The clock is ticking for department stores like Macy’s Inc. and J.C. Penney Co. Inc., according to Sucharita Kodali, retail analyst at Forrester.
On Thursday, both retailers reported same-store sales declines during the important holiday shopping season, and both retailers saw their shares sink as a result.
Macy’s M, -2.15% confirmed with MarketWatch on Thursday that it will close 28 locations and one Bloomingdale’s in the coming weeks.
Macy’s stock closed Thursday down 2.2%, while J.C. Penney stock slumped 10.8%.
“Department stores have had very bumpy holiday seasons over the years and this just highlights that they are fundamentally challenged,” said Kodali.
“They may have a good season or two in the future, but unless they drastically reinvent their businesses and diversify out of retail, or at least the business of owning inventory, they can’t just keep hoping that accepting Amazon returns or allowing in-store pickup will turn around their fortunes.”
Kohl’s Corp. KSS, -6.54% has a partnership with Amazon.com Inc. AMZN, +0.48% to accept returns made to the e-commerce giant, but analysts say Kohl’s has to do more to generate sales.
Kohl’s reported a 0.2% comparable-store sales decline.
Read: Kohl’s needs more than an Amazon partnership to grow sales
Moody’s called the department stores’ holiday showing “tepid.”
“The sector continues to underperform as alternative channels continue to resonate more favorably with consumers and gain share,” said Christina Boni, vice president at Moody’s Investor Service. “Holiday performance suggests department stores will need to change more rapidly in 2020 to maintain their market position.”
For one thing, stores could simply get a bit more into the Christmas spirit. In notes following the Macy’s and J.C. Penney announcements, GlobalData Retail Managing Director Neil Saunders leveled the same criticism at both retailers: stores weren’t jolly.
“Across the holiday period, many shops lacked cheer and were just not configured for successful trading,” he said in the J.C. Penney note. “Inspiration was lacking in key categories with assortments their usual jumbled mix of insipid, undifferentiated product.”
While the Macy’s stores that have gotten key investments were dressed in their holiday best, others were dull.
“Most legacy stores, of which Macy’s has a very long tail, looked shabby and lacked festive cheer,” Saunders said. “In our view, they remain unfit for purpose and there is a big question mark over their long-term future.”
Going forward, Cowen analysts are more optimistic than others.
“Macy’s is making the right strategic changes to improve its performance,” analysts said. They applaud the decision to close stores.
Cowen rates Macy’s stock market perform with a $16 price target.
And on J.C. Penney, Cowen is “encouraged” that the holiday results weren’t worse.
“Following a tumultuous 2019 as the company worked on building out its senior leadership team, exited major categories and constructed a plan of attack, we expect to see an improvement in trends in fiscal 2020,” analysts wrote.
Cowen rates J.C. Penney stock market perform with a target price of $1.
Nonetheless, Moody’s is cautious about department stores this year. In a Dec. 9 report, analysts cut their forecast for operating income growth in 2019, though it is expected to stabilize in 2020.
“[D]epartment stores will remain among the worst performers in retail,” analysts said.
“Department stores will continue to operate in this highly promotional environment, with further cost cuts difficult in the face of continued investment and tepid sales growth.”
Macy’s stock is down 44.2% over the past year. J.C. Penney shares have tumbled 20.2%. The ProShares Decline of the Retail Store ETF EMTY, +1.08% is up nearly 2% in that time while the benchmark S&P 500 index SPX, +0.67% has gained 26%.
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