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The bulk of third-quarter earnings season has passed, but one major group remains: retailers.
Macy’s,
Target,
Home Depot,
Nordstrom, and
Lowe’s
are among the bevy of bricks-and-mortar players releasing their earnings this coming week.
The group’s stock performance has been mixed so far this year. Discount and mass-merchant stores—like Home Depot (ticker: HD),
Dollar General
(DG), Target (TGT), and
Walmart
(WMT)—have seen their shares soar, while department stores or retailers with high exposure to malls—think Macy’s (M),
L Brands
(LB), or
J.C. Penney
(JCP)—have seen theirs collapse. The SPDR S&P Retail exchange-traded fund (XRT) has returned 11% in 2019, well behind the
S&P 500
index’s 26% return.
The long-term narrative of the rise of e-commerce and shifting consumer behavior has been further complicated by tariffs and a potentially peaking economy. Going into third-quarter earnings season, Wall Street analysts are most positive on home-improvement retailers Home Depot and Lowe’s (LOW) and on off-price stores like
TJX
(TJX) and
Ross Stores
(ROST).
After year-over-year sales and profit-margin declines last quarter, department stores once again face the gloomiest outlook from the analyst and investor community.
“We’re modeling [third-quarter earnings per share] misses across our department-store coverage,” wrote Bank of America Merrill Lynch analyst Lorraine Hutchinson in a report on Thursday.
“Sluggish traffic, weather patterns, and weakening consumer sentiment suggest a soft third quarter,” added Morgan Stanley’s Kimberly Greenberger on Thursday. She also sees risks of department stores missing their earnings estimates and giving a cautious outlook for the holiday shopping season.
Macy’s is the worst-performing member of the S&P 500 in 2019, off 40% after dividends. It has particularly negative sentiment going into its third-quarter report this coming Thursday before the market opens, according to data from Olivetree Financial, a broker that uses a variety of fundamental, technical, and other indicators to calculate sentiment scores for stocks.
Short interest in Macy’s stock has tripled since August, to 27% of shares outstanding, while the stock has been roughly flat. Its dividend yield stands at 8.9%, well above peers’, and it trades at just 6.5 times forward earnings estimates—versus 13.6 times for the SPDR S&P Retail ETF. It’s the type of setup that requires only a mildly positive catalyst to trigger a big upward move in a stock, says Daniel Sanders, Olivetree’s head of U.S. execution services.
We got a hint of that on Friday, when J.C. Penney reported a smaller-than-feared third-quarter loss but missed on the revenue and same-store sales lines. Its stock soared 7% and lifted other department stores’ shares, as well. Macy’s stock jumped 4%—a big move presumably juiced by short sellers covering their positions by buying shares.
Other retailers with particularly bearish sentiment—by Olivetree’s scores—that report this coming week are L Brands on Wednesday evening and Gap (GPS) and Nordstrom (JWN) on Thursday evening.
While the long-term fundamental outlook for the department-store and mall-exposed retailer group still isn’t pretty, their beaten-up stocks, cheap valuations, and high short interest mean that just narrowly matching expectations for the third quarter could be enough to send shares sharply higher in the coming week. Even a dead cat will bounce if it falls from a steep enough height.
Write to Nicholas Jasinski at [email protected]
