As Goldman Cuts Outlook For Department Stores, Macy's CEO Said More Open To Sale
In a research note this morning, Goldman Sachs analyst Lindsay Drucker Mann downgraded Urban Outfitters (URBN) and Nordstrom (JWN) to Sell, while reiterating a Cautious coverage view on the Department Stores and Specialty retailers sector given the increasing headwinds being faced in the industry.
UNDER PRESSURE: Goldman Sachs' Drucker Mann told investors that apparel retail has been under pressure for several quarters, and fourth quarter results so far suggest that headwinds for traditional players are getting worse. According to the analyst, the challenges include traffic declines in brick and mortar, price deflation, and market share loss to Amazon (AMZN) and off-price. She reiterated a Cautious coverage view on Department Stores and Specialty.
SELL URBAN, NORDSTROM: As part of the broader note on the industry, the analyst downgraded both Urban Outfitters and Nordstrom to Sell from Neutral this morning. While the companies are among the best in their peer group in areas like brand equity and real estate quality, headwinds from declining store traffic, price transparency, and competitive share gains have overwhelmed their models and are likely to persist, Drucker Mann contended. The analyst lowered her earnings per share estimates for Nordstrom to reflect sustained flattish comparable sales and moderate gross margin pressure, while expecting a similar scenario for Urban Outfitters. Additionally, Drucker Mann reiterated a Sell rating on Kohl's (KSS) and American Eagle (AEO). The analyst noted that she sees signs the American Eagle brand is rolling over after a period of strong growth and execution, having now decelerated materially over the last 6 quarters. Meanwhile, she believes persistent negative store traffic will weigh on Kohl's comparable sales for the foreseeable future, and sees margin pressure stemming from the higher relative cost to the company of ecommerce versus brick and mortar, and deleverage from negative store comps.
MOVING TO THE SIDELINES ON VF: Goldman Sachs' Drucker Mann also downgraded VF Corp. (VFC) this morning to Neutral from Buy, saying that its long-term growth engine remains in flux as it still remains largely a domestic-oriented wholesaler, and its largest retail partners are facing declining store traffic, internet competition, and brand disintermediation. The analyst pointed out that she sees limited catalysts for upward earnings per share revisions exiting the key cold-weather selling season, especially as the company's retailer partners continue to tighten inventory buys into 2017. Conversely, she voiced a less bearish view on two other names. Drucker Mann upgraded lululemon (LULU) and Coach (COH) to Neutral from Sell, saying the former's comparable sales are more resilient than anticipated in light of healthy comp growth over the difficult Holiday period, while noting that turnaround initiatives for the Coach brand are clearly bearing fruit from a top-line and margin standpoint as its major competitors appear to be in "greater disarray." The analyst also has a Neutral rating on Macy's (M), Gap (GPS), and Ascena Retail (ASNA).
WHATS' NOTABLE: Terry Lundgren, who is stepping down soon as Macy's CEO and had not planned to cap his tenure with a sale, has recently become open to offers from potential friendly buyers, according to a report by The New York Post, citing sources familiar with the situation. Lundgren's change of heart comes as he tries to avoid an ugly board shakeup as Jeff Smith of Starboard Value is angling for seats on Macy's board, the publication added.
PRICE ACTION: In morning trading, shares of Nordstrom are flat near $43.89. Shares of Macy's, meanwhile, have jumped over 4% to $30.50.
Disclosure: None.