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After last quarter's bloodbath, little gains for department stores may yield big results

Lauren Thomas

Just three months ago, disappointing department store earnings sparked an intense sell-off in retail stocks.

In the week following each of their financial reports, Macy's (NYSE: M), Kohl's (NYSE: KSS), Nordstrom (NYSE: JWN) and J.C. Penney (NYSE: JCP) shaved a combined $3.71 billion from their market capitalization. While Kohl's, Nordstrom and Penney's have recouped losses since then, Macy's still trades nearly 18 percent lower than when the company issued first-quarter results.

This week, Wall Street is waiting in anticipation to see if that same scenario will play out again. Macy's, Kohl's, Nordstrom and Dillard's (NYSE: DDS) are scheduled to report earnings on Thursday, with J.C. Penney's results out Friday morning.

Early signs are hinting at negative to flat same-store sales across the board for department stores, JPMorgan analyst Matthew Boss said in a note to clients. But his firm also has increased comparable sales estimates for Kohl's, Dillard's and Nordstrom this quarter, expecting store traffic to be a tad better.

Boss added that he expects cost savings to be a "theme" for department stores this quarter. That would be a welcome change from the retail woes that started 2017. These retailers are just begging for a new narrative.

Nobody is questioning that department stores remain the "laggards" of the retail world, GlobalData Retail managing director Neil Saunders told CNBC in an interview. "There are no real dynamics or shifts to suggest that the tide is turning in their favor."

That being said, "many of those [chains] reporting are up against very weak comparatives from the prior year, which may make declines less harsh," Saunders pointed out.

Improved weather, holidays like Mother's Day and Father's Day, and an end to delayed tax refunds should help this quarter's results come in better than last, for most, Telsey Advisory Group's Dana Telsey told CNBC. Among the department stores, she expects Penney's, Nordstrom and Kohl's to be able to beat Street estimates.

JPMorgan's Boss said he thought that each month of the second quarter was better than the prior month of the period for department stores, marking another encouraging sign.

But let's not get ahead of ourselves. All department store retailers are still expected to post same-store sales declines this quarter, according to data from Thomson Reuters. Although the first quarter was tough, "being better than awful" this go-round doesn't make everything good again, GlobalData Retail's Saunders said.

According to Thomson Reuters analyst Jharonne Martis, Macy's same-store sales are expected to be the worst of the four and are forecast to drop 3.2 percent. In the second quarter of 2016, Macy's comps fell 2 percent.

Over the past three months, department stores have all been in the news both for better and for worse.

Nordstrom is reportedly running out of time to sign a deal to go private and has been courting investors with preferential terms. That's sure to be a question raised on Thursday's earnings conference call.

"Nordstrom's update will be overshadowed by speculation over whether or not the company will go private," Saunders said. "The market will seek a more substantive update on management's position — although they may well be left wanting."

Macy's is in the midst of growing its off-price brand, Macy's Backstage. New to the job, Macy's CEO Jeff Gennette is still figuring out how the company will be able to compete with other off-prices players like T.J. Maxx (NYSE: TJX) and Ross (NASDAQ: ROST).

Smaller chain Dillard's marks the latest target by activists for its real estate — similar pressure that Macy's had also been under from hedge fund Starboard Value.

Meantime, analysts are looking to learn more about how Under Armour (NYSE: UAA) merchandise has been selling at Kohl's since the two formed a partnership. And J.C. Penney iwas scheduled to close 138 stores on July 31.

With all the noise, it's easy to forget retailers are in the midst of back-to-school shopping season, the second busiest retail sales period of the year. But this year looks to be shaping up differently as department store chains prepare to issue second-quarter results.

Long known to be a key destination for parents to restock the clothing their kids grew out of over the summer, department stores this year are expected to lose a share of the market, according to a 2017 report from Deloitte.

"Younger consumers are shifting from a retailer-focused to a brand-focused buying mentality, and with more brands selling directly to consumers via channels such as Facebook, department stores will likely feel the impact during the back-to-school season," said Deborah Weinswig of Fung Global Retail & Technology.

Mass merchants like Target (NYSE: TGT) and Wal-Mart (NYSE: WMT), off-price chains such as T.J. Maxx and Ross, and e-retailers are also ringing up more of parents' purchases. This shift is happening as the categories to which shoppers allocate dollars are changing — more money is going toward electronics, with less left over for apparel.

"The challenge for department stores is that they used to be a destination of choice for shoppers for back to school," Craig Johnson, president of Customer Growth Partners, told CNBC in an interview.

"Today, the format [of department stores] has been crying for reinvention. It's still basically the same as when the format was invented by R.H. Macy and Marshall Field [of Marshall Field and Company]."

According to a Deloitte survey of 1,200 parents, only 28 percent of shoppers plan to purchase back-to-school items from department stores this year, down from 54 percent a year ago.

According to a similar survey of parents from Branding Brand, the majority of shoppers will choose to pick up items for school at Target, Wal-Mart and Amazon this back-to-school season.

Looking at 2017's back-to-school shopping season, analysts appear to be "most worried about declining [mall] traffic ... and continued intensification of Amazon competition," Cowen and Co. analyst Oliver Chen wrote in a note to clients. This doesn't paint a pretty picture for department stores fighting to keep up.

"We worry about mall traffic declines ... potentially carrying over into August and September."

WATCH: Telsey Advisory's Dana Telsey: JCPenney is top pick among department stores

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