US department stores have been struggling to thrive over recent years due to declining foot traffic in malls, the rapidly growing strength of online retailers like Amazon and tough competition from off-price retailers like TJX Companies and Ross Stores, which offer similar merchandise at attractive discounts.
The pandemic crushed the already troubled department stores and caused Neiman Marcus, J.C. Penney, Stage Stores and Lord & Taylor to file for bankruptcy.
Using the TipRanks’ Stock Comparison tool, we will compare upscale department stores Nordstrom and Macy’s and see which stock is likely to recover on the other side of the pandemic.
Nordstrom (JWN)
Like other retailers, Nordstrom was also expected to deliver weak results for the second quarter of fiscal 2020, which ended August 1. But, the sales decline was worse than anticipated. Nordstrom’s sales fell about 53% Y/Y to $1.78 billion as the company’s stores were closed for about 50% of the days in the quarter. The company’s loss per share was $1.62 compared to EPS of $0.90 in fiscal 2019’s second quarter.
While other retailers reported a significant surge in their online sales, Nordstrom’s digital sales fell 5% in the quarter. The company stated that the shift in the company’s Anniversary Sale to the third-quarter hurt its digital sales. Also, Nordstrom’s aggressive inventory reduction left some demand unmet.
Looking ahead, Nordstrom is positive about better sales trends in the second half of the year and beyond. The company is seeing slightly better traffic in its off-price Rack stores than its full-line stores. Nordstrom generated cost savings of $420 million in the first half of fiscal 2020 and plans to reduce its costs further. The company has shut down 16 full-line stores.
On September 2, Cowen analyst Oliver Chen reiterated his Hold rating for Nordstrom but lowered his price target to $16 from $20. The analyst feels that while the near-term outlook is definitely challenged, there are reasons to be more optimistic about the company’s future.
For the longer-term growth, Chen listed catalysts like industry-leading omnichannel platform, e-commerce margins, prime locations in some of the nation’s top-performing malls, and its off-price Nordstrom Rack business. He also sees the company benefiting as other competitors close their doors. (See JWN stock analysis on TipRanks)
The Street’s Hold consensus for Nordstrom breaks down into 1 Buy, 5 Holds and 3 Sells. Nordstrom stock has plummeted 62% so far this year but might recover 9.1% based on the 12-month average analyst price target of $17.00.
Macy’s (M)
The pandemic continued to pull down Macy’s business in the fiscal second quarter but the results were better than the Street’s predictions. The company began reopening its stores gradually during the first week of the second quarter but almost all stores opened by the end of June. Faster than anticipated reopening, digital business and the sale of luxury categories at Bloomingdale’s stores helped the company in beating analysts’ expectations.
Due to the impact of store closures, Macy’s second-quarter net sales plunged 35.8% to $3.56 billion and comparable sales fell 35.1%. The company posted an adjusted loss per share of $0.81 compared to adjusted EPS of $0.28 in the second quarter of fiscal 2019.
Meanwhile, digital sales surged 53% Y/Y and accounted for 54% of the second-quarter comparable sales. However, with the physical stores reopening, digital penetration came down to 42% in July.
Categories that performed well in the quarter included home, fine jewelry, activewear and sleepwear. But, the remote working trend amid the pandemic hurt the sales of men’s tailored clothes and dresses.
As uncertainty prevails, Macy’s sees a resurgence in COVID-19 cases, erosion of international tourism and slower recovery of its stores in urban areas as headwinds. Based on slightly stronger digital growth and slightly weaker recovery, the company predicts comparable sales to be down low-to-mid 20s in the third and fourth quarters.
Amid the current crisis, Macy’s continues to cut costs and expects to save about $365 million in fiscal 2020 through the recently announced 3,900 layoffs. In February, the company announced that it would close 125 stores over the next three years and reduce 2,000 jobs. Meanwhile, it will continue to invest in its digital channels and in the expansion of its off-price Backstage stores. The company also plans to open several off-mall smaller format stores.
Despite Macy’s better-than-feared results, UBS analyst Jay Sole maintained his Sell rating and stated, “We think the Street underestimates the pressure on M earnings from share loss as consumers’ migrate to online pureplay channels, retailers with better value-for-money propositions such as TJX, and brands’ own stores and websites.”
The analyst warned, “Plus, COVID-19 has changed fashion trends away from work, dressy, and event items, three important categories for Macy’s. We also believe many underestimate how difficult it will be for M to re-leverage fixed costs.” (See M stock analysis on TipRanks)
The Street is also bearish about Macy’s as reflected in the Moderate Sell consensus based on no Buys, 3 Holds and 4 Sell ratings. Macy’s stock has already plunged over 58% year-to-date and the average analyst price target of $6.00 indicates a further downside of about 15% over the next 12-months.
Conclusion
The bankruptcy of several department stores and retailers amid the current crisis could benefit survivors like Macy’s and Nordstrom. Both companies will have to step up their game to recover in a tough retail environment. But, currently, Nordstrom seems to be at an advantage as it forayed into the off-price space way before Macy’s and has strong omnichannel capabilities.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
