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Departments Stores Are A Dying Breed As Discount Retailers Flourish

Daniel Laboe

Kohl’s KSS is down over 10% in morning trading as they report worse than expected Q1 results. They missed EPS estimates by 9%, representing a 5% year-over-year decrease. Reported revenues missed by about 3% illustrating a reduction of 3% year-over-year. Full year EPS guidance has been lowered by over 10%. Expect to see KSS as a Zacks Rank #4 or 5 (Sell) tomorrow.

JC Penney JCP also released its quarterly results today, missing its already pessimistic EPS by 18%. JCP just reported its worst sales figures in the firm’s observable history (since before the 2000s). This company has been struggling to keep its head above water as discounted competitors and online retail pressures continue to push it under. JCP is currently sitting at Zacks Rank #5 (Strong Sell) and I don’t see this status changing anytime soon.

Department Store Industry

The broader department store industry has been getting hammered over the past 52-weeks, with the industry as a whole being down around 19%. Kohl’s 52-week returns just turned negative today with its disappointing Q1 results. JCP has fallen 56% this year so far and has plummeted 97.6% since its high in 2012. I see no reason why this cash burning machine wouldn’t fall further.

Part of the additional pain that KSS (blue) and its investors experienced today is due to the stock outperforming its peers YTD as you can see below.

 

Macy’s M was able to beat EPS earnings in its Q1 results reported last week by over 40% and only slightly missed its sales estimates. This still represented a year-over-year decline in both sales and EPS. M is down 3.5% since this report. Macy’s is expected to see declines on both their top and bottom lines over the next couple years.

The S&P 500 is up over 53% in the last 5 years with the US remaining in one of the strongest and longest bull markets on record. Department store retailers, on the other hand, have lost investors over 46% in the same time frame. With this segment unable to perform when the economy is strong, how will they keep their head above sea-level when the waters get tough? 5-year chart comparing S&P 500 (red) vs. Department Store Industry (blue) below.

 

Discount Retail

While the department store industry is declining, discount retailers like TJX TJX have been flourishing. With the overall discount industry up 17% and TJX up even more.

TJX beat both EPS and sales estimates in its Q1 financial release this morning. They showed 6.8% year-over-year growth for the top line and were able to keep EPS results unchanged from Q1 2018. TJX (blue) has outperformed the S&P 500 (red) by more than 30 percentage points in the past 5 year.

 

Amid the brick-and-mortar retail decline, discount retailers like TJ Maxx and Marshalls are somehow able to continue growing. Over the last 10 years, sales and profits have gone nowhere but up. TJX has been able to consistently open more and more stores, increasing their store count by over 26% in the past 4 years.

How have discount retailers like TJX been able to compete in an ever-growing e-com economy? They must be giving retailers something they can’t find online.

Millennials are driving consumer’s trends in today’s economy, and they have an attraction to savvy shopping. They love the feeling of finding “diamonds in the rough”, which is what TJ Maxx and Marshalls allow consumers to feel. The ability to find name brand products at a bargain is what is keeping TJX the growing retail powerhouse it is.

Take Away

Department stores are a dying breed as discount retailers and online shopping displace the need for consumers to tediously navigate their way through these massive stores. On the other hand, discount retailers have been able to drive growth through their ability to satisfy consumers’ needs/wants. I would stay away from dying department store stocks like M, JCP, and KSS. Look to buy growing discount retailers like TJX as they continue to outperform the market.

 

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The TJX Companies, Inc. (TJX) : Free Stock Analysis Report
 
Kohl's Corporation (KSS) : Free Stock Analysis Report
 
J. C. Penney Company, Inc. (JCP) : Free Stock Analysis Report
 
Macy's, Inc. (M) : Free Stock Analysis Report
 
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