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Brick & Mortar Feeling the Wrath on Friday the 13th

Friday the 13th of May, 2016

Friday the 13th may have negative historical connotations, but we have no reason to change our daily routines. Unless, of course, our livelihoods are directly tied to the traditional brick-and-mortar retail space, particularly department stores.

The pain in the department store space is widespread, with J.C. Penney (JCP) becoming the latest operator to come out weak numbers. Penney’s has been somewhat of a turnaround story, but even supposedly better placed players like Macy’s (M), Nordstrom (JWN), Kohl’s (KSS) and others appear to be on their knees this earnings season.

Apparel is apparently the weakest category for these operators, with management teams appearing clueless as to what has happened to apparel demand. But that’s hardly the only issue facing these operators – they are dealing with a secular shift in consumer preferences who are increasingly comfortable spending their money online at Amazon (AMZN) instead of going to the mall.

It’s not a consumer spending issue, it is more tied to evolving consumer spending habits. In other words, the question isn’t how much consumers are spending, but where they are spending it. This is clearly visible in today’s April Retail Sales report, which came in better than expected, with the report’s internals showing a lot of momentum. Not only did the Retail Sales reading come out strong, offsetting the negative momentum from the last two months, but the report’s sub-category about non-store retailers (includes operators like Amazon and other on-line and catalog vendors) had the strongest gain of all categories.

The bottom line is that department stores need to align their businesses with evolving consumer preferences. They can’t have all of their capital tied up in physical facilities when consumers are looking for convenient and easy-to-use online facilities. Perhaps the solution lies in the stores becoming showrooms and warehouses in their broader fulfillment chain. Perhaps the market’s reaction to these retail earnings reports on Friday the 13th will really put the point across.

Sheraz Mian
Director of Research

Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.

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PENNEY (JC) INC (JCP): Free Stock Analysis Report
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