Analysts preach caution on department store earnings as consumer trends shift

Trevir Nath, director of content
Mario Anzuoni | Reuters

In recent years, department stores have continually blamed their anemic growth on a shift in U.S. consumer spending habits. The rising popularity of off-brand retail and fast fashion and consumers' infatuation with e-commerce platforms have been two of the primary culprits.

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Today's department stores often serve as showrooms for leading online platforms and specialty stores. The broader pullback has pushed future earnings prospects down as retailers cope with a tougher market. With no signs of a bounce back any time soon, retail earnings this week are sure to paint an ugly picture.

Year-to-date stock performance

Macy's and Nordstrom are the first major department stores to report, both announcing results Thursday.

Macy's management has already indicated that the quarter to be reported could show sluggish growth on weak sales and excess inventory. This comes on the heels of a quarterly report that featured the largest decline in comparable store sales since the financial crisis. Macy's cut its full-year guidance after the report, setting the bar even lower for the department store in the coming months.

The slowdown has pushed the retailer to be more aggressive with markdowns despite its impact on margins. Weak international tourism trends and currency headwinds have also added another layer of uncertainty around potential profit growth.

Analysts are calling for earnings per share of 42 cents on $5.75 billion, according to Estimize consensus data. Compared to a year earlier, this represents a 32-percent decline on the bottom line and 5-percent on the top.

Shares are down 1 percent year to date but almost 50 percent in the past 12 months.

Nordstrom takes the stage after the bell Wednesday with what should be an equally abysmal report. Like Macy's, Nordstrom lowered its full-year sales and earnings guidance after a weak first quarter. Early signs suggest its annual anniversary sales generated strong traffic.

Its real growth driver, though, is its off-price business, Nordstrom Rack, and its ecommerce platform, Hautelook. Sales in this space increased 11.8 percent last quarter with comparable sales topping 4.5 percent. However, Nordstrom's over-reliance on promotions and discounting are expected to have a negative impact on margins and profitability.

Analysts are looking for another tough report from Nordstrom Thursday afternoon. Crowd-sourced data forecasts earnings per share of 55 cents, down 37 percent from the same period last year. That estimate has been cut by 35 percent since Nordstrom's most recent report in May. Revenue is anticipated to be down 1 percent to $3.65 billion, marking two consecutive quarters of negative growth.

JCPenney is the last of the major department stores to report, scheduled to release results early Friday. The low-end retailer is expected to post another loss, but what's most important is that the company continues to show signs of improvement.

Investors have been impressed with the company's rebound, as it improves both top and bottom line growth. The continued rollout of Sephora shops within its locations, massive store renovations, deeper penetration of private brands and an expanded online platform have all been integral to JCPenney's recovery.

Investors are holding out hope that JCPenney can be a bright spot in what appears to be a weak retail earnings season. Analysts at Estimize are calling for a loss of 14 cents per share, representing a 67-percent improvement from the same period last year. That estimate has increased 29 percent in the past three months. Revenue is expected to jump 2 percent to $2.93 billion, making JCPenney the sole department store expected to turn positive growth.

Shares of JCPenney are up nearly 42 percent year to date.

The next three days not only feature a flood of retail earnings but also the highly anticipated retail sales number. By week's end, we will have a better idea of where consumers are spending their hard earned income.

How do you think these names will report? Be included in the Estimize consensus by contributing your estimates here.