Holiday Wrap-Up: Department Store Winners & Losers

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I’d like to open this piece by wishing readers a healthy and prosperous New Year.

With the holiday season now in the rear-view mirror, investors will turn their attention to upcoming sales releases for a multitude of retailers. Based on initial data points, it appears that forecasters have been overly optimistic regarding the potential for a material increase in December same-store sales.

Morgan Stanley indicates that holiday mall foot traffic slowed in the fourth week of December 2012, coming off a third week that already showed deceleration from the prior year. Furthermore, MasterCard is indicating that total payments increased a mere 0.7 percent in the two months leading up to Christmas compared to 2011.

Despite these negative indicators, the National Retail Federation is sticking by its original forecast of a 4.1 percent sales increase for 2012. My gut tells me MasterCard is correct with a cautious prediction, because its calculation is based on aggregate data. Even with a lukewarm holiday season as a whole, consumers will manage to choose winners and losers with their marginal purchases. Here are my predictions for the following department stores with upcoming January results.

Macy’s (NYSE: M)

The Cincinnati, Ohio based retailer has been enjoying a breakout year, despite visible weakness from one-time competitors such as JCPenney. Chief Executive Terry Lundgren, who became President in 1997 and CEO in 2003, has received glowing write-ups from Business Journals and Barron’s in recent weeks based on his strong operating execution. Macy’s has continued to innovate in a dynamic retail environment, introducing new brands within its stores to target the millennial generation (13–34 age group) this holiday season. Its merchandising teams have announced exclusive lines such as the Marilyn Monroe fashion collection for women and Fatal Clothing tattoo-influenced designs for men. The department store chain has also been testing Toys ‘R’ Us Express-branded outlets within select locations from mid-October through mid-January.

Macy’s remains a Wall Street favorite within the retail sector, although estimates have been reduced in recent weeks based on negative trends. If expectations prove to be too high when December sales results are announced, I would use any weakness in the shares as a buying opportunity for long-term investment.

Macy’s stated during their third quarter conference call on Nov. 7 that the company would discontinue reporting monthly sales figures in fiscal year 2013. The current fiscal year ends on January 26, 2013, indicating management will provide a final report in early February.

Target (NYSE: TGT)

Holiday expectations for the Minneapolis, Minnesota headquartered mass merchandiser appear to be low, as shares have declined approximately 7% since December 3. Pessimism began to increase in late November when sales results for Target came in lower than expectations following Black Friday.

Management at Target also entered into a fashion deal with Nieman Marcus in advance of this year’s holiday season, and recent indicators all but confirm the partnership is turning sour. The companies planned to boost fourth quarter sales by selling an original collection of clothing and household accessories within stores. However, Target marked down prices on its luxury collections by up to 50 percent during the week of December 24, leading investors to believe that the retail giant will report a disappointing holiday sales figure in coming weeks.

Wal-Mart Stores (NYSE: WMT)

Management stated in early December that the impending fiscal cliff has been negatively affecting consumer shopping behavior. CEO Mike Duke informed reporters that his customer base is not only aware of the cliff, but began curbing their spending based on the uncertainty. Shares of the world’s largest retailer have retreated from an all-time high of $77 reached in mid-October and currently exchange hands 10% lower at $70. In other news, Wal-Mart is rumored to be one of multiple bidders for the bankrupt Hostess brand.

Kohl’s (NYSE: KSS)

Shares of Kohl’s gapped lower by more than 10 percent on Nov. 29, after the department store reported less-than-stellar sales figures for the month of November. Total sales declined a massive 4.9 percent for the four week period ending Nov. 24.

The November disappointment caused Wall Street analysts to subsequently lower their fourth quarter and 2013 fiscal year estimates. Kohl’s is scheduled to release December sales results on Jan. 3. Even if holiday sales make a rebound, I would use any strength in Kohl’s stock as a selling opportunity, as it will take multiple quarters of financial results to restore investor confidence.

Finally, I would advise readers to avoid J.C. Penney (NYSE: JCP), which is running out of time for its transformational retail strategy to take hold. The company announced in mid-December it is hiring former Abercrombie and Fitch executive Brandon Tonniges to assist in the layout and design of its new retail stores. JCPenney also engaged in extensive promotional activity leading up to the holiday season, which will likely impact its gross margin.

During November, rating agency Moody’s downgraded the credit outlook for J.C. Penney, citing a need to clear excess inventory. J.C. Penney also suffered a loss with the resignation of a key executive vice president within its product development team. EVP Ken Mangone originally joined J.C. Penney in 1977, and the timing of the abrupt departure should cause concern.

In conclusion, investors will need to navigate a mixed retail environment on a case-by-case basis in coming weeks. Overall, I would be a net buyer of Macy’s and Wal-Mart stores, and advise readers to stay clear of J.C. Penney. I am neutral on Kohl’s and Target.

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johnmacris has no positions in the stocks mentioned above. My mother Georgia is employed by Macy's, Inc. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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