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Department store earnings to paint ugly picture for retail

When retail earnings season kicks into high gear this week, you may be tempted to panic.

Don't.

After reporting in May their worst results since the recession, department stores are again expected to lead off the flood of earnings reports on an alarming note. Of all 15 subcategories tracked by Retail Metrics, department stores are presumed to have generated the worst results. In fact, they're the only group that's expected to have lost money.

Sears accounts for the lion's share of that assumption, with Retail Metrics calling for it to squander nearly $400 million. As a whole, department stores are expected to be $104 million in the red. While that would be a slight sequential improvement from their $120.5 million first-quarter loss, every department store — save for J.C. Penney and Bon-Ton — is expected to post weaker results.

"This same group kicked off the [first-quarter] retail reporting season in May with less than stellar results that initiated a brief period of 'the sky is falling' mentality," Retail Metrics President Ken Perkins said. "We may be setting up for a similar scenario here in August and would not necessarily read through tough department store results."

That's not to say things are looking rosy for the overall retail space. The 116 companies tracked by Retail Metrics are expected to report a 1.9 percent drop in second-quarter earnings year over year. That compares with a first-quarter increase of 2.1 percent from the prior year.

Macy's and Kohl's are the first major department stores on deck, with both releasing results early Thursday. Macy's management has already warned that sluggish sales and piled-up inventories would dent its sales and gross margins during the second quarter. The international tourism slowdown that dinged Kate Spade last week added another headwind, as many Macy's locations cater to these shoppers.

Macy's lowered the bar for its full-year results back in May, when it reported its steepest quarterly comparable-sales decline since the 2009 recession.

Shoppers look at shoes at a Macy's department store in New York.
Michael Nagle | Bloomberg | Getty Images
Shoppers look at shoes at a Macy's department store in New York.

Like Macy's, Kohl's first-quarter same-store sales drop was its worst since the recession. But unlike Macy's, Kohl's maintained its full-year guidance — something analysts remain skeptical about.

Though the retailer is up against its easiest same-store sales comparison for the year — and is relatively unburdened by excess inventories — a full-year earnings cut "still appears imminent," Morgan Stanley analyst Kimberly Greenberger said.

"Despite a potential warm-weather boost in June and July, we're still seeing signs U.S. department stores are struggling," Greenberger said. Those signs include two months of sales declines in the second quarter, as reported by the Commerce Department.

Meanwhile, vendors have commented that department stores continue to order product cautiously, as they try to work their way through older goods. Children's brand Carter's last month lowered its full-year sales forecast because of softness at department stores. These retailers are also facing stiff competition from Amazon, which grew its North American sales in electronics and general merchandise by a whopping 32 percent during the comparable quarter.

Analysts are likewise calling for another tough quarter at Nordstrom, which lowered its full-year sales and earnings forecast after a disappointing first quarter. The retailer's well-heeled customers have reigned in their spending in an uncertain economy, and performance at its discount Rack division has been choppy.

And while J.C. Penney is expected to post another loss, investors will be watching for further improvement in its top line. In June, the recovering department store said it had delivered positive same-store sales through Memorial Day. That bodes well for the retailer, as overall retail sales trends appear to have improved after that holiday, when the weather turned warmer.

Despite second-quarter pessimism, some on Wall Street are clinging to hope that things could turn around for department stores in the second half. With more Americans at work and consumers paying less at the gas pump, retailers' easy comparisons could position them for an easy win. That is, if they exited the second quarter with the right amount of inventory.

"We see opportunity for a favorable [second-half] set-up versus easy compares if weather is indeed more favorable," Deutsche Bank analyst Paul Trussell said.