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Retail Earnings Sag, and Worst is Yet to Come

The second quarter earnings season has begun gloomily, with Wal-Mart, Nordstrom Inc., and Macy’s all slashing their annual profit projections. Despite some encouraging macroeconomic signs, like rising retail sales in July and improving employment numbers, consumers remain cautious about spending, continuing to strain major retailers.

And chronic underperformance has taken a toll on stock values. Wal-Mart’s stock dropped 2.6%, or 15.41 points to 816.5. Nordstrom’s stock has taken a hit as well, falling 2.9% to $57.80 in after-market trading. Overall, the Dow Jones Industrial Average slid 1.5%, or 225.47 points to 15,112.19.

David Strasser, a Janney Capital Market analyst, painted a dour picture. “Disposable income of [the] lower/middle tier consumer continues to be constrained by a 2 percent increase  in payroll taxes, along with [the] recent increase in gas prices, a trend that seems unlikely to change in the near term. These trends indicate a bigger disappointment at several discretionary retailers.”

Despite its adjusted projections, Wal-Mart continues to beam enthusiasm regarding the future. Bill Simon, president and chief executive officer of Wal-Mart US, said, “Apparel is rebounding. We raised quality of the offerings, improved fabrics and fit and introduced new brands. Children’s shoes and intimate apparel are experiencing growth. We expect progress in apparel over the second half of the year as we improve quality and selection.”

Mike Duke, Wal-Mart Stores chairman, was less optimistic. He conceded, “As a company, we didn’t leverage expenses.” Some of these expenses were incurred as a result of a protracted investigation of its alleged violations of the Foreign Corrupt Practices Act, which cost the company a staggering $73 million in the first quarter alone. They had originally projected a much more modest price tag, closer to $40 million. During the second quarter, the costs might hit as high as $70 million.

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Nordstrom has suffered as well, despite a second quarter leap in profits by 17.9%. Blake Nordstrom, company president, said, “Our sales trends in the second quarter and throughout the first half of the year weren’t as strong as we expected.”

Nordstrom moderated its EPS forecast for the year to approximately $3.60, down from $3.80. Analysts still expect a growth in sales by 3 or 4 percent, markedly lower than the 4 to 6 percent previously anticipated.

Executive vice president Michael Koppel predicted, “While full-line stores will continue to be the foundation of our business, representing the core of our brand, we believe that over the next five years roughly half of our sales could come from the combination of Rack, online and Canada.”

Kohl’s net profits in the second quarter dipped 3.8% to $231 million, down from last year’s $240 million.  In response to its woes, the retailer is looking to refocus on cosmetics , which has performed better than expected. Chief financial officer Weslet McDonald said, “The key to all this is really getting the extra trip. Beauty in and of itself isn’t going to excite you guys. As a strategy, we certainly expect the beauty sales per square foot to grow significantly, but getting the customer to come to us for beauty versus somewhere else, that’s really going to be the big win.”

CEO Kevin Mansell chmed in, “We’re significantly underserving our customer in this multibillion-dollar market,” Mansell said. “We’re continuing to test both size of the area and location of the area within the store in over 150 stores this fall, including our remodels. We expect to continue our tests and incorporate the changes in more stores in 2014 based on those results.”