Macy's and Kohl's weak sales weigh on department store shares

Macy's and Kohl's reported bigger-than-expected declines in sales in the latest quarter, underscoring department store operators' continued struggle to attract customers amid a slump in demand for apparel and the shift to shopping online.

The first-quarter reports from Macy's Inc and Kohl's Corp were the first by department store operators and the disappointing sales numbers weighed on the sector.

Macy's shares fell as much as 14.5 percent on Thursday to levels last seen in 2011. Kohl's shares initially rose after the company's profit topped expectations, but soon reversed course and were last down 6 percent.

Shares of J.C. Penney Co Inc, which reports results on Friday, were down 7 percent. Nordstrom Inc, which reports after markets close on Thursday, sank 7.5 percent.

Department stores are struggling with declining mall traffic as well as tough competition from online retailers and off-price stores. They have tried to cope by cutting costs through store closures, managing inventory better and squeezing more out of their real estate.

Still, Macy's net sales declined for the ninth straight quarter, while Kohl's sales dropped for the fifth quarter in a row. Even sales at the retailers' stores open for at least a year tumbled much more than analysts were expecting in the February-April quarter.

The weak sales led to a 4.2 percent jump in Macy's inventory, which in part led to a bigger-than-expected drop in its profit. In contrast, Kohl's inventory dropped 2.3 percent, helping the company's profit beat analysts' expectations.

Q2 IMPROVEMENT?

Macy's said it expects sales trends to improve from the current quarter, helped by the store closures, changes to its promotional marketing and a revamp and expansion of product lines in categories such as beauty, jewelry and furniture and mattresses.

But analysts were skeptical.

"We view these initiatives positively, however they are not enough to offset the challenging environment and changing consumer shopping habits," Jefferies analyst Randal Konik said in a note.

Kohl's efforts to speed up its supply chain, stock stores to suit local tastes, and use in-store merchandise to fill online orders helped keep inventories low and boost margins, Chief Executive Kevin Mansell said on a conference call.

That helped Kohl's profit of 39 cents per share easily beat analysts' estimate of 29 cents, according to Thomson Reuters I/B/E/S.

However, sales at the retailer's stores open at least a year fell 2.7 percent, much steeper than the 1.1 percent drop analysts polled by research firm Consensus Metrix had expected.

Macy's same-stores sales, including sales in departments licensed to third parties, fell 4.6 percent, also steeper than the 3.5 percent drop analysts has expected.

As a result, the company's profit sank 39 percent to $71 million. Macy's earned 24 cents per share on an adjusted basis, well below the 35 cents analysts on average had expected.

Macy's net sales fell 7.5 percent to $5.34 billion, missing the average analyst estimate of $5.47 billion.