How Bad a Time Is It to Be a Bricks-and-Mortar Retailer?

Markets Motley Fool

In this Motley Fool Money podcast segment, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Total Income's Ron Gross commiserate with the nation's big department stores, which got bludgeoned in the market this week after reporting their second-quarter earnings, with negative comps across the board among Macy's (NYSE: M), Kohl's (NYSE: KSS), and Nordstrom (NYSE: JWN). The worst of the bunch, in terms of market reaction, was J.C. Penney (NYSE: JCP): It's share price fell 30%. The reasons why its performance was off shouldn't have surprised investors -- but they did.

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A full transcript follows the video.

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This video was recorded on Aug. 11, 2017.

Chris Hill: Rough week for general retail. Macy's, Kohl's, and Nordstrom falling 5-10% this week after their latest reports, but that pales in comparison to J.C. Penney, whose stock fell 30%. Where do you want to start with this, Ron?

Ron Gross: It's across-the-board pretty bad. J.C. Penney is actually worse than the rest largely because of liquidating inventory of stores that were closing. Why investors and analysts didn't anticipate that happening is beyond me. It wasn't a secret. That that hits margins, when you start liquidating inventory. So, numbers were bad, but in my mind, not necessarily worse than one should have expected. But, again, overall, retail continues to be a very tough industry. All of these companies except Nordstrom's reported negative same-store sales. That's not good for a retailer. [laughs] That's one of the metrics you need to see going the other way. And the fact that Nordstrom is the only company that can do it is tough. A lot of these companies focusing on the more discounted segments of their brands -- Nordstrom Rack, for example. Macy's has a new Backstage concept that they're going to be focusing on. That's where they see the consumer going, that's how they think they can compete with Amazon and other online entities. Of course, they need to beef up their digital channel as well.

Matt Argersinger: From an investing perspective, I have to say, at some point, there's going to be some opportunities here within the space. But I'm starting to see some arguments that I don't like. One of those is that a lot of these companies own great real estate or have long-term leases that are very compelling. And I have to say, as soon as you start making arguments like that, I think you're going in the wrong direction, only because the trends are not there. You can say that this real estate is worth something today. If customer traffic trends continued downward, and a lot of these companies, Macy's in particular, Dillard's, are still attached to malls, where we know we're seeing less traffic -- so, that real estate asset value is probably not as valuable as a lot of investors think. 

Jason Moser: Matty, I think they call that the Sears thesis, and it does not work so well.

Argersinger: The Eddie Lampert approach.

Moser: Yeah. And I think with J.C. Penney, they've really been throwing so many things at the wall here trying to see if anything sticks. A lot of investment here recently in selling appliances. It doesn't look like that investment is really paying off. So, I think Ron said it probably a couple years ago, does the world really need J.C. Penney? It appears, Ron, that no, it does not.

Hill: I feel a little bit bad for Nordstrom, just because they had a good quarter. In this environment, the fact that Nordstrom's same-store sales were 2% higher than Wall Street analysts were expecting, that's a huge beat in this environment.

Gross: Huge beat. Online sales growth of 20% for Nordstrom.com, 27% growth in their Nordstromrack.com and their HauteLook, if I'm pronouncing that right. The numbers look pretty strong, they're just getting wrapped up in this general retail malaise.

Hill: You're definitely pronouncing that right.

Gross: Thank you.

Chris Hill owns shares of Amazon. Jason Moser has no position in any stocks mentioned. Matthew Argersinger owns shares of Amazon. Matthew Argersinger has the following options: short December 2017 $800 puts on Amazon. Ron Gross owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.