Department store shares get a boost from upbeat Macy's and Kohl's

November 10, 2016 8:19 AM EST

A sign that marks the Macy's store is seen at the Herald Square location in New York, U.S., May 9, 2016. REUTERS/Shannon Stapleton/File Photo


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By Siddharth Cavale and Gayathree Ganesan

(Reuters) - Macy's Inc (NYSE: M) and Kohl's Corp (NYSE: KSS) struck an optimistic note going into the holiday shopping season, giving a rare boost to shares of department store operators, which have struggled to grow in the face of intense competition from online retailers.

Macy's Inc (NYSE: M) shares were up 6.8 percent and Kohl's 13.4 percent after upbeat comments that accompanied their otherwise lackluster quarterly results on Thursday.

Shares of Nordstrom Inc (NYSE: JWN), which reports later on Thursday, were up 8 percent while those of J.C. Penney Co Inc (NYSE: JCP), reporting on Friday, were up 7.7 percent.

Kohl's Chief Executive Kevin Mansell said he was encouraged by a strong back-to-school season and sales during October.

Macy's Chief Executive Terry Lundgren was also upbeat.

"Our third-quarter top-line results were better than the first half of the year and our sales-driving initiatives continue to gain traction," he said.

Macy's, which also formed a partnership with Brookfield Asset Management to look at ways it can cash in on the value of its real estate, said total sales for the full year would be better than the 2 percent decline it had previously estimated.

"The trends we saw in the third quarter give us confidence that we can deliver our expectations for the fourth quarter and our guidance for fiscal 2016," Lundgren said in a statement.

Strengthening trends in Macy's apparel businesses, coupled with initiatives related to Apple Inc (NASDAQ: AAPL) watches, handbags from Michael Kors Holdings Ltd (NYSE: KORS) and others, will help performance in the current quarter, he added.

Macy's said that Brookfield would have exclusive rights to create pre-development plans for about 50 Macy's real estate assets, including owned and leased stores and associated land.

UNDER PRESSURE

The partnership, which is for up to two years, is the latest move by Macy's to squeeze more value from its vast real estate holdings across the United States.

The company, under pressure from activist investor Starboard Value LP, is already exploring options for its flagship stores, including its famous Herald Square store in New York.

Macy's has also said it plans to close about 100 stores, or about 14 percent of the total, representing annual net sales volume of about $1 billion.

U.S. department store operators have been struggling to grow in the face of intense competition from online retailers, especially Amazon.com Inc (NASDAQ: AMZN).

Macy's net sales fell 4.2 percent in the latest quarter while Kohl's sales dropped 2.3 percent.

Macy's same-store sales on an owned plus licensed basis fell 2.7 percent - but that was better than the 3.4 percent fall expected by analysts polled by consultancy Consensus Metrix.

Kohl's same-store fell 1.7 percent, more than the 1.4 percent analysts had expected.

But while Macy's net profit fell 85 percent, mainly due to a pension-related charge, Kohl's profit rose 21.7 percent.

Both retailers have been closing stores and looking for other ways to cut costs as shoppers spend more on pricey things such as holidays and home improvement items and less on apparel, which accounts for most of their sales.

Macy's sales have also been hit by a strong dollar, which has affected tourist spending at the company's U.S. stores, which include Bloomingdale's.

Unlike Kohl's, Macy's has been focusing on its huge real estate holdings as a way to shore up its business.

Since the beginning of 2015, the retailer has announced or completed asset sales with anticipated proceeds of more than $800 million.

In its latest deals, Macy's said on Thursday it had signed a contract to sell its Union Square Men's building in San Francisco for $250 million and its downtown Portland, Oregon store for $54 million.

Under the deal with Brookfield, the asset manager will create plans for real estate assets mostly in or near malls.

"While we might close stores in some of these locations, it is more likely that we will create value with surplus land or through improvements alongside an existing store," Macy's Chief Financial Officer Karen Hoguet said on a call with analysts.

"This (partnership) should give us insight into the potential of our total portfolio," she said.

Macy's said it now expected full-year comparable sales on an owned-plus-licensed basis to decrease 2.5-3.0 percent this year, an improvement on its prior forecast for a fall of 3-4 percent.

Up to Wednesday's close of $38.38, Macy's shares had risen 9.7 percent this year. Kohl's shares, which closed at $45.70 on Wednesday, had gained 4.1 percent.



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