Weak holiday sales at Macy’s and Kohl’s rattle investors’ fears

This year, holiday sales have been if anything, disappointing. With the likes of Macy’s and Kohl’s reporting weak figures for the festive period, the market’s unrest has been clearly escalating as the New Year kicks in.

Disappointing sales at Macy's Inc and Kohl's Corp, coupled with store closures and layoffs, triggered a sell off in retail stocks earlier this month, reports Reuters. Although some investors are holding out hope for a longer-term recovery, the general sentiment is that retailers might never really recover from the economic downturn.

On the upside, the string of price target cuts and stock downgrades didn’t materialise in an outright "sell" rating on department store stocks.

"There is optimism that someone will shrink the business enough to hit that magic number and turn it around," said Ken Murphy, senior vice-president and portfolio manager at Standard Life Investments.

Murphy and other investors said strategic changes being executed by department store operators carried promise. This includes investing heavily in boosting online sales, shrinking the number of stores and aggressively cutting expenses.

Portfolio investors don’t want to throw the towel regarding Macy’s and Kohl’s performance

Portfolio investors and credit analysts focused on retail are willing to give Macy's, Kohl's and some other chains more time to turn around, citing positive strategic changes in the face of a seismic shift in the sector. Department stores have suffered due to the rise of e-commerce and fierce competition from off-price chains including TJX Cos and fast-fashion retailers such as Inditex's Zara.

Shares of both Macy’s and Kohl’s were crushing after logging poor holiday sales and cutting earnings forecasts late Wednesday.

Robert W. Baird and Telsey Advisory Group slashed their ratings on Kohl's, with Baird downgrading the value department store chain to neutral from outperform and cutting its price target to 44 from 60, notes Reuters. Likewise, Macy's received price target cuts from RBC and Telsey to 35 (from 43) and 38 (from 42), respectively.

It’s worth recalling that Macy's kicked off the year announcing the closure of 68 stores this year, part of a plan announced in August to shutter a total 100 stores. The retailer said it will invest in increasing its digital business, focus on the off-price retail channel with its "Backstage" branded stores, restructure management and reduce costs.

This news also hurt the likes of JC Penney Co Inc , which fell 7.2 percent on the back of Macy’s and Kohl’s target price cuts. Nordstrom Inc also traded down, shredding 6.9 percent. Other retailers including Sears Holdings Corp, Victoria's Secret owner L Brands Inc and American Eagle Outfitters Inc also reported weak sales.

Photo:Macy’s