January 5, 2017 / 1:15 PM / 8 months ago

Dismal holiday sales at Macy's and Kohl's cast gloom over sector

(Reuters) - Disappointing holiday-season sales at Macy's Inc (M.N) and Kohl's Corp (KSS.N) underscored the uphill task facing department stores to win back shoppers, who are increasingly turning to online retailers and spending less on apparel.

Macy's shares fell as much as 14 percent on Thursday, their biggest percentage drop in seven months. Kohl's stock dropped as much as 20.5 percent, its biggest decline in more than 14 years.

Both reported lower-than-expected sales for November and December and cut their full-year profit forecasts on Wednesday.

Macy's, known the world over for its flagship Herald Square store in Manhattan and its annual Thanksgiving Day parade, is considered a bellwether for department stores.

However, it is expected to relinquish its position as the largest U.S. apparel retailer to Amazon.com Inc (AMZN.O) as soon as this year as it struggles to compete on prices and the convenience offered by online shopping.

Amazon said last week it had its "best ever" holiday season, shipping more than 1 billion items worldwide.

GREAT EXPECTATIONS

Shares of other department store operators, including J.C. Penney Co Inc (JCP.N) and Nordstrom Inc (JWN.N), also fell as the dismal showing took investors by surprise.

Expectations were high that department stores would get a good boost from a strong holiday shopping season.

The National Retail Federation had forecast that 2016 holiday period sales would rise 3.6 percent to $656 billion. A jump in spending in the last days of December was expected to make up for a slow start to the shopping season.

"The strength around Thanksgiving and Christmas was insufficient to offset the sales weakness in the balance of the quarter," Stifel, Nicolaus & Co analyst Richard Jaffe wrote.

A sales assistant works in a Christmas hat at Macy's Herald Square in Manhattan, New York City, U.S., December 22, 2016.Andrew Kelly

"In addition, these peak selling periods were characterized by greater promotions which contributed to weaker than anticipated gross margin as well," he said in a client note.

Struggling Sears Holdings Corp (SHLD.O), the operator of Sears and Kmart stores, reported a 12-13 percent drop in same-store sales for November and December on Thursday.

The company's shares rose 4 percent, though, after it said it would sell its Craftsman tools business to Stanley Black & Decker Inc (SWK.N) for $900 million.

President-elect Donald Trump was among those who had cheered a bumper shopping season. "The world was gloomy before I won - there was no hope. Now the market is up nearly 10% and Christmas spending is over a trillion dollars!," he tweeted last week.

Slideshow (3 Images)

JP Morgan analyst Matthew Boss, who cut his price target on shares of both Macy's and Kohl's, wrote that "Department stores missed the $1 trillion Holiday'16 Tweet".

Apart from competition from Amazon, department stores have been hit by a shift in spending away from apparel to experiences such as dining out and traveling.

Apparel retailers including Victoria's Secret owner L Brands Inc (LB.N) and American Eagle Outfitters Inc (AEO.N) also reported weak same-store sales.

L Brand's comparable sales fell 1 percent in the five weeks to Dec. 31, while American Eagle's have been flat since November. L Brand's shares were down 7.7 percent at midday, while American Eagle's were down 3.4 percent.

At least eight brokerages cut their price targets on both Macy's and Kohl's.

Deutsche Bank's Paul Trussell downgraded Macy's to "hold" from "buy," saying the company's turnaround initiatives continued to fall short and that core earnings, excluding gains from asset sales, were falling at an "alarming pace."

Macy's comparable sales fell 2.1 percent in November and December combined, and the company said it expected a similar decline in 2017.

"(This) reflects the realities of market share losses to off-price retailers such as TJX Cos Inc (TJX.N), Amazon and other online threats, with the pace of store rationalization and monetization just not fast enough," Trussell said.

Reporting by Siddharth Cavale and Sruthi Ramakrishnan in Bengaluru; Editing by Saumyadeb Chakrabarty and Ted Kerr

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