Investors are betting on a Macy's revival. Should they be?

Retailers have been battered by the pandemic, which triggered a plunge in foot traffic and caused demand for products like work clothing to all but evaporate...

Posted: Feb 24, 2021 9:07 AM

Retailers have been battered by the pandemic, which triggered a plunge in foot traffic and caused demand for products like work clothing to all but evaporate.

But stock in Macy's is now trading close to where it was before Covid-19 rattled markets, while Kohl's has recovered all its losses. That raises the question: Are these stores on the brink of a comeback, or have investors gotten ahead of themselves?There are clear signs that the outlook for retailers is starting to brighten.

Macy's surprised Wall Street on Tuesday when it announced that it turned a profit for the first time since the pandemic started, netting $160 million during the 13 weeks ending on Jan. 30. Shares jumped nearly 4%.

US retail sales grew 5.3% in January compared to the previous month, far better than what had been expected. A measure of consumer confidence from the Conference Board improved again in February after rising in January.

The coming months could still be tough, however. Macy's CEO Jeffrey Gennette told analysts that he thinks current trends will hold for the first half of the year. That would mean that home businesses and some luxury lines like designer skin care keep thriving, while sales of apparel — particularly formalwear — are due to remain weak. He predicted that clothing sales would start to mount a recovery in the second half of 2021.

The thing is, Macy's problems won't end with the pandemic.

Traditional department stores have been squeezed in recent years by Amazon and online brands, big box stores such as Target and discount clothing chains like TJMaxx. Competitors JCPenney and Neiman Marcus filed for bankruptcy last May.

Macy's has been slashing costs and is trying to pivot to online sales. It predicts that about $10 billion in sales will be digital by 2023. But even its most optimistic prediction for net sales in its current fiscal year is more than 15% lower than what it brought in during fiscal 2019. That's not a great sign.

Meanwhile, a group of activist investors has honed in on Kohl's, announcing a 9.5% stake in the company and the nomination nine new members to its board earlier this week.

"The Investor Group's belief that change is necessary stems from performance of the business over the decade leading up to 2020, prior to the pandemic, and the implication for future performance, once the economy reopens, based on the systemic inability of the Company to execute a plan that creates shareholder value," the group said in a letter Monday.

News of the move has boosted shares. The activist group has had some success in the past, executing a similar push at Bed Bath & Beyond in 2019.

But the action makes clear that even once the pandemic passes, the path forward for struggling retailers remains uncertain. That makes strong stock increases for department stores a bit of a head scratcher.

Jerome Powell calms jittery markets

Investors have been desperately seeking reassurance that central banks won't change their plans to stimulate the economy any time soon.

On Tuesday, Federal Reserve Chair Jerome Powell delivered, telling members of US Senate that "the economic recovery remains uneven and far from complete."

"The single best thing [the Fed] can do about that is to keep monetary policy accommodative," he testified.

Investor insight: Powell's remarks calmed unruly markets, allowing the S&P 500 to snap a five-day losing streak. The Nasdaq Composite closed down 0.5% Tuesday, after falling more than 3% earlier in the session.

Rock-bottom interest rates and huge bond-buying programs have been driving the euphoria that's taken hold of markets since last March. But the mood has shifted in recent days as Wall Street assesses the risk that a strong economic recovery this spring and summer could boost prices, forcing central banks to raise interest rates or curb bond purchases sooner than expected.

That's sparked a jump in government bond yields, which move opposite prices, and a selloff of tech stocks, which have been among the strongest performers during the pandemic.

Coming up: Investors aren't out of the woods yet. Powell's testimony is scheduled to continue Wednesday, this time before lawmakers in the House.

If he sticks to Tuesday's script, though, Wall Street may be appeased.

"His success was striking a balanced tone," Stephen Innes, global chief markets strategist at Axi, told clients Wednesday.

Had Powell been too dovish, Innes said, he "risked exacerbating near-term inflation concerns." Had he been too hawkish, it may have fed fears that the Fed would take its foot off the pedal.

5 reasons Tesla's stock is tumbling

After a year of frantic gains, one of the hottest stocks in the world is backsliding.

The latest: Shares of Tesla have entered bear market territory, dropping 20% from their recent closing high of $883.09 in late January. They finished Monday at $698.84.

My CNN Business colleague Chris Isidore points to a few factors behind the move. Bitcoin prices have been falling, which exposes Tesla following the carmaker's announcement that it had invested $1.5 billion in the cryptocurrency. There's also been confusion over pricing of the cheapest version of the Model Y, and buzz about growing competition from Apple and GM, which rolled out an SUV version of its Chevrolet Bolt a week ago.

Investors also may have simply moved too fast, Chris notes. Tesla shares peaked one day before an earnings report that fell short of Wall Street forecasts. CEO Elon Musk also warned that the company was scrambling to procure enough batteries.

One more from me: Tesla has been a top beneficiary of the recent spree of risk-taking in markets. It's not surprising, then, that its stock would suffer as sentiment turns more cautious.

Shares are up 4% in premarket trading, indicating the rout may have run its course. But recent declines are a reminder that Tesla's spectacular run-up leaves it vulnerable to big plunges, and that its rich valuation isn't a given.

Up next

Casper, Lowe's, Office Depot and TJX report results before US markets open. Booking Holdings, Hostess Brands, L Brands, Nvidia and ViacomCBS follow after the close.

Also today:

  • Federal Reserve Chair Jerome Powell testifies before the House Financial Services Committee at 10 a.m. ET.
  • New US home sales for January also post at 10 a.m. ET.

Coming tomorrow: Earnings from Anheuser-Busch InBev, Domino's Pizza, Best Buy and Etsy.

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