Today, the retail sector is breathing a sigh of relief. Two of the biggest (and most disappointing) department stores just reported earnings, and the results weren’t as bad as analysts feared. As I write this, shares of Kohl’s Corp. (KSS) and Macy’s (M) are rallying over 15% on the news.
Are these earnings reports enough to change my mind on these beaten-down stocks? Let’s dig into the details.
As for Kohl’s while the headline results were strong, the details were troubling. According to management, Kohl’s second-quarter results were boosted by warmer weather, which brought more shoppers to the stores. Compared with the year ago quarter, earnings climbed 7.7% and sales fell 1.8%. Adjusted EPS was $1.22, which beat the $1.03 consensus EPS estimate by 18.4%.
While investors cheered the hefty earnings surprise, Kohl’s also slashed its full-year earnings guidance. The company now expects to earn between $3.80 and $4.00 per share, down from its previous estimate of $4.05 to $4.25 per share. This is a big red flag, and it means that Kohl’s expects earnings to decline between and 0.3% and 5.5%.
To make matters worse, analysts have been cutting their EPS projections over the past 90 days. These downward revisions usually indicate that the company is going to disappoint in upcoming earnings reports. So despite today’s fanfare, I still consider KSS an F-rated Strong Sell.
Unfortunately, Macy’s report wasn’t much better. The retailer did beat sales and earnings expectations. However, its sales fell 3.8% and its earnings dropped 15.6% compared with Q2 2015. Macy’s was hit by currency headwinds, which weighed on international credit card sales.
The company also announced that it is going to close 100 stores over the next few years. This is on top of the 90 stores that Macy’s has already closed in recent years. These closures will result in $1 billion in lost revenue each year, as well as $249 million charges in the second quarter.
The fact remains that Macy’s is no longer as profitable or popular as it used to be. In fact, analysts expect that Macy’s will post double-digit earnings losses for the next few quarters. Keeping this in mind, I also consider M an F-rated Strong Sell.
The bottom line is that I wouldn’t buy into today’s relief rally just yet. If you already own shares of either Kohl’s or Macy’s, I’d take this opportunity to sell into near-term strength.