Major U.S. Department Stores’ Big Earnings Blows Hint at Next Possible Indices Boosters

Department stores Macy's (M) and Kohl's (KSS) crushed Q3 earnings views early Thursday, while also reporting strong revenue and FY guidance as the global holiday shopping season kick-started. Macy's stock and Kohl's jumped despite overall market sluggishness.

Altogether, the department store stocks have had a stellar year, collectively soaring over 230% year-to-date in 2021, despite wrestling with supply-chain issues and labor shortages. Meanwhile, holiday shopping deals are already available at Kohl's. Kohl's kicked off its Black Friday deals on Nov. 5. It will launch six days of Black Friday deals beginning Nov. 21. It also plans to offer Dashing Deal Days weekends in December.

Kohl's (KSS) saw a 14.7% increase in comparable sales on the quarter and gross margin grew to 39.9% of sales from 35.8% a year ago. As a result, the department store operator swung to a profit with a net income of $243 million vs. a $12 million loss last year. KSS also repurchased $506 million worth of shares in the quarter and plans to repurchase $1.3 billion worth of shares in 2021.

Likewise, Macy's (M) reported an owned comparable sales increase of 37.2% in Q3 and up 35.6% on an owned-plus-licensed basis during the quarter. Both numbers were up around 9% from the pre-pandemic level in 2019. Macy's (M) also said it added 4.4 million new customers to the brand in the quarter. Remarkably, digital sales increased 19% vs. 2020 and were up 49% vs. 2019.

Gross margin for the quarter improved to 41% vs. 35.6% last year with improved merchandise margin largely due to benefits from pricing, promotion and inventory productivity enhanced by the so-called Polaris strategy. In terms of its guidance, Macy's (M) outlined its adherence to sales of $24.12 billion to $24.28 billion vs. $23.55 billion to $23.95 billion prior view and $23.88 billion in the consensus, as well as EPS of $4.57 to $4.76 vs. $3.41 to $3.75 prior view and $3.91 consensus.

After the updated valuations and taking into account the above-mentioned new considerations, both stocks now look like valid buys.