order to return to profitability. The company still has a long road ahead of it, and weak first-quarter sales certainly didn't help the cause.

The first quarter typically accounts for a small portion of department-store profits, so investors will need to wait for the rest of 2016 to play out before it becomes clear whether the problems facing these companies are anything other than temporary issues. Investors punished all four stocks in May, and the pain could continue if the numbers don't improve.

The article Why Department Store Stocks Crashed in May originally appeared on Fool.com.

Timothy Green owns shares of Kohl's. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.