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Why Department Store Stocks Pulled Back This Week

Editorial Staff by Editorial Staff
July 9, 2021
0
Why Department Store Stocks Pulled Back This Week

What happened

In a holiday-shortened week, department store stocks have been on the losing side as fears of COVID-19’s spreading Delta variant and falling bond yields left investors feeling warier about the cyclical sector. Among the department store stocks that had lost ground as of the close of trading Thursday were Kohl’s (NYSE:KSS), which was down 6.7% for the week; Nordstrom (NYSE:JWN), which had given up 8.5%; and Macy’s (NYSE:M) was off by 6.2%.

No company-specific news was reported about any of them, but the shift in the macro environment was enough to dampen enthusiasm for the stocks. And retail stocks generally fell this week: One benchmark for the industry, the SPDR S&P Retail ETF, was down by 3.6% as of Thursday’s close.

So what

Treasury yields, one of the best measurements for gauging  investors’ confidence in the U.S. economic recovery, continued to fall this week. The 10-year Treasury yield closed Thursday at 1.29%, down from 1.43% last Friday. This trend seems to reflect both a lack of confidence in the recovery and Wall Street’s belief that it’s becoming more likely that the Federal Reserve will begin to tighten its monetary policy. 

Those views suggest more difficult conditions ahead for department stores, which benefit when it’s cheap to borrow. These retailers relied on their credit lines during the pandemic, and they are also counting on robust consumer spending continuing in the months ahead, especially during the key back-to-school and holiday shopping periods.

Meanwhile, the threat of the Delta variant continues to loom over the economy. For the U.S. as a whole, COVID-19 cases have begun to rise again, though only slightly, due to the spread of the variant in communities where vaccination rates remain low. Japan is also considered re-instituting a state of emergency and has banned spectators at the upcoming Summer Olympics. That’s another sign that a recovery in the international tourism market will take time, and more bad news for Macy’s. Tourists have traditionally accounted for 4% of the chain’s sales.

All three of these stocks have recovered from their pandemic era sell-offs, but they’re still on shaky ground, and are especially at risk if the recovery falters. The pandemic accelerated consumers’ transition away from brick-and-mortar retail to e-commerce, and also hastened the decline of shopping malls, both of which are headwinds for department stores. Macy’s has accelerated its store closing plans in recent years, and even Nordstrom has begun shuttering some of its full-line stores.

Now what 

In their fiscal first-quarter earnings reports, Kohl’s and Macy’s delivered much stronger results than expected, but Nordstrom’s quarter was more middling. While those results were largely good, the quarter may have been anomaly for these companies due to President Biden’s economic stimulus package, which passed Congress in March. Still, their profits are expected to return now that the U.S. economy has reopened.

Over the long term, these companies will need to find a way to manage their large brick-and-mortar operations even as greater shares of sales shift to digital channels. Some retailers, like Nordstrom, have been doing a better job of this than others.

For the near term, macroeconomic indicators are likely to have significant sway over these stocks, especially since a recovery in retail stocks already looks priced into them. Fiscal second-quarter earnings reports won’t be released until August, but keep your eye on the June retail sales report, which is due out next Friday, for the latest snapshot of the sector.

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