The Retail Apocalypse Hits Wall Street

The retail apocalypse finally moved from Main Street to Wall Street over the past week. Brick and mortar retail stocks were devastated, after investors got a look at some of the latest earnings reports from the some of the biggest names in the sector.

It was Macy’s (NYSE: M) first quarter earnings report that triggered the big sell off of retailers, and it is easy to see why. The grand old name in department stores turned in financial numbers reminiscent of those at Sears Holdings (NASDAQ: SHLD).

Macy’s reported that its revenues dropped by $460 million during the first quarter of 2016. Macy’s reported revenues of $27.08 billion in January that fell to $26.62 at the end of April.

This followed a dismal fourth quarter; in which revenues actually dropped during the holiday season. Macy’s reported revenues of $27.57 billion in October 2015 that fell to $27.08 billion in December.

To make matters worse that was the fifth straight quarter in which Macy’s revenues fell. Since January 2015, Macy’s revenue has fallen by $1.49 billion, dropping from $28.11 billion to $26.26 billion.

Macy’s income is in even worse shape, dropping to below $1 billion for the first time since April 2011. Macy’s reported a net income of $1.072 billion in January that fell to $995 million in April. Over the past year Macy’s has lost a half billion in net income, it reported a net income of $1.495 billion in April 2015.

The amount of cash that Macy’s makes from operations fell by $649 million over the past year; dropping from $2.588 billion in April 2015 to $1.939 billion in April 2016.

Mr. Market’s reaction to Macy’s revenues was quite predictable, its shares plummeted by $6.14 in just a week, dropping from $37.65 to $31.51 between May 6 and May 13, 2016. Last year on May 12, 2015, Macy’s was trading $65.33 a share. Macy’s shares have lost more than half their value in a year.

Is Macy’s the New Sears? Or is it Dillard’s?

Naturally some observers will be reminded of the situation Sears but this time we cannot blame Eddie Lampert for the mess. Sears share price fell to a new low of $11.27 on May 13, 2016 and that company had not even reported its latest numbers yet.

Dillard’s (NYSE: DDS) did and reported numbers much like those of Macy’s. Dillard’s revenue fell by $87 million during the second quarter. Dillard’s reported revenues of $6.755 billion in January and $6.817 billion in October. Like Macy’s Dillard’s revenues actually fell during the holiday season. It reported revenues of $6.817 billion in October 2015.

Net income has also taken a big drop at Dillard’s falling from $315.75 million in October 2015 to $269.37 million in January to $237.2 million in April. Over the past year Dillard’s net income has fallen by $92.54 million nearly $100 million; dropping from $329.74 million in April 2015 to $237.2 million on April 30, 2016.

Just like Macy’s Dillard’s stock price took a major tumble when the earnings were released. Dillard’s was fetching $67.10 a share on May 6, 2016 and $59.94 a share a week later on May 13, 2016.

With numbers like these, one has to wonder if Macy’s and Dillard’s businesses are sustainable. These companies will have to make major numbers of store closings and other cutbacks just to stay in operation.

Has Target entered the Death Spiral?

Expect to see major carnage and massive sell offs in the retail sector as numbers like these hit home. There are two big earnings reports to come which will either reverse the sell off or make it worse, Walmart Stores Inc. (NYSE: WMT) and Target (NYSE: TGT).

Target in particular is one to watch because it reported a slight earnings drop for fourth quarter 2015. Target’s revenue dropped from $73.91 billion in October to 2015 to $73.78 billion in January 2016. Target has been laid low by some of the same forces devastating Macy’s and Dillard’s; such as the growth of Amazon and the decline of middle class income, due to wage stagnation and technological unemployment.

Target’s revenues plummeted by $920 million during the first quarter of 2016; dropping from $73.78 billion in January to $72.86 billion at the end of April, ycharts data indicates. To make matters worse this was the second straight quarter of revenue losses at Target. The discounter’s revenues fell by $30 million during the first quarter, which indicates sales fell during the holiday season.

Target’s cash from operations is also in freefall; the amount of cash running through Target’s till fell by $1.304 billion during the second quarter, dropping from $5.844 billion in January to $4.54 billion in April. If that continues for another quarter it could be the beginning of a death spiral.

Target’s net income did hold steady a $3.36 billion in April; the same number as in January. The problem we have to ask is can that number be maintained next quarter? The July earnings report could spell real trouble for Target if this continues. These figures indicate that Target’s brick and mortar business could be collapsing and that the reports of its online success could be greatly exaggerated.

Is Walmart coming back?

Walmart’s revenues have been falling but they have a longer way to go. Walmart reported revenues of $484.03 billion in October 2015 that fell to $482.13 billion in January. Yet its revenues for first quarter beat expectations; coming in at $115.9 billion rather than the $113.3 billion, analysts had expected, Business Insider reported.

That indicates Walmart has the sheer resources to whether the storm and that its investment in online retail is paying off. Another possibility is that Walmart’s imitation of Amazon is paying off, Walmart.com might be succeeding in a way that Target.com is not.

If Walmart’s revenues keep growing; it could prove that its business model of deep discounting is immune to some of the market forces hitting more upscale competitors. A Walmart turnaround could also show that the problems affecting retail are from a bad economy.

Walmart and Target have also invested heavily in online infrastructure, so they may have a sort of safety cushion. Walmart in particular has been able to match many of Amazon.com’s (NASDAQ: AMZN) prices but not its popularity.

Doomsday for Office Depot

One company that has not been able to survive is Office Depot (NASDAQ: OD) which had a share price of $3.61 on May 13, 2016. A week earlier it was trading at $6.14 a share. Office Depot’s shares collapsed because a federal judge put the kibosh on its imbecilic plans to merge with Staples (NASDAQ: SPLS).

Staples’ shares fell to $8.26 on May 13, 2016, because of the news. Staples lost just  $2 in value between May 6 and May 13, 2016, dropping from $10.26 to $8.26. Expect Office Depot to shrink dramatically or collapse completely after its next earnings report. Its numbers as I have pointed out elsewhere are that bad.

What Retail Stocks will survive the Apocalypse?

Naturally, investors will be wondering if there are some safe retail stocks out there. Revenue figures show us that there are. Here are a few publicly traded retailers that have doing fine despite the apocalypse:

• Kroger (NYSE: KR). The grocery giant’s revenue rose for every quarter in 2015. It added $960 billion in revenue between October 2015 and January 2016, the total number rose from $108.87 billion to $109.83 billion. Expect Kroger to deliver an even better earnings report for third quarter, because it absorbed the Wisconsin grocer Roundy’s which had around $4 billion in revenues last year in March.

 

• Walmart, the retail giant has proven more resilient with revenue gains. These led to a nice price increase during the week of May 16. On May 17, Walmart bottomed out at $65.10 a share; but Friday, May 20, its’ price had risen to $69.89 a share on the earnings report good news. That’s an increase of $4.79, nearly $5 a share.

• Walgreens Boots Alliance (NASDAQ: WBA). The drugstore giant added $3.61 billion in revenue during first quarter 2016. Revenues rose from $112.92 billion in November 2015 to $116.53 billion in February. Walgreen could be in for even more revenue growth when it finishes its Rite Aid (NYSE: RAD) Rite Aid reported $30.74 billion in revenue on February 29, 2016.

 

• Costco Wholesale (NASDAQ: COST). Costco bucked the trend and added $720 billion in revenue during first quarter 2016. The king of club stores reported $116.55 billion in revenue in November 2015 and $117.27 billion in February 2016.

 

• Nordstrom (NYSE: JWN). The high end department store operator reported a slight revenue increase of $32 million for second quarter 2015. It reported revenues of $14.44 billion in January and $14.47 billion in April, 2016. Nordstrom’s revenues are growing but the increase is slowing. That indicates Nordstrom might be able to survive the apocalypse.

 

• Dollar General (NYSE: DG). Like Nordstrom, Dollar General has been able to buck industry trends by catering to a growing demographic. Nordstrom sells to the affluent, Dollar General to the increasingly cash strapped working class. Dollar General’s revenues increased by $350 million during first quarter 2016. Revenues from $20.02 billion in October 2015 to $20.37 billion in January.

 

• Nordstrom and Dollar General have something else in common; both retailers reported steady revenue growth through 2015. Dollar General’s revenues grew from $18.91 billion in January 2015 to $20.37 billion in January 2016. Nordstrom’s revenues grew from $13.51 billion in January 2015 to $14.44 billion in January 2016.

These numbers show us that it is possible for companies to survive the retail apocalypse. They also show that retailers with a nontraditional business model; one that caters to growing segments of the population, can experience revenue growth during the retail apocalypse.

Disclosure: the blogger has owned shares of Kroger in the recent past and has sold them.