3 Department Store Stocks to Buy, 1 to Avoid Even though the resurgence of COVID-19 cases may dampen department stores' growth in the near term, relatively inelastic demand for consumer goods and...
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Even though the resurgence of COVID-19 cases may dampen department stores' growth in the near term, relatively inelastic demand for consumer goods and their strong online presence are expected to help quality department store stocks Kohl's (KSS), Macy's (M), and Dillard's (DDS) advance. In contrast, we think it could be wise to avoid Nordstrom (JWN) because of its relatively weak fundamentals. Let's discuss.
The resurgence of COVID-19 cases due to the rapid spread of the highly contagious Delta variant continues to worry investors. In addition, according to Trading Economics data, U.S. retail sales in July declined 1.1% from the prior month.
However, the department store industry is expected to continue gaining in the coming quarters on the back of increasing demand for consumer goods and strengthening online platforms and delivery systems. According to Statista, department stores and other general merchandise stores are expected to generate $2.18 trillion by 2025. Furthermore, with rapid vaccinations across several parts of the world, department stores could witness rising foot traffic.
So, we think it could be wise to bet now on fundamentally strong department store stocks Kohl's Corporation (KSS), Macy's, Inc. (M), and Dillard's, Inc. (DDS). However, with increasing competition in the department store industry, we think it's advisable to avoid Nordstrom, Inc. (JWN) now because of its relatively weak financials.
Click here to checkout our Retail Industry Report for 2021
Stocks to Buy:
Kohl's Corporation (KSS)
KSS in Menomonee Falls, Wis., is one of the leading omnichannel retailers. It has come a long way from opening its first department store in Brookfield, Wisconsin in 1962, to now operating more than 1,100 stores across 49 states. It provides various products, including branded apparel, footwear, and accessories, through its stores and website.
Sephora announced in April 2021 that more than 125 prestige beauty brands would be coming to Sephora at Kohl's this year in partnership with KSS. This partnership is expected to help expand the company's reach and the accessibility of prestige beauty brands through a unique, immersive beauty experience.
KSS' revenue increased 30.5% year-over-year to $4.45 billion in the second quarter, ended July 31, 2021. Its operating income came in at $570 million, up 383.1% year-over-year. Its non-GAAP net income for the quarter was $382 million, versus a $39 million loss in the year-ago period. Also, its non-GAAP EPS came in at $2.48 compared to a $0.25 loss in the prior year period.
Analysts expect KSS' revenue and EPS to increase 23.6% and 358.5%, respectively, year-over-year to $18.58 billion and $6.1 in the current year. In addition, it has surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 75.2% in price to close Friday's trading session at $58.69.
KSS's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
KSS has an A grade for Growth, Value, and Quality. Within the A-rated Fashion & Luxury industry, it is ranked #12 of 64 stocks. Click here to see the additional POWR Ratings for Momentum, Sentiment, and Stability for KSS.
Macy's, Inc. (M)
One of the nation's premier omnichannel fashion retailers, M's portfolio of brands includes Macy's, Bloomingdale's, and Bluemercury. The company has roughly 726 retail stores and operates through its websites and mobile applications. M is headquartered in Cincinnati, Ohio.
On August 26, 2021, Bloomingdale's launched its first "Bloomie's" store in Fairfax, Virginia. Also, on August 19, 2021, M announced a partnership with WHP Global to bring together Macy's and Toys"R"Us. These strategic moves are expected to help M expand in the retail space.
For its fiscal second quarter, ended July 31, 2021, M's net revenue increased 58.7% year-over-year to $5.65 billion, with its comparable sales up 61.2% year-over-year. The company's operating income came in at $597 million versus a $631 million loss in the prior year. Its net income was $345 million, versus a $431 million loss in the year-ago period. Also, its EPS was $1.08 compared to a $1.39 loss per share in the prior year's quarter.
M's revenue is expected to be $23.63 billion in its fiscal year 2022, representing a 36.2% year-over-year rise. The company's EPS is expected to increase 272.4% year-over-year to $3.81 in the current year. It surpassed the Street's EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 111.9% in price to close Friday's trading session at $22.99.
It's no surprise that M has an overall B rating, which equates to a Buy in our proprietary rating system. In addition, it has an A grade for Growth and Value, and a B grade for Quality.
M is ranked #20 in the Fashion & Luxury industry. Click here to see the additional POWR Ratings for M (Momentum, Stability, and Sentiment).
Dillard's, Inc. (DDS)
Established retail company DDS in Little Rock, Ark., operates in 250 sites and 32 clearance centers across 29 states and an internet store at www.dillards.com. The company operates through two segments: Retail operations and its Construction segment.
DDS has announced a $0.20 quarterly dividend, payable on November 1, 2021. It represents its 210th consecutive quarterly dividend since becoming a public company in 1969. Furthermore, DDS announced a $500 million share repurchase program in May 2021.
DDS' net sales increased 70.9% year-over-year to $1.57 billion for its fiscal second quarter, ended July 31, 2021. Its net income from operating activities was $343.90 million, versus a $170.50 million loss in the prior year's quarter. Its net income was $185.70, compared to an $8.60 million loss in the year-ago period, while its EPS came in at $8.81, compared to a $0.37 loss in the prior-year period.
For its fiscal year 2022, DDS' revenue and EPS are expected to grow 39.9% and 866.5%, respectively, year-over-year to $6.20 billion and $21.31. In addition, it surpassed consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 152.7% in price to close Friday's trading session at $201.39.
DDS' strong fundamentals are reflected in its POWR ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system.
In addition, it has an A grade for Growth, Value, and Quality. DDS is ranked #4 in the Fashion & Luxury industry. Click here to see DDS' ratings for Stability, Sentiment, and Momentum as well.
Stock to Avoid:
Nordstrom, Inc. (JWN)
Fashion specialty retailer JWN operates across the United States and Canada through its branded stores and online through Nordstrom.com and TrunkClub.com. Its offerings include private labeled apparel, shoes, cosmetics, and accessories for women, men, young adults, and children. JWN is based in Seattle, Wash.
JWN and ASOS announced on July 12, 2021, that JWN had acquired a minority interest in the Topshop, Topman, Miss Selfridge, and HIIT brands. However, we think this acquisition could take a toll on JWN's already weak financials in the near term.
JWN's net sales have increased 22% sequentially to $3.57 billion for its fiscal second quarter, ended July 31, 2021, while its credit card revenue increased 4.5% sequentially to $92 million. However, the company's total assets decreased 3.2% year-over-year to $9.23 billion. Also, its total current liabilities increased 5.9% year-over-year to $3.86 billion.
Over the past six months, the stock has lost 19.8% in price to close Friday's trading session at $29.22.
JWN's POWR Ratings reflect its poor prospects. The stock has a D grade for Stability and Sentiment. Click here to access the additional POWR Ratings for JWN (Momentum, Quality, Growth, and Value). JWN is ranked #53 in the Fashion & Luxury industry.
Click here to checkout our Retail Industry Report for 2021
KSS shares were trading at $58.11 per share on Monday morning, down $0.58 (-0.99%). Year-to-date, KSS has gained 44.04%, versus a 21.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.
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