U.S. markets close in 3 hours 50 minutes
  • S&P 500

    4,326.92
    -83.21 (-1.89%)
     
  • Dow 30

    33,999.55
    -364.95 (-1.06%)
     
  • Nasdaq

    13,485.84
    -369.29 (-2.67%)
     
  • Russell 2000

    1,990.91
    -42.60 (-2.09%)
     
  • Crude Oil

    84.98
    +1.67 (+2.00%)
     
  • Gold

    1,848.20
    +6.50 (+0.35%)
     
  • Silver

    23.81
    +0.01 (+0.04%)
     
  • EUR/USD

    1.1289
    -0.0041 (-0.36%)
     
  • 10-Yr Bond

    1.7640
    +0.0290 (+1.67%)
     
  • GBP/USD

    1.3497
    +0.0006 (+0.05%)
     
  • USD/JPY

    113.8880
    -0.0720 (-0.06%)
     
  • BTC-USD

    37,081.61
    +2,740.07 (+7.98%)
     
  • CMC Crypto 200

    842.45
    +21.86 (+2.66%)
     
  • FTSE 100

    7,371.46
    +74.31 (+1.02%)
     
  • Nikkei 225

    27,131.34
    -457.03 (-1.66%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Macy's and Nordstrom risk ‘becoming another Amazon knockoff’ with 3rd party sellers: Analyst

In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • M
  • BBBY
  • HD
  • JWN
  • BBY
  • KSS
  • TGT
  • LOW
  • WMT
  • COST
  • AMZN

David Swartz, Morningstar Equity Analyst, joins Yahoo Finance Live to discuss Macy’s and Kohls earnings ahead of the holiday shopping season.

Video Transcript

KARINA MITCHELL: Well, Macy's and Kohl's both reported strong beats before the bell today. Here to break down the results and look at what its near-term future holds for both of the retail stocks and the entire sector is David Swartz, Morningstar equity analyst. Sir, thank you so much for being here. Just your reaction to the results today from both Macy's and Kohl's.

DAVID SWARTZ: Both companies reported very strong earnings, very strong operating margins and strong growth. This is a continuation of what we've seen in the last couple of quarters. We've seen a very strong bounceback in sales, retail sales especially of apparel and home goods and the kind of products that are sold at Kohl's and Macy's. And so we've seen a lot of momentum this year as the economy has reopened and as people have had strong savings during the pandemic, and they've been spending those savings on products that are sold by department stores.

ALEXIS CHRISTOFOROUS: And David, I know that today we learned that Macy's has now hired a consulting firm to see whether or not it makes sense to spin off its e-commerce operations. I know they've had an activist investor calling for them to do this for some time. Do you think that makes sense for Macy's? And will it unlock some shareholder value?

DAVID SWARTZ: No, I don't think it makes sense, and I don't think the management of the company intends to do it at all. It would go completely against Macy's strategy, which has been to integrate these stores and the online businesses as much as possible. And so splitting them up would be a complete reversal of what Macy's management wants to do.

Now, in theory, Macy's online business could get a stronger valuation than it could as part of the consolidated company. But we don't know what that would do to the store part of the business. Without the online business, Macy's stores would be in very bad shape. And so you could say that the online business will get a better valuation, but that doesn't say much about what would happen to the rest of the business.

KARINA MITCHELL: So its online platform will launch in the second half of 2022. And what does that allow it to do? And then just to follow up on that, if I could, sir, Nordstrom also saying it's partnering with sports apparel seller Fanatics. So is this the wave of the future? Is this what retailers need to do to succeed going forward, adopt a format that's more sort of like an Amazon and allowing third party vendors?

DAVID SWARTZ: I don't think they have to do it. But, you know, Macy's already has a very large online business. It's going to be about $10 billion in sales within a couple of years. Macy's is one of the largest online retailers in the United States. So it makes a lot of sense for Macy's to use that traffic to generate revenue in another way, not just selling its own products. And Nordstrom is doing the same thing. Nordstrom has talked about increasing the number of products that it sells online from 300,000 to 1.5 million items.

So one of the benefits of an online business is that there's no shelf space to worry about. There's no floor space to worry about. You can have an infinite number of products. So both Macy's and Nordstrom have a lot of traffic to their sites already. And so it makes sense for them to try to make money selling other companies' products on those sites. The downside would be that it could dilute the brands. Nordstrom and Macy's, if they do this too much, they run the risk of they just become another Amazon knockoff, selling everything under the sun, rather than selling unique products to Macy's or Nordstrom.

ALEXIS CHRISTOFOROUS: And, David, you know, online retailers like Target, which saw its margins shrink to absorb those higher expenses, Macy's actually reported higher margins compared with last year. How were they able to do it? And what might other retailers like Target, like Walmart-- I can't believe I'm asking this, but what might they learn from Macy's when it comes to margins?

DAVID SWARTZ: Yeah, it's a difficult comparison because you have to remember that stores like Walmart and Target also sell a lot of food. And they also sell a lot of other items that are not carried by Macy's and Nordstrom and Kohl's. Those department stores now are really just very large closed stores. They mostly just sell apparel. And so what's happened this year is that inventories have been very low.

Coming out of the pandemic last year, when the store started closing, there were a lot of canceled orders. And then even when the stores reopened, a lot of retailers were hesitant to order more clothing from the factories. And so going into the year, inventories were low, and then as demand has picked up from government stimulus programs as well as the opening of the economy, demand has been very high at a time that inventories have been low.

And so pricing on clothing this year has been very high. We've seen record markdown rates, very little discounting across the whole industry. And this has a big impact on margins because the big problem for department stores and other clothing retailers in recent years has been that they have to sell everything at discount prices. But that hasn't been the case this year. And so, it's been a situation where being a department store has actually been an advantage over Walmart and Target, which, in past years, that certainly hasn't been the case.

KARINA MITCHELL: I'm so glad that you say inventories are low because I have a family wedding coming up this weekend, and nothing is in stock. Everything that I tried to order was either not available in my size, sold out, or you had to pre-order it and it would show up in February. So it really has been a challenge.

So when I hear things like, you know, Target and Walmart saying our shelves are stocked, come in, we have everything that you need, that's not the case across all retailers. And I want to ask you, what are some of the headwinds that they now face, moving into beyond the fourth quarter, which we think, you know, holiday sales seem to be-- people are flush with money. They want to spend. That's what we're seeing. What happens beyond that? What are the headwinds?

DAVID SWARTZ: Yeah, I mean, some of the problems that we've had this year I think are starting to resolve themselves, like, for example, in Vietnam. And factories in Vietnam were basically closed for about four months from June all the way until July and through July and then into October. And so what happened was a lot of production just got completely stopped, as well as a lot of shipping got stopped, too, in Asia. And there have been other sporadic shutdowns of ports in China, other places in Asia. And that's created problems.

So, as the vaccines become more readily available in parts of Asia, I think that part of the problem will be resolved. The shipping issues are not going to be resolved any time soon, because you can only port so many ships at a time. And there's only so many trucks and truck drivers and space on land to unload all the products. There's even warehouse space shortages all over the place. So those problems are going to take months to resolve. Most likely, they won't be resolved until the middle to late part of 2022. It really depends on how the economy develops. If the economy continues to be relatively strong, demand will be strong and products will sell through quickly.

And it's really going to also depend on what you're looking to buy and what retailer you're talking about. So a company with a lot of financial resources, like, for example, Lululemon, can airfreight its products in from Asia. And so I'm not that worried about a company like Lululemon running out of inventory. This is a bigger problem for, like, a smaller retailer or an independent store that doesn't have the financial resources to do that. It also doesn't have flexibility.

But even large companies are being affected. Nike, when they reported a few weeks ago, it lowered its numbers. And if you go through the numbers, Nike's talking about losing about $3 billion in sales in this fiscal year to lost inventory because of shipping delays. And so, even a very wealthy company like Nike cannot solve all the problems in a short period of time.

KARINA MITCHELL: Yeah, absolutely a bigger problem for mom and pop shops without that pricing power. All right, we will have to leave it there. David Swartz, Morningstar, thank you so much for that analysis.