Holiday Central

What goes for Macy's goes for retail? Outlook lowered

Macy's best in class: Pro

Investors shrugged off Macy's disappointing sales results and lowered full-year forecast on Wednesday, sending shares higher after the retailer reported earnings that blew past estimates.

But underlying weakness in the department store's sales figures—a symptom that's already reared its head in early releases from competitors J.C. Penney and Kohl's—signaled that despite predictions of a consumer rebound this Christmas, things still aren't easy for department stores.

Although softness has been reported across much of the retail sector, the department store set is particularly vulnerable because it relies heavily on dwindling mall traffic, and tends to cater to middle-income consumers.

That shopper is still feeling pinched despite the strengthening economy, which has seen gains in employment and the stock market.

"We've still kind of got a tale of two cities here," Villanova School of Business professor Eric Karson said ahead of Macy's earnings. "It's the middle that always does get attacked."

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Macy's, one of the few big winners last holiday, said on Wednesday that its earnings per share rose 30 percent to 61 cents for the third quarter. But its $6.2 billion in revenue fell well shy of the $6.34 billion anticipated by Thomson Reuters consensus forecasts.

What was most jarring, however, was the company's diluted full-year forecast. Many experts have pointed to Macy's—a leader among the department stores for its buy online, pick up in store initiatives and attractive merchandise mix—as a top pick for the critical fourth-quarter season.

Weakness at Macy's would likely translate into softness for the whole department store set, though analysts tend to be more bullish on Nordstrom since it caters to a higher-income consumer.

Terry Lundgren, chairman and CEO of Macy's.
Adam Jeffery | CNBC

"Expectations were very low going into [the third quarter] since the entire sector has had a tough [quarter], and Macy's results were no worse than feared," Wells Fargo analyst Paul Lejuez said. "The highlight on the positive side is the flat gross margin, an impressive achievement in the highly promotional environment."

Lejuez added that while challenges will continue into the holiday season, Macy's is "well-positioned with the right brands and promotions to drive consumers to its stores."

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JPMorgan analyst Matt Boss agreed that the retailer remains a best-in-class pick, saying he was pleased that Macy's set the bar low for the fourth quarter.

The company now expects to earn $4.25 to $4.35 a share for the full year, down from its anticipated $4.40 to $4.50 a share.

The competition heats up

Given the challenging backdrop for retail, companies are holding their holiday sales events even earlier to get a bite at consumers' wallets as soon as they finish their turkey.

J.C. Penney will open its doors at 5 p.m. on Thanksgiving Day, while Macy's, Sears, Kohl's and Belk will open at 6 p.m. High-end department store Nordstrom will once again remain closed until Black Friday.

"The more commoditized someone views the product assortment, probably the more pressure you have to be open," Villanova's Karson said.

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But the pressure isn't limited to department stores. Further evidence of struggles in the teen sector emerged on Wednesday, when American Eagle preannounced that although third-quarter results came in above expectations, its same-store sales declined 5 percent.

Last week, fellow teen store Abercrombie & Fitch , and last month, Urban Outfitters said its third-quarter sales were trending lower than expected.

Though the companies are no doubt losing share to fast-fashion brands such as H&M and Zara, declining mall traffic has also played a role. According to ShopperTrak, total U.S. retail visits fell 1.5 percent in the first week of November.

Weak traffic is one reason Stifel Nicolaus analyst Richard Jaffe said he remains cautious on American Eagle, despite the company's third-quarter improvement.

"While we are encouraged by the improvement evident in [the third quarter], we remain on the sidelines as we believe external headwinds ... will pressure [fourth-quarter] results," he wrote in a note to investors. "Additionally, we believe the company's holiday assortment is uninspiring, evidence to us that the merchandise turnaround remains a work in progress."

J.C. Penney will report its third-quarter earnings after the bell Wednesday. Kohl's, Nordstrom and Wal-Mart are all scheduled to report on Thursday.