Practical analysis for investment professionals
15 August 2016

The C-Suite Speaks: Department Store Rebound?

The C-Suite Speaks: Department Store Rebound?

Macy’s and Kohl’s stocks both jumped after earnings last week, but that is a relative event. Overall, results were still pretty negative: They were just less lousy than they were in the first quarter. Kohl’s was characteristically ho-hum, and Macy’s was characteristically optimistic. But Macy’s newest initiative is to close more stores than they were expecting. No matter how it’s spun, a company only does that when it is challenged.

As we learned last quarter, department stores don’t provide the same read on the economy as they did in the past. Overall, activity is still depressed but there are signs of a possible upturn. The presidential election has been a source of uncertainty, but polls may be starting to give an indication of who is likely to win without having to wait until Election Day. Let the market reaction begin.

The Macro Outlook

Department stores were pleased with weak results.

“Sales in the second quarter were $5.866 billion, down 4% from last year. On a comp owned-plus-licensed basis, sales were down 2%. This compares to the 5.6% drop we experienced in the first quarter.” — Macy’s CFO Karen Hoguet (Department Store)

“Comp sales decreased 1.8% for the quarter, below our expectations, but significantly improved over first quarter results. Transactions per store were down 4.8% for the quarter.” — Kohl’s CFO Wesley McDonald (Department Store)

The consumer remains cautious.

“In terms of consumer behavior, I think there isn’t any new news there. We had modest improvement in our business and in traffic, but it’s still negative.” — Kohl’s chairman, president, and CEO Kevin Mansell (Department Store)

But the weather, for once, has provided a boost.

“Weather has been hot this summer and has contributed to the strong apparel sales and perhaps more shopping in general as a way to avoid the heat.” — Macy’s CFO Karen Hoguet (Department Store)

But the news can’t be that great if you are shuttering more stores.

“We decided to be proactive and to close a larger number of stores this year . . . We believe we can benefit from right-sizing the company . . . While it will shrink the company somewhat, these closings will . . . help us to accelerate our growth.” — Macy’s CFO Karen Hoguet (Department Store)

There are some real green shoots sprouting up though. It’s the start of that most wonderful time of the year. 

“We are encouraged by the start of the back-to-school season. We are seeing strength in all categories, but are most excited by the strong trend in denim.” — Macy’s CFO Karen Hoguet (Department Store)

Consumer electronics suppliers are hopeful that demand will pick up in the latter half of 2016.

“We still expect the electronics demand picture to begin to turn in the second half of the year . . . We do think we’ve seen pretty much a bottoming in [the] electronics business in Asia . . . The drivers are still the same as we have been talking about . . . from Apple for example.” — Platform Specialty Products CEO Rakesh Sachdev and president, performance solutions, Scot Benson (Specialty Chemicals)

Moderate capital spending is a bright spot for mining companies.

“Generally speaking, we expect continued slow recovery in the global economy . . . However, with that negative note, we are seeing capital spending return.” — Fluor chairman and CEO David Seaton (Engineering and Construction)

Once the US presidential election is settled, the economy can move forward.

“Wherever I go around the world, I hear a lot of discussion about the United States presidential election. And I would say, seeing that one calm down, however it is resolved, but seeing it calm down, I think will be an interesting and positive catalyst for our many businesses, and, honestly, probably for a lot of other markets as well. So that I would look for.” — Sotheby’s president and CEO Tad Smith (Art Dealer)

Polling results may be starting to ease any election worries prior to November.

“We have some very unusual personalities involved in this election. I think they are giving people some concern. I am not going to predict the outcome. But you know, we’re obviously watching the polling very closely. And I think that the election is important, but I think the polling would suggest that we will be in reasonable shape in this election.” — Third Point LLC CEO Dan Loeb (Hedge Fund/Insurance)


Brexit has not had an impact on communications consumption in the United Kingdom.

“We didn’t support Brexit on a corporate level . . . While we favor stability and regulatory certainty, we’re not actually that worried at all about the future here. We’ve seen no slowdown in our sales levels in UK.” — Liberty Global president and CEO Mike Fries (European Cable)

Terrorism has hurt European tourism.

“The main drag to our earnings expectation has been the rapid and steep deterioration of the operating environment in Europe and the negative impact that successive incidences and geopolitical events have had on cruise demand for the region, especially from our core North American consumers.” — Norwegian Cruise Lines president and CEO Frank Del Rio (Cruises)


Lending Club restricted credit to less creditworthy borrowers.

“As this recovery gets longer, credit has become more available. And these individuals, in particular, have shown a propensity to be building debt . . . and then continuing to accumulate debt after the Lending Club loan as opposed to leveraging the loan to kind of pay off their debt.” — Lending Club president and CEO Scott Sanborn (P2P Lending)

Macy’s has seen a rise in credit delinquencies, but isn’t concerned.

“We are seeing some increase in delinquencies, as we had said. But . . . we’re also trying to grow the portfolio. So there’s nothing concerning happening in the portfolio today, and it is happening as we had anticipated.” — Macy’s CFO Karen Hoguet (Department Store)


Fashion names are starting to push back against department store promotions.

“We will be removing ourselves from all of the department store friends and family sales as well. We think that this is critical for us to really do three things: number one, to protect our brand image. As you know, that channel has become very promotional and . . . we don’t think that’s the right thing to do for our brand going forward.” — Michael Kors chairman, director, and CEO John Idol (Apparel)

The restaurant industry needs some positive consumer growth to overcome its challenges.

“We enter fiscal 2017 believing this will continue to be a tough macro environment. We’re not counting on relief from a presidential election or significant improvement in the economy anytime soon. Until household incomes start to see some absolute growth, we believe things will continue to be a challenge for consumers and for our industry.” — Brinker International president and CEO Wyman Roberts (Restaurant)

Especially when it is less expensive these days just to eat at home.

“I do think this food at home versus food away from home gap does impact it . . . it’s gotten a lot more cheaper, relatively speaking, to go get fresh beef at your local butcher and go home and grill it. So that does have a bit of an impact.” — Wendy’s president and CEO Todd Penegor (Fast Food)

Competition in the packaged food industry is acute.

“As an industry we are in an environment where retail competition is intensified in our biggest and most mature markets . . . Our biggest challenge remains the fact that you continue to have a number of categories where consumption trends are working against us.” — Kraft Heinz CEO Bernardo Vieira Hees (Packaged Food)

Video game franchises are now judged on their potential as esports.

“We think we’ve created a strong character driven universe with big opportunities beyond just the game. We think Overwatch has strong potential as an esport.” — Blizzard Entertainment president and co-founder Michael Morhaime (Video Games)

Streaming music is becoming a tough business.

“I think the overwhelming drive in the digital music space is that you have several . . . big players who are . . . likely to further commoditize the market. Spotify did something, like, for the last year, $3.54 of ARPU [average revenue per user] per month and had 82% or 84% content costs. That sounds like a very hard business to me . . . [Amazon] Prime has an enormous amount of music if you are a subscriber that is embedded in that $99 annual fee. That is surely a commoditization of music . . . So, I think that subscription space is very hard.” — Liberty Media Corporation CEO Greg Maffei (Media)


Fashion watch brands are preparing to make a big push into the wearables market.

“The next three months are really going to amount to unprecedented launch in wearables. So we’ll have eight brands across three product categories, 100 SKUs, 40 countries, 20 languages, all launching in the next three months . . . What we’ll see there is hybrid smartwatches and trackers across eight brands, so Fossil, Michael Kors, Kate Spade New York, Armani, Diesel, Misfit, and Chaps by Ralph Lauren.” — Fossil EVP and chief strategy and digital officer Greg McKelvey (Watches)


The resale value of leased cars is a great unknown.

“I have friends who are car dealers and probably you have friends who are car dealers. They are still very bullish but, of course, that’s their part of the food chain. They are supposed to be optimist[s]. So I remain optimistic, but I don’t know what’s going to happen with resale values.” — Amerco chairman, president, and CEO Edward J. “Joe” Shoen (U-Haul)

Materials, Energy

At a minimum, oil companies need $60 per barrel for growth.

“We believe $40 oil will not provide enough cash flow or investment return to overcome the combined effect of production decline and demand growth worldwide . . . We continue to believe the US horizontal oil industry as a whole needs a sustained $60 oil price . . . to deliver a moderate level of growth.” — EOG Resources chairman and CEO Bill Thomas (Oil and Gas)

But EOG says that it can grow production at 10% per year at $50 oil.

“Due to the sustainable gains in well productivity and cost, we can grow oil production at a 10% compound annual growth rate at $50 oil. At $60 oil, our compound annual growth rate jumps to 20%.” — EOG Resources chairman and CEO Bill Thomas (Oil and Gas)

And Apache said that volumes could grow above $45 oil.

“I think above $45 this year, you would have seen our volumes grow and been able to do that.” — Apache president and CEO John Christmann IV (Oil and Gas)

Miscellaneous Nuggets of Wisdom

It’s easy to make friends when you sell $1 for $0.90.

“A few former sales employees have told us that the customers liked Atmel. Well, if you allow me to sell a large amount of $1 bills for $0.90, I can get a lot of love from the customers too. Microchip’s customer relations are built on charging a fair price for our proprietary value-added products. There’s nothing wrong with some healthy and constructive tension with customers on the pricing front.” — Microchip Technology chairman and CEO Steve Sanghi (Semiconductors)

Each week the team at Avondale Asset Management reads dozens of transcripts from earnings calls and presentations as part of their investment process. If you find these posts useful, click here to receive them every week via email.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Scott Krisiloff, CFA

Scott Krisiloff, CFA, is the CEO of Avondale Asset Management, an independent investment advisory firm located in Los Angeles. Krisiloff is the author of the firm's blog, Company Notes.

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