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Ross and TJX Disrupt Volatile Brick-and-Mortar Retail Industry

- By James Li

On May 11 and May 12, several brick-and-mortar retail companies reported weak earnings, driving the SPDR S&P Retail (XRT) exchange-traded fund's share price down 1.38%. These companies include Macy's Inc. (NYSE:M), JC Penney Co. Inc. (JCP), Kohl's Inc. (KSS) and Nordstrom Inc. (JWN). Other retail companies, including Ross Stores Inc. (ROST) and TJX Companies Inc. (TJX), have taken away competitive power from the previous list of companies.


Macy's

Macy's continued its decline from the 2016 holiday season with net sales of $5.338 billion and earnings of 23 cents per diluted share during first-quarter 2017. These results underperformed first-quarter 2016 results: net sales dropped approximately $400 million while earnings tumbled about 14 cents per diluted share.

Although CEO Jeff Gennette offered "encouraging" performance from several pilot programs in women's shoes, fine jewelry and furniture, Macy's still has a weak financial outlook for 2017. The company reaffirmed its expected declines in comparable sales and total sales, ranging from 2.2% to 3.3% in the former and 3.2% to 4.3% in the latter. The expected drop in revenues further weakens Macy's profitability as the company already has a three-year EBITDA growth rate near a 10-year low of -7.10%.

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While the company's financial strength rank averaged 5 out of 10 during January 2006 to April 2017, Macy's business predictability has ranked one star out of five since 2008. Figure 1.1 summarizes the historical trend of Macy's financial strength scores while Figure 1.2 presents the key statistics as of May 11.

Figure 1.1

Figure 1.2

As illustrated in Figure 1.2, Macy's stock price closed at $23.45 per share May 11, approximately $6 less than its May 10 stock price. On May 12, the stock further tumbled 2.55%.

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Several gurus, including Robert Olstein (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio), axed Macy's from their portfolios during first-quarter 2017 as the company offers declining growth potential.

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JC Penney

JC Penney reported $2.7 billion in net sales and a loss of 58 cents per diluted share, the latter missing expectations by approximately 38 cents per share. The reported net loss included $200 million, or about 71 cents per share, in restructuring charges associated with the store closing announcement and the planned retirement of $520 million in outstanding debt. According to a Feb. 24 company release, JC Penney plans to close 130 to 140 stores during second-quarter 2017.

While the company's profitability rank and Piotroski F-score rebounded from their historical lows in 2013, JC Penney's business predictability has ranked a flat one star since January 2006 as illustrated in Figure 2.1. Figure 2.2 reports JC Penney's financial strength statistics as of May 11.

Figure 2.1

Figure 2.2

JC Penney's share price dropped nearly 11% to a new low of $4.71 May 12 following the poor earnings announcement.

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Kohl's

Kohl's reported higher earnings in fiscal first-quarter 2017 even though revenues tumbled 3.2% year over year. Earnings increased eight cents per share, driven by a 3% decline in selling, general and administrative (SGA) expenses.

Unlike Macy's or JC Penney, Kohl's had high profitability and business predictability during the backtesting period from January 2006 to April 2017. The company's profitability generally ranked at least 7 out of 10 while the company's predictability ranked at least four stars out of five. Figure 3.1 summarizes the historical trend of financial strength scores for Kohl's.

Figure 3.1

As illustrated in Figure 3.2, Kohl's currently has a 3.5-star predictability rank, suggesting less consistent revenue and earnings growth. The company's operating margin declined approximately 9.7% on average over the past five years. Additionally, Kohl's returns on equity and assets are both near a 10-year low.

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Figure 3.2

Kohl's stock trades around $36.44 per share, about a 2% decline from the previous close of $40.32.

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Nordstrom

Specialty retailer Nordstrom reported net earnings of 37 cents per diluted share during the quarter ending April 29, outperforming expectations by approximately 11 cents per share. Despite total sales increasing 2.7% year over year, comparable store sales dropped 0.8% year over year.

Unlike Macy's and JC Penney, which are closing stores, Nordstrom opened a net 24 stores from April 2016 to April 2017, suggesting good growth potential. The Seattle-based specialty retailer's profitability ranks 8 out of 10 with returns on equity outperforming 96% of global competitors.

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During the backtesting period from January 2006 to April 2017, Nordstrom's profitability ranked at least 7 out of 10 while the company's business predictability seldom dropped below three stars as Figure 4.1 illustrates. Figure 4.2 summarizes Nordstrom's financial strength values as of May 11.

Figure 4.1

Figure 4.2

Ross and TJX change the industry

The above four companies are losing competitive power to two off-price retailers, Ross Stores and TJX Companies. Figure 5 captures the phenomenon through the cumulative percent gains of each company since January 2006. (The backtesting assumes quarterly rebalancing.)

Figure 5

Ross Stores reported net sales of $3.5 billion and net earnings of 77 cents per diluted share for the quarter ending Jan. 28. These results outperformed prior-year results by 8% and 14% respectively.

Even though CEO Barbara Rentler gave a "cautious" fiscal 2017 outlook, Ross Stores still has a profitability rank of a perfect 10 as of May 11. The company has five good signs, including expanding operating margins, consistent per-share revenue growth and a Piotroski F-score of a perfect nine (See Figure 6.1). Ross' business predictability has ranked at least four stars out of five since January 2006 as illustrated in Figure 6.2.

Figure 6.1

Figure 6.2

Like Ross, TJX Companies also has high profitability and predictability, the latter a perfect five stars as of May 11. The Massachusetts-based off-price retailer reported increasing comparable sales for 21 consecutive years according to CEO Ernie Herrman. In the fourth-quarter 2016 earnings report, the CEO reaffirmed that TJX continues "making strategic investments in [the company's] infrastructure, stores and new seeds" to expand its market share domestically and internationally. Figure 7.1 captures the historical trend of financial strength scores for TJX since January 2006 while Figure 7.2 reports the key company statistics as of May 11.

Figure 7.1

Figure 7.2

While both companies trade near a 10-year high, Ross and TJX still offer higher growth potential than the other brick-and-mortar retailers mentioned.

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Conclusions and see also

As several brick-and-mortar retail companies reported weak earnings performance, the SPDR Retail ETF traded approximately 1.72% lower than its May 10 price of $44.10 per share.

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GuruFocus added several new GURUF templates, including one on price-valuation charts and one on financial strength scores. You can download these on our Excel Add-in page. The following article introduces the GURUF template on Piotroski F-scores, Altman Z-scores and Beneish M-scores.

Disclosure: The author has no positions in the stocks mentioned.

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