Are Retailers Coming Back From the Dead?

Throughout 2016, one of the constant themes in the stock market has been the seemingly unending assault on physical retail businesses by internet competitors. Spearheaded by online retail giant Amazon.com (NASDAQ: AMZN), the boom in e-commerce has shaken the retailing industry to its core, and has become a serious threat to traditional retailers.
This onslaught caused retail stocks, particularly those of department stores and electronics retailers, to collapse over the course of the year. However, these retailers  stocks finally got a reprieve, and have enjoyed a strong rebound in recent weeks.
The reason is better-than-expected quarterly earnings from a number of high-profile retailers including Kohl’s (NYSE: KSS), Macy’s (NYSE: M) and Best Buy (NYSE: BBY). All three retailers beat analyst expectations for the most recent quarter, and saw their stock prices soar after reporting.
This has given investors optimism that there is still a place for brick-and-mortar retail.

Investors Breathe a Sigh of Relief

The widespread fear heading into this round of earnings reports was that the physical retailers would continue to deteriorate at an alarming pace. Fortunately, several retailers posted better-than-expected quarterly results, which sent their stock prices soaring.
First, Kohl’s stock jumped 14% after it reported a mixed quarter. Comparable store sales, a key metric for retailers that captures sales performance at stores open at least one year, fell 1.8% for the quarter. This missed analyst expectations for a 1.7% decline.
However, Kohl’s earned an adjusted $1.07 per share of profit, which surpassed analyst forecasts by $0.04 per share.
The company managed to beat earnings, even though revenue fell short, because of its successful inventory management. Kohl’s cleared out excess inventory at a faster rate than anticipated, which helped boost gross margins by 0.53% for the quarter.
Going forward, Kohl’s is hoping for better days ahead. The company noted positive momentum as the quarter drew to a close, thanks to a strong start to the back-to-school season. In addition, Kohl’s has invested significant resources in renovating its beauty departments and building its online business. More than 13 million people downloaded Kohl’s app.

Macy’s Holds Its Own

Macy’s earned $0.54 per share in adjusted profit last quarter, which topped analyst expectations of $0.48 per share. Revenue clocked in at $5.87 billion for the trailing three-month period. While this was a notable decline from $6.1 billion in the same quarter last year, it nevertheless beat analyst estimates, which called for $5.77 billion.
In addition, Macy’s announced it will close 100 underperforming stores. This will likely result in a near-term restructuring charge, but the company reiterated its full-year earnings forecast. Macy’s expects earnings per share between $3.15 to $3.40 this year.
Despite its dip in sales this year, Macy’s still generates strong cash flow and healthy profitability. The company returns a sizable chunk of its profits to shareholders with a 3.9% dividend yield.
Lastly, Best Buy reported 24% growth in its own e-commerce business in the most recent quarter. This was an even higher growth rate than the same quarter last year, when e-commerce revenue increased 17%. It is a great sign that Best Buy’s growth rate is accelerating in e-commerce. Online revenue now represents 11% of Best Buy’s total revenue. Best Buy’s CEO attributed the strong digital sales to faster checkout, quicker delivery and strong sales of 4K televisions.
For the quarter, Best Buy’s comparable sales rose 0.8%, double the rate of growth analysts were expecting. And, Best Buy grew earnings per share from continuing operations by 21% for the quarter. This sent Best Buy shares up 18% on the day it reported earnings.

Retailers Beef Up E-Commerce Platforms

It is unlikely that Amazon.com will relinquish its iron-clad grip on e-commerce any time soon. But retailers are doing well for themselves by building and upgrading their own e-commerce platforms while simultaneously improving the in-store customer experience.
Indeed, while there is no doubting the attractions of Internet retail  ̶  namely, the low prices and at-home shopping  ̶  it appears consumers still see value in going to stores to try on clothes and inspect electronic gadgets in person. This gives investors reason to believe there is room for both Amazon.com and physical retail to peacefully coexist.
 
Disclosure: The author is personally long M.