Bargain Buys? Kohl's and Macy's Surge After Earnings

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 up 11% and 6% respectively.

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 third-quarter results were boosted by a stronger back-to-school season. Compared with the year ago quarter, earnings climbed 22% and sales fell 2.3%. Adjusted EPS was $0.80, which beat the $0.70 consensus EPS estimate by 14.2%.

While investors cheered the hefty earnings surprise, Kohl’s missed sales expectations by a hair—$4.327 billion versus the $4.33 billion consensus estimate. The company also reaffirmed its lackluster adjusted earnings guidance of $3.80 to $4.00 per share. Compared with FY 2015, Kohl’s earnings are expected to be flat at best. So despite today’s fanfare, I still consider KSS an C-rated Hold.

Unfortunately, Macy’s report wasn’t much better. The retailer did beat sales expectations. However, its sales fell 4.2% and its adjusted earnings plunged 70% compared with Q3 2015. The company also missed the consensus EPS estimate by a wide mile; its adjusted earnings of $0.17 per share was well below analysts’ expectations of $0.41 per share. According to management, Macy’s was hit by recent and planned store closings.

Macy’s also updated its 2016 forecast; it expects sales to decline between 2.5% and 3.0% and earnings to range between $3.15 and $3.40 per share. This represents between a 9.8% and a 16.4% year-on-yera drop in earnings.

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 sales and earnings losses for the next few quarters. Keeping this in mind, I consider M an D-rated 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.

Sincerely,

Louis Navellier

Louis Navellier

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