Macy's And Kohl's Earn Free Pass In Q3, But Need To Gives Consumers Reason To Shop In Q4

Department store stocks were under heavy selling pressure on Thursday after Kohl's Corporation KSS and Macy's Inc M both reported earnings.

The Expert

Dana Telsey, retail expert and CEO of Telsey Advisory Group.

The Strategy

Kohl's and Macy's are both a "show me story."

The Thesis

There are two different scenarios playing out between Macy's and Kohl's, Telsey said during CNBC's "Squawk Box" segment. Macy's reported lower sales and negative comps but a better gross margin, while Kohl's reported better sales that was offset by a weaker gross margin. But between the two choices neither is particularly favorable as sales and traffic growth combine for the "holy grail" in retail.

Nevertheless, Kohl's does have some promising initiatives in its playbook moving forward, including a partnership with Amazon.com, Inc. AMZN and a focus on activewear, Telsey said. As such, the initial 10 percent selloff in Kohl's stock immediately following the earnings report is "overdone."

Macy's also has several initiatives it just began to implement, Telsey said. So the company may be granted a pass in the third quarter that was impacted by factors out of its control, including unusual weather patterns, the impact of hurricanes, and a decrease in traffic from tourists to the U.S.

Bottom line, consumers "have the ability to spend" but department stores have to give them the "want to spend," especially in the all important holiday season.

Price Action

Shares of Macy's were trading higher by nearly 10 percent early Thursday afternoon, while Kohl's was trading lower by around 1 percent.

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