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UBS Downgrades Macy’s and Kohl’s amid COVID-19 Storm

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Macy’s (NYSE:M) and Kohl’s (NYSE:KSS) stocks were down 6.0% and 6.3% as of 12:45 PM ET today following a rating downgrade. UBS downgraded Macy’s and Kohl’s from “neutral” to “sell.”  Notably, UBS doesn’t think that brands can rely on malls or department store chains like Macy’s and Kohl’s. UBS also doesn’t think that the market has been fully taking into account how much the pandemic will permanently disrupt the retail landscape.

Will COVID-19 erase Macy’s and other department stores?

Even before the pandemic, department stores were already under pressure due to rivalry from e-commerce players, especially Amazon (NASDAQ:AMZN). Off-price retailers like TJX Companies (NYSE:TJX) and Ross Stores grabbed market share from department stores by offering compelling merchandise at attractive discounts.

The COVID-19 outbreak caused temporary store closures starting in mid-March. The store closures hurt Macy’s, Kohl’s, and several other retailers’ first-quarter results. Specifically, Macy’s first-quarter sales declined 45.2% year-over-year to $3.03 billion. Kohl’s first-quarter sales fell 43.5% to $2.16 billion. Both of the retailers experienced a surge in digital sales amid the lockdown. However, higher digital sales weren’t enough to offset the impact of store closures.

Macy’s and Kohl’s started reopening their stores gradually in May amid easing lockdowns. According to Macy’s quarterly report, most of the stores have reopened. However, the COVID-19 pandemic is a big roadblock for the customer footfall at the physical stores.

Meanwhile, both companies continue to enhance their online capabilities. Customers prefer to shop online due to social distancing mandates. Retailers have strengthened their fulfillment options to support online sales.

Wall Street is skeptical about the recovery

Macy’s and Kohl’s stocks were down 60% and 56% year-to-date, respectively, as of July 21. Currently, nine out of 17 analysts recommend a “hold,” while eight recommend a “sell.” None of the analysts have a “buy” recommendation for Macy’s. The company struggled to revive its top line even before the pandemic. Macy’s strategy to improve its business includes enhancing its merchandise, expanding of the Bluemercury beauty and spa business, and adding more off-price Macy’s Backstage stores. However, the pandemic led to a major drop in the company’s sales. So, the company will reduce its capital expenditures and only focus on priority areas.

For Kohl’s stock, 12 out of 19 analysts recommend a “hold,” three recommend a “buy,” and four recommend a “sell.” Kohl’s has been optimizing its women’s assortment by exiting weak brands and adding attractive names. The company thinks that its Amazon Returns program will drive incremental traffic to its stores and help improve its sales. Meanwhile, Kohl’s has cut down its capital expenditure for fiscal 2020 by $500 million. Kohl’s and Macy’s have suspended dividends and reduced costs to survive the pandemic.

Mid-tier department store chain JCPenney has already filed for bankruptcy. The COVID-19 pandemic crushed whatever hopes investors had about Macy’s and Kohl’s recovery. Also, growing unemployment and the uncertain macro environment will impact discretionary spending and continue to hurt retailers. Currently, department stores seem to be fighting very hard to survive.

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