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Macy's Downgrade, JC Penney's Guidance Prompt Industry-Wide Selloff

Shares of several major U.S. department store chains plummeted on Monday after a Citigroup C analyst downgraded Macy’s M, and JC Penney JCP lowered its third-quarter earnings guidance.


Citigroup downgraded Macy’s stock from “Neutral” to “Sell” on Monday morning, citing poor performance from the company’s retail business as the primary reason. Citi analyst Paul Lejuez noted that Macy's "as seen significant pressure on sales/margins for several years, they no longer make much money as a retailer."

The analyst went on to say that Macy's "core business is weak and (we believe) is getting weaker." The analyst pointed to an overall decrease in foot traffic and a decline in brick-and-mortar overall as other reasons for the downgrade.

On top of that, Citi cited JC Penney’s recent poor performance as yet another factor for downgrading Macy’s to sell.

On the back of the Citi downgrade, shares of Macy’s slumped over 3% to touch a new 52-week low of $18.94 per share.

JC Penney Guidance

Retail industry investors are also spooked the day before Halloween because JC Penney provided new, weaker updated third-quarter and full-year 2017 guidance on Friday.

The department store chain now expects comparable store sales will fall as much as 1% for the full year, with flat growth presented as the best-case-scenario in this vital retail category. JC Penney also projects the cost of goods sold will jump as much as 120 basis points. What’s more,

JC Penney now expects to post an adjusted third-quarter EPS loss in the range of $0.40 to $0.65.

JC Penney noted that its inventory liquidation “favorably impacted sales during the months of September and October.” However, the company has been forced to make other larger strategic changes to its business that has some investors nervous.

“Although these actions will create a short-term negative impact to cost of goods sold and earnings, long term, we firmly believe it was the right decision for the Company as we transition into the fourth quarter and fiscal 2018,” CEO Marvin R. Ellison said in a statement.

“In addition, based on the way our business is growing, including continued comp sales growth penetration in major appliances and omnichannel in the third quarter, we are taking a renewed approach to aligning our expense structure to match the mix of our growth initiatives.”

Shares of JC Penney sunk over 8.3% on Monday to hover just above their 52-week low in response to the company’s poor full-year and quarterly projections.

Other Department Stores

As is often the case, big movement from Macy’s and JC Penney—based on negative industry trends—has helped push much of the rest of the retail industry down.

Shares of Nordstrom JWN and Dillard's DDS dipped around 2%, while Kohl's KSS saw its stock price fall marginally.

Retail sector ETFs also fell on Monday. Shares of the SPDR S&P Retail ETF XRT fell 1.15%, while the Direxion Daily Retail Bull 3x Shares ETF RETL dropped 2.93%. The VanEck Vectors Retail ETF RTH experienced a marginal decline.

What’s Next?

The second week of November is one that retail investors will want to pay close attention to as a ton of department store heavyweights are set to report third-quarter earnings.

Macy’s, Nordstrom, and Kohl’s are all set to report Q3 earnings on Thursday, Nov. 9. JC Penney is ready to announce its results Friday, Nov. 10.

Department store chains’ third-quarter earnings are important, but investors will also try to hone in on their fourth-quarter and full-year guidance ahead of the all-important holiday shopping season. Luckily, there are some signs that things could pick up for department stores as the country’s biggest retail trade group, National Retail Federation, projects retail sales for November and December (excluding autos, gas and restaurant sales) will jump as much as 4% to $682 billion, and account for up to 30% of annual sales for some retailers (also read: Zacks Industry Outlook Highlights: Macy's, J. C. Penney, Target and Gap).

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