Kohl's and Macy's Enjoy a Strong Start to the Holiday Season

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Kohl's (NYSE: KSS) has been posting mediocre comp sales growth in recent quarters, while Macy's (NYSE: M) hasn't reported growing comps in nearly three years. Shares of both companies have plunged since 2015, as investors began to fear that department stores may never mount a successful comeback.

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In this episode of Industry Focus: Consumer Goods, the cast digs into the two department store giants' recent sales trends. With the exception of a potentially costly credit card glitch at Macy's on the afternoon of Black Friday, both companies have had good news to report for this holiday season. Sales ran ahead of expectations throughout November, which could drive a return to earnings growth at Kohl's and Macy's in this all-important quarter.

A full transcript follows the video.

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This video was recorded on Nov. 28, 2017.

Vincent Shen: How are the department stores responding to the early Black Friday numbers and results?

Adam Levine-Weinberg: Generally speaking, department stores have seen a little bit of an uptick in the past month or month-and-a-half, which is really good because third quarter, the numbers were on the mediocre to bad scale. On the mediocre side, you had someone like Kohl's, Kohl's had comp sales of 0.1%. Which was pretty good, given the headwinds that they were facing during the third quarter. But obviously, you want to have your comp sales after more than a fraction of a percent. Meanwhile, someone like Macy's, that's a company that has posted comp sales declines for now 11 straight quarters so nearly three years. However, all of these companies have said that comp sales have been much better starting around the second half of October. And a big part of that is that companies have a big presence in the northern part of the country, in the Northeast, having really benefited from colder weather, which didn't really kick in until the second half of October, and then it got even colder in November. And that's what drives really great sales for coats, scarves, boots, sweaters, and other cold weather items.

So, looking at Black Friday in particular, several of the CEOs fortunately gave some data about how they were doing on Black Friday. Kohl's CEO, Kevin Mansell, said that the sales for Thanksgiving and Black Friday were significantly better than what the company saw last year, both in-store and online. Again, cold weather apparel helped a lot. They're also doing very well in activewear from Nike, Adidas, Under Armour. That was a bit of a surprise, not that these are better categories within apparel, but apparel as a whole has just been a big weak spot. And traditionally, for Black Friday, you see a lot more sales of the big-ticket items -- things like electronics, kitchen and home appliances. So that's where Kohl's was expecting to see their best results, but it actually did pretty well in apparel as well. And the last thing that Kohl's management noted was that they opened an hour earlier this year compared to last year, so 5 p.m. compared to 6 p.m. on Thanksgiving, and that seemed to help them.

Shen: I'll add that, it seems like Kohl's is seeing some of their investments from the past year pay off. They have their new shopping app, they have a lot more omnichannel initiatives -- for example, they're shipping more from their stores. The company noted that it saw record traffic to its website during the holiday. Then, some other initiatives, like buy online pickup in store, also enjoyed significant growth, up 40% year over year. And for those winning products that you mentioned, in addition to the cold weather apparel that we're seeing across the industry, Mansell also mentioned some of the best sales at their store with specific electronics like the Apple Watch and Fitbit devices, and then some of those apparel categories, in terms of the activewear that you mentioned.

But let's move on. How about Macy's? What did management say there?

Levine-Weinberg: Macy's CEO, Jeff Gennette, was on CNBC pretty early on Black Friday. He sounded really positive about how the company was doing. He noted that the traffic in the Herald Square flagship store in Manhattan was up significantly when they opened, also an hour earlier on Thanksgiving Day so 5 p.m. Generally, across the chain, they are expecting sales to be up. They're doing very well in the Northeast and the northern part of the country, again, because of this stronger demand for cold weather gear. Later during the weekend, they said that they expect to break a million sales of cold weather items over the Thanksgiving to Cyber Monday weekend.

Now, the one issue there is, on Black Friday itself, Macy's ran into a slow down with its payment system for credit cards and gift cards. It seemed to be a capacity issue, just too many people trying to buy too much stuff at once, and the whole system, it didn't entirely crash, but some people couldn't complete their transactions, and the processing of other transactions slowed down dramatically. So you have these really long lines in stores, to the point where some people just walked out rather than waiting. So that obviously wasn't good. The one saving grace was that this didn't start until about noon eastern time, and it was for about six hours. So it was definitely during a decent chunk of Black Friday, but a lot of the spending happens both on Thanksgiving Day now, and then in the overnight hours and early morning. So I think Macy's was probably able to get most of the sales that they would have otherwise gotten, but they probably did leave some money on the table through that glitch that they had.

Adam Levine-Weinberg owns shares of Apple, Kohl's, Macy's, and Under Armour (C Shares) and has the following options: long January 2018 $90 calls on Apple, short January 2018 $140 calls on Apple, and short February 2018 $160 calls on Apple. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.