This Week Could Be Huge for Department Stores

Department stores like Macy's (NYSE: M), Kohl's (NYSE: KSS), and J.C. Penney (NYSE: JCP) stopped issuing monthly sales reports several years ago. Instead, they report their sales on a quarterly basis, in conjunction with their earnings releases. However, the three still make an exception for the crucial holiday season. They often provide sales updates for the months of November and December during the first week of January.

Evidence pointing to strong holiday season sales has been piling up since November. Still, department store investors have been burned more than once in recent years. As a result, shares of Macy's, Kohl's, and J.C. Penney could move sharply -- up or down -- in response to this week's sales reports.

Last year's holiday season was a bust

The current department store sales slump began in 2015. Entering the 2016 holiday season, many management teams felt cautiously optimistic, thanks in large part to easy year-over-year comparisons.

Those hopes were dashed. During the first week of January 2017, Macy's said that comp sales declined by 2.1% in the combined November-December period of 2016, following a 4.7% plunge during the same period a year earlier. Macy's also slashed its full-year earnings-per-share forecast range from $3.15-$3.40 to a new range of $2.95-$3.10. Finally, it announced plans to close more than 60 stores in early 2017.

Results were similar at Kohl's, which also reported a 2.1% comp sales drop for November and December combined. In response, Kohl's cut its full-year EPS guidance range to $2.92-$2.97 from $3.12-$3.32.

J.C. Penney performed a little better, driven in part by its decision to start selling appliances in 2016. Its November-December period comp sales slipped by just 0.8%. Nevertheless, this weak performance led to the company's February decision to close up to 140 stores in 2017.

Has the long-awaited turnaround finally begun?

Department stores' sales and earnings results remained subpar for most of 2017. Unseasonable weather was a key factor weighing on sales during the spring and fall seasons.

However, everything has fallen into place in the last two months. Consumer confidence is at its highest level since 2000. This has driven strong retail sales growth. The Redbook chain store sales index has shown an average year-over-year increase of more than 4% during the past six weeks, including a 5.7% gain in the week before Christmas.

Meanwhile, there has been plenty of cold weather to motivate consumers to buy winter apparel items. Macy's CEO Jeff Gennette mentioned this factor as a big sales driver for Thanksgiving weekend.

Room to run for department store stocks

Shares of the largest department store companies have soared since Nov. 8, the day before Macy's and Kohl's released their third-quarter earnings reports. J.C. Penney stock is up more than 25% during that period, while Kohl's shares sport a 33% gain and Macy's stock has surged 43% higher.

Notwithstanding these big increases, there could be plenty of additional gains for all three companies if they post upbeat sales reports. Macy's and J.C. Penney have the most upside, due to investors' low expectations.

Indeed, analysts expect Macy's to post a double-digit EPS decline in fiscal 2018 (on average). A modest margin recovery combined with the benefit of tax reform could enable Macy's to exceed those EPS forecasts by about 50%. In the meantime, J.C. Penney stock lost more than 60% of its value in 2017, despite its year-end rally. Right now, investors doubt that its initiatives to drive sales growth and margin expansion will succeed. Evidence that J.C. Penney is getting back on track could send the stock soaring.

Thus, strong sales reports from Macy's, Kohl's, and J.C. Penney could add more fuel to the stocks' recent rallies. On the other hand, if the companies post weak holiday sales again -- in spite of the favorable backdrop -- investors could lose all hope, sending the stocks into another free fall.

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Adam Levine-Weinberg owns shares of J.C. Penney, Kohl's, and Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.