US retail sector’s misery — in charts

Investors wiped $4.6bn from the market value of the US department store sector in the space of two days this week, as concern mounted about sliding sales and the effects of online competition.

The consequences are spilling into the real estate and derivatives markets, and the latest bad news has intensified the focus on the sector ahead of more earnings reports from retail heavyweights next week.

Five stores, $4.6bn in market value

A quintet of big US department stores this week disclosed declines in like-for-like sales for the first three months of the year. The figures that were revealed by Macy’s, Kohl’s, Dillard’s, Nordstrom and JC Penney were below most analysts’ forecasts, suggesting Wall Street has still not got a handle on how fast things are deteriorating in the sector.

The disappointment ignited a sell-off that sent the market value of the S&P department stores index sliding from $27.8bn on Wednesday to $23.2bn on Friday, marking the biggest two-day wipeout in dollar terms since the 2008 financial crisis. This despite some commentary from executives that they had seen an improvement since the start of spring.

Here is how the individual stocks fared:

● Macy’s and Dillard’s each ended down 18.5 per cent

● JC Penney fell 17.1 per cent

● Nordstrom was down 15.9 per cent

● Kohl’s fell 9.1 per cent

Jitters among fixed-income investors

The anxiety was not limited to the equities market.

Investors marked up the cost of insuring against defaults on department stores’ debt, and on the debt of other groups that are vulnerable to consumers’ shift away from bricks-and-mortar shopping.

Macy’s, Nordstrom and Kohl’s were three of the worst four performers in Markit’s index of credit-default swaps of investment-grade companies this week. Spreads also widened for the CDS tracking the debt of electronics retailer Best Buy, Simon Properties, the biggest US mall operator, and discount chain Target.

Retail Reits left reeling

Real estate investment trusts that own and operate retail properties, like shopping malls, were among the worst-performing industry groups on the S&P 500 index this week. The broad benchmark ended the week down 0.35 per cent, while the retail Reit group was off 4.1 per cent.

The fall this week deepens the year-to-date decline for retail Reits to 12.3 per cent, versus 1.5 per cent for the whole Reits sector.

Here is a round-up of how individual retail Reits performed this week:

● Macerich, which operates malls in the western US, fell 5.6 per cent

● Kimco Realty, which focuses on open-air shopping centres, was down 5.1 per cent

● Simon Properties, the largest player in the group, slipped 4.3 per cent

● GGP, the second-biggest group by market value, slipped 1.9 per cent

What retail executives are saying

Marvin Ellison, chief executive at JCPenney: “While February was a very challenging month for JCPenney and broader retail, we are pleased with our comp-store sales for the combined March and April period, which improved significantly versus February.”

James Nordstrom, Nordstrom president: “While there may be opportunities to close underperforming stores, that’s not really part of our strategy. We don’t have a closure strategy. We have a market share strategy.”

Jeff Gennette, Macy’s chief executive: “These are unusual and challenging times for retail, especially for mall-based department stores. We know that these changes we’re seeing are secular and not cyclical.”

How earnings look so far

The weakness in sales is affecting the bottom line.

According to FactSet, department stores and apparel retailers are expected to average declines of 6 per cent or more in net income for the first quarter. Profits at general merchandise stores are faring even worse, whereas internet retailers are on a tear. Their net income is expected to be up more than a quarter, on average.

On deck next week

If department stores are uniformly losing out in the changing retail landscape, the companies that are reporting next week may be more of a mixed bag.

So far off-price retailers, which offer rapidly changing selections of designer names at a sharp discount to retail prices, have bucked the gloom. Investors will tune in next week to see if TJX Cos, behind chains such as TJ Maxx and Marshalls; and Ross Stores, had a better start to the year than their traditional rivals, even though those traditional rivals have recently started to push their own lower-price offerings.

Meanwhile, Target had a difficult holiday season as customers turned to Amazon and Walmart. But next week investors get to hear if chief executive Brian Cornell’s efforts to lure customers back by lowering prices, sprucing up stores, and introducing new brands is paying off.

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