Weak holiday sales announcements from Macy’s Inc. and Kohl’s Corp. furnished experts and analysts with fresh evidence that retailers must further transform their businesses to operate across the bricks-and-mortar and e-commerce channels while seeking ways to expand overseas.
Online sales for the holiday season from Nov. 1 through Dec. 31 total $91.7 billion, according to the latest numbers from Adobe, an 11% increase on a year-over-year basis. Nearly all of the 61 shopping days, 57 of them, generated more than $1 billion of sales.
Going into 2017, experts believe the threat from e-commerce giant Amazon.com Inc. AMZN, +2.97% won’t abate. Moreover, investments in things like personalization and such technology as artificial intelligence won’t necessarily combat the “Amazon effect.”
“These investments will fall short in 2017 because they are not traffic drivers, they are geared toward conversion and while they may help with conversion, they are not going to help retailers gain additional core traffic to their site or stores,” said Adrien Nussenbaum, U.S. chief executive and co-founder of Mirakl, an e-commerce marketplace operator and solutions provider. “Omni-channel retailers will differentiate from Amazon by offering a consolidated and curated brand experience that answers consumers’ lifestyle needs.”
And while analysts are cautious about the risks to retailers from prospective border-adjusted corporate taxes, companies like Nike Inc. NKE, -0.57% have been cited among those with growth prospects overseas.
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“Macy’s and Kohl’s disappointing holiday results serve as a reminder that underlying fundamentals trump the post-election rally we observed for many structurally challenged bricks-and-mortar retailers,” said Macquarie Research. “We continue to favor brands that are channel agnostic and have the ability to find growth outside the U.S.”
Macquarie rates Macy’s M, -14.13% shares neutral and lowered its price target to $32 from $38. It was one of many price target drops since the late Wednesday announcement. UBS cut its stock price target cut to $34 from $42 and The Buckingham Research Group lowered it to $39 from $48. Deutsche Bank downgraded Macy’s shares to hold from buy on Thursday, and cut the retailer’s price target to $34 from $47.
“We expect the shift of purchases to alternative channels such as online and the off-price channel to continue in 2017, said Moody’s senior analyst Christina Boni. “Lean inventories entering fourth quarter were not enough to support profitability targets at either Macy’s or Kohl’s given the disappointing sales performance.”
Kohl’s KSS, -19.02% shares plummeted almost 20% by early afternoon, putting them on track for their biggest one-day decline. Macy’s tumbled 13%. The declines dragged down other fashion retailers with Michael Kors Limited Ltd. KORS, -3.83% down nearly 5%, J.C. Penney Company Inc. JCP, -6.49% down 6.6%, and Nordstrom Inc. JWN, -7.67% down 8.7% for the day so far.
Macy’s said that it will close 68 stores in addition to the 100 closures announced in 2016.
The retailer will also cut about 6,200 jobs in 2017. Macy’s expects expense savings of about $550 million, it said, giving it the flexibility to invest an additional $250 million in its digital businesses and store-related growth efforts like those in China and at Macy’s Backstage, its off-price brand.
The company reported a same-store sales decline of 2.1% on an owned-plus-licensed basis, but outgoing Chief Executive Terry Lundgren said the company experienced double-digit gains at both the Macy’s and Bloomingdale’s e-commerce sites.
Macy’s expects to report full-year same-store sales at the lower end of its guidance, which forecasts an increase between 2.5% and 3.0% on an owned-plus-licensed basis. It lowered its earnings per share guidance to a range of $2.95 to $3.10, from $3.15 to $3.40. The company’s shares are down 14.3% so far Thursday.
Kohl’s said same-store sales for the fiscal months of November and December 2016 fell 2.1%, and sales for the combined months fell 2.7%. The retailer now expects fiscal 2016 earnings per share of $2.92 to $2.97, down from $3.12 to $3.32. Excluding impairments, store closures and other costs, Kohl’s expects EPS of $3.60 to $3.65, down from $3.80 to $4.00.
Cowen & Company prescribes greater differentiation at both Macy’s Inc. and Kohl’s Corp., which could take years to achieve.
“We think Macy’s needs to reinvent itself and has prudently identified the need to change the store experience, leverage big data, and reduce field staffing to drive agility – a new organization will unfold but this will take multiple years,” analysts said in a Thursday note. “Kohl’s needs to drive greater differentiation in brands, ideally become less weather sensitive, and drive special-ness in the accessories category.”
Cowen rates both company’s shares market perform. It has a price target of $44 on Macy’s and $53 on Kohl’s.
Though e-commerce has gained favor, stores are still an asset. However, both the purpose of and experience in bricks-and-mortar locations has to be upgraded in line with changing consumer shopping habits.
“There is an argument to be made that Macy’s has, for too long, neglected its store base and has failed to develop a compelling proposition to pull in shoppers in the digital era,” said Neil Saunders, chief executive of Conlumino, in a late Wednesday note. “In our view, it needs to completely overhaul the experience to make stores easier to shop, more interesting to browse, and more relevant to today’s shopper.”
Analysts see upside for Kohl’s, but believe it will follow in Macy’s footsteps by shrinking its footprint.
“Although Kohl’s still has a reasonable first-half 2017 opportunity with easy gross margin compares, Under Armour launch, and potential for a new chief financial officer, we believe disappointing holiday sales and the guidance cut removed most of the market’s excitement around a return to momentum, reviving the secular bear case around department stores and Kohl’s,” wrote RBC Capital Markets. “Given the attention that Macy’s real estate is attracting, we believe Kohl’s is next in line to become more proactive in shrinking its store base.”
Analysts believe the retailer could start discussing smaller store formats and store closures, as 50 leases will expire in 2019.
RBC rates Kohl’s shares underperform and cut its price target to $42 from $48.
Both Macy’s and Kohl’s shares are down nearly 17% for the last year, while the S&P 500 SPX, -0.19% is up 12.3% for the same period.