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November 6, 2017

U.S. Department Stores Set to Report Q3 Results

by Jharonne Martis.

U.S. department stores are getting ready to report Q3 financial results this week. Despite facing easy same store sales from a year ago, only JC Penney is expected to report a positive 0.5% Q3 2017 comp (Exhibit 1). The same can be said for earnings growth rates; the bulk is negative, and Macy’s is expected to see a slight earnings growth of 12.7%.

First out of the gate include Dillard’s, Macy’s, Kohl’s, Nordstrom and JC Penney. Dillard’s and Macy’s are expected to post the weakest SSS estimate at -2.7%, and -2.6% SSS below last year’s -4.0%, and -2.7% SSS result. Sears Holdings, which is expected to report later in the month, has the weakest estimate in the group at -6.2%, better than last year’s -7.4%.

Exhibit 1: Department Store Same Store Sales and Earnings Growth Rates

Source: I/B/E/S estimates

Bearish analyst reports

According to StarMine, beware of the department stores and listen to the saying, “never try to catch a falling knife.” The bulk of these stores score in the top decile on the Relative Valulation (RV), but there’s likely a reason their stock prices appear cheap. According to the StarMine Combined Credit Risk (CCR) model, the most comprehensive StarMine credit model, the department stores may be in danger of default in the next year.

Last year, most of these department stores had been in the riskiest quartile of all retailers likely to default. This year, however, those scores have fallen lower, placing most of the retailers in the bottom decile. Six out of seven stores rank in the bottom of the StarMine CCR model score. These scores correspond to implied credit ratings of CC or worse, suggesting these stores are not financially stable.  For example, Macy’s has a score of 8 corresponding to a BB- implied credit rating, according to the model. And, the fact that the CCR scores continue to fall suggest that the danger of default has become greater.

Exhibit 2: StarMine Combined Credit Risk Model Scores – Department Stores

Source: StarMine

Outlook and earning trends

Third quarter retail earnings are expected to grow 5.5% over Q3 2016. The household durables and hotels, restaurant & leisure retail sectors are expecting the highest earnings growth rates for the quarter, while the leisure products and multiline retail sectors have the weakest negative anticipated growth rates compared to Q3 2016 (Exhibit 3).

The household durables retail sector is expected to see earnings grow by 15.4%. The sector received a boost from MDC Holdings and TRI Pointe Group Inc’s 125.6%, and 118.2% earnings growth rate, respectively.

The hotel, restaurant & leisure group is expected to see earnings grow by 15.3%, led by Penn National Gaming Inc’s 1,553% earnings growth result, followed by Chipotle’s strong 392.6% jump in earnings.

Meanwhile, the leisure products sector has the weakest earnings growth rate at -26.1%.  The weakness is coming from Mattel Inc.’s 87.1% drop in earnings growth rate, after missing consensus estimates. Meanwhile, Vista Outdoor Inc. is expected to report a 63.9% drop in earnings.

Exhibit 3: Q3 2017 Earnings Growth: Retail Industries

Source: I/B/E/S estimates

Negative revenue guidance

In addition to the 56 Q3 negative pre-announcements and 22 positive for EPS, retailers posted 34 negative and 29 positive revenue forecasts (Exhibit 4). The bulk of the negative guidance (34%) comes from the apparel sector. Guidance is already starting to come in for Q3.

Exhibit 4: Q3 2017 Earnings and Revenue Guidance

Source: I/B/E/S estimates

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