In Q3, Back-To-School Likely A C+ At Best For Department Stores

For Bank of America Merrill Lynch, Kohl's Corporation KSS continues to be its top idea within the department store sector, while the firm remains cautious on Nordstrom, Inc. JWN.

The Sector Preview

Department store retailers are set to announce their quarterly numbers amid expectations of lukewarm comps as an unseasonal warm start to Back-to-School weighed on fall apparel demand.

The brokerage expects a 3 percent drop in average comp at department stores, flat with second quarter, and its average EPS estimates are 4 percent below consensus.

“Our aggregated internal BAC debit and credit card spending at department stores support our view that sector sales decelerated from 2Q into 3Q,” analyst Lorraine Hutchinson wrote in a note.

However, BofA projects third-quarter gross margins to be relatively stable, while investors would focus on retailers' holiday plans, exposure to cold weather goods given forecasts for cooler weather and easy sales and margin comparisons.

Looking ahead, Hutchinson sees 1 percent fall in comps in the fourth quarter, 200bp above third-quarter outlook based on a stronger seasonal business.

Preferences And Downside Risk

Stock-wise, Hutchinson prefers Kohl’s, as it would benefit from a more normal winter by selling more cold weather goods and reducing clearance. The company is set to report on November 10. BofA models 3 percent comp decline, compared to the Street’s 1.5 percent drop, and expects $0.66 in EPS.

On the other hand, the analyst sees downside risk for Nordstrom into second half on fading Anniversary Sale-driven momentum, as consumers gravitate spending toward key promotional events. The analyst projects third-quarter EPS of $0.55, $0.02 above consensus, when the company reports results on November 10.

Upcoming Events Of Note

Following are the analyst’s views on the upcoming earnings of various department store retailers:

• Dillard's, Inc. DDS is expected to report earnings this week. The analyst cut her third-quarter EPS view by $0.04 to $0.72, lower than Street’s outlook for $0.80. She estimates a 4.5 percent comp decline, below the Street’s 3.5 percent drop.
• J C Penney Company Inc JCP will report on November 11. Hutchinson cut her comp and EPS estimates to 1 percent and $(0.21) from 4 percent and $(0.14) previously. JCPenney’s business is highly sensitive to weather, especially in the third quarter. However, it may benefit from sales of appliances.
• Macy's Inc M will report November 10. The analyst cut her comp estimate to -3 percent (from -2 percent) due to the unfavorable weather, but raised EPS forecast to $0.40 from $0.39 on higher asset sales in the quarter. However, the $0.40 EPS view is a penny lower than Street.
• Stage Stores Inc SSI is set to report on November 17. BofA predicts a per share loss of $0.39 on 8 percent fall in comps.