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Macy's holiday troubles are giving retail investors 2019 jitters 

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As the results start rolling in, the early signs are disquieting. Department stores Macy's Inc and Kohl's Corp disappointed.

[NEW YORK] When the dust settles on the 2018 holiday-shopping season, it might still look like the spending boom many expected. But in the meantime, early results from big public companies are bringing long-held worries about the industry back to the surface.

Investors entered the holidays with both optimism and trepidation, knowing that this might be the last hurrah of the economic recovery - a kind of peak Christmas. Thursday's jarring results cast doubt on that premise, as a strong economy and high consumer confidence failed to translate into a standout year-end for every store. For those lucky chains that did sidestep lacklustre sales, there's a growing concern that all the promotions and free shipping ate into profits.

As the results start rolling in, the early signs are disquieting. Department stores Macy's Inc and Kohl's Corp disappointed. Bookseller Barnes & Noble Inc boosted sales, but warned earnings might suffer as a result of its discounting. And while Target Corp beat sales estimates, analysts warned that profit could be another story.

Slowing sales and more pressure on profit margins will no doubt increase the divide between the winners and losers in the retail industry. Over the past two years, a slew of bankruptcies, including high-profile chains such as Toys "R" Us Inc and Sears Holdings Corp, had some calling this era a "retail apocalypse". But those struggles occurred during a frothy environment - 2017 and 2018 was the best two-year stretch for retail sales during the economic recovery. So what happens if consumers do pull back or become even bigger bargain hunters?

"Ultimately, promotions and deals are back," said Simeon Siegel, an analyst for Nomura Instinet. "Today is more of a sign of retail health, or lack thereof, than consumer health. There was a false sense of structural improvement."

The season started strong. Black Friday weekend, the official start of the season, saw more than 165 million US consumers shopping, but there are signs spending waned after an initial surge. Macy's CEO Jeff Gennette said its sales momentum during the holidays weakened in mid-December and "did not return to expected patterns" until Christmas week.

"Investors got ahead of themselves after Black Friday," said Gabriella Santaniello, founder of retail consulting firm A Line Partners. "This is not a case of a rising tide lifts all boats."

Retailers sold off Thursday, with the SPDR S&P Retail ETF sinking 1.6 per cent. Macy's emerged as the S&P 500's worst daily performer, falling 18 per cent - its biggest drop on record. The results also raised concerns about the strength of the US consumer and what the year ahead will look like for the retail industry.

"If Macy's can't deliver in a stronger consumer environment, then what does that mean for its future?" said Poonam Goyal, an analyst at Bloomberg Intelligence. "Can it outperform if the economy gets a little weaker?"

Companies are already facing the potential of more tariffs and continued cost increases for labour and transportation. Toss in a disappointing Christmas that weighs on profit, and that may create a "double whammy," which could slow down hiring, according to David Schick, director of research for Consumer Edge Research.

"We are seeing broad evidence that the 2018 holiday season was likely better early than late," Mr Schick said. "This has implications for margins into 2019."

Discounter Target reported same-store sales growth of 5.7 per cent, topping estimates of about 5 per cent. But it didn't increase its fourth-quarter sales or earnings guidance and only gave a vague forecast for this year, saying it would deliver "profitable growth".

"Target is doing an excellent job driving sales growth," Simeon Gutman, a Morgan Stanley analyst, said in a research note. "However, this growth is coming at the expense of profitability." Plus, this year will only be more difficult with a "weaker consumer spending backdrop".

Investors will get a better read on whether the weakness was mainly tied to malls, which have been struggling for years and are anchored by department stores, when speciality chains such as Abercrombie & Fitch Co report results. And full fourth-quarter earnings for most chains won't be reported until February. But there are already dark clouds, with L Brands Inc, owner of the Victoria's Secret chain and a huge mall tenant, posting a drop of 6 per cent in December same-store sales.

While Thursday's company reports gave an early indication of recent performance, the broader picture of US holiday shopping is likely to be murky for several more weeks. That's because the partial federal-government shutdown will probably delay the Commerce Department's data on December retail sales, which were scheduled for Jan 16. During the last extended shutdown in 2013, the release of retail figures was postponed for more than two weeks.

Some of the 2018 trends aren't new. During every holiday season, retailers balance chasing revenue and protecting profit. But with the arrival of online shopping and consumers becoming savvier with easy access to prices and promotions, this juggling act has become more difficult for retailers.

Barnes & Noble boosted same-store sales 1.3 per cent during the nine-week holiday period, reversing a 6.4 per cent drop last year. But it said increased promotions and advertising spending could reduce its annual earnings by 10 per cent. Given the presumed financial health of US consumers, retailers shouldn't need as many discounts.

One excuse for increased promotions might be related to the calendar: An early Thanksgiving meant there were more days until Christmas, and that extended lull may have spooked retailers to pour on discounts.

"The calendar did throw people," said Ed Yruma, an analyst at KeyBanc. "People got anxious, and invariably someone hits the panic button."


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