Retail stocks hit decade lows on the heels of Macy's dismal earnings

Key Points
  • Shares of retailers Nordstrom, Kohl's, Dilliard's and J.C. Penney tank after Macy's lowered its profit outlook in an earnings miss.
  • Macy's move underlines the challenges in the retail sector.
Here's what's next for department store retail
Here's what's next for department store retail

Shares of department stores Nordstrom, Kohl's, Dilliard's, and J.C. Penney tanked Wednesday after Macy's lowered its profit outlook in an earnings miss that underlined challenges in the retail sector.

Macy's shares closed Wednesday down 13%,  while Nordstrom and Kohl's skidded 10%, J.C. Penney dropped nearly 5% and Dilliard's was less than 2% lower. Macy's fell to its lowest level since February 2010, while Nordstrom's low was its worst since July 2009.

Outside the department store sector, declines were also severe. Shares of Gap fell nearly 8%, hitting its lowest level since October 2011. Victoria's Secret-owner L Brands sank 8%, its worst performance since February 2010.

The S&P Retail ETF (XRT) sank nearly 4%, to its lowest level in two years.

The decline in retail stocks happened against the backdrop of a broader market sell-off with the Dow Jones Industrial Average tanking 800 points in its worst day of the year. The plunge in stocks was sparked by investor worries about an inversion in bond market yields, which has been known to indicate a coming recession.

In its earnings report, Macy's said excess inventory during the spring season forced the company to cut prices in order to move merchandise, which weighed on profits. The company is now expecting to earn between $2.85 and $3.05 a share this fiscal year, down from a range of $3.05 to $3.25.

On Wednesday, J.P. Morgan downgraded shares of the department store to underweight from neutral, lowering its price target to $16 from $22. The stock closed at a little lower than $17.

The retail sector has been under pressure as annual sales at U.S department stores fell 20% from 2017 to 2018 and are on pace to drop even further this year, according to the U.S. Census Bureau.

More and more shoppers are steering clear of shopping malls and instead turning to online platforms like Amazon, Stitch Fix, Net-a-Porter and Gilt to shop. Department stores are also struggling as more of the brands that sell within their stores, like Nike and Coach, are investing in selling as much directly to consumers as they can.

Department store operators also continue to deal with the threat of additional tariffs on consumer goods, like apparel and footwear, going into effect later this year.

The fallout from these headwinds has been clear: Luxury chain Barneys New York filed for bankruptcy earlier this month, while Penney announced it was working with restructuring advisors to lessen its debt.

It has been a bad year for department store stocks in general, with shares of Macy's and Nordstrom both down more than 40% since the start of the year.

–CNBC's Lauren Thomas contributed to this report.