Major department stores are set to report quarterly earnings in the next two weeks, providing a much needed update on a retail recovery wave that has lifted the group to two- and three-year highs. A strong U.S. economy, major belt-tightening and innovative online strategies have improved margins, ending a brutal bear market triggered by the exodus out of brick-and-mortar sales into e-commerce.
Still, there are reasons to be skeptical about this group's long-term outlook. Amazon.com, Inc. (AMZN) and other internet-based retailers continue to take market share, while the department stores' operations are highly dependent on foreign production, exposing them to shrinking margins if their goods wind up on tariff lists. In addition, rising customer debt and low wage increases could eventually take their toll, shrinking retail sales and sending these issues back to their lows. (See also: Amazon Captures 5% of All Retail Spending: Bloomberg.)
Macy's, Inc (M) reports earnings in Wednesday's pre-market. The stock completed a round trip into the 2007 high at $46.70 in 2013 and broke out, hitting an all-time high at $73.61 in July 2015. The subsequent decline failed the breakout four months later, generating aggressive selling pressure that ended at a seven-year low in the upper teens in November 2017. It has carved three rally waves since that time, stalling at the .382 Fibonacci sell-off retracement level in the upper $30s in June 2018.
Price action into August has carved a narrow consolidation that may complete a small-scale cup and handle breakout in reaction to a bullish earnings report. In turn, that could lift the stock into the .50 retracement level in the mid-$40s, generating a third test at the failed breakout level (blue lines). Mounting that barrier will take exceptionally strong buying power, suggesting that timing-conscious shareholders use the advance to take profits. (For more, see: Macy's Seen Rising 12% Despite Weak Profit Forecasts.)
Dillard's Inc. (DDS) reports earnings after Tuesday's closing bell. The stock topped out at $40.56 in 2007 and plunged during the 2008 economic collapse, dropping to $2.50. It returned to the prior high in 2011 and broke out, entering a powerful trend advance that posted an all-time high at $144.21 in April 2015. It then sold off with other mall anchors, finally bottoming out in the mid-$40s in May 2017.
A breakout above a two-year bowl-shaped pattern (blue line) reached the .50 retracement of the 2015 into 2017 downtrend in the upper $80s in June, triggering a reversal that failed the breakout in July. However, it is now trading near resistance at $88.50 and could reinstate the breakout with a strong earnings report. Traders should look for a rapid advance to triple digits if that happens, while a sell-the-news reaction could signal the end of the 15-month uptrend.
Kohl's Corporation (KSS) reports earnings on Aug. 21. A multi-year uptrend ended at 2002 resistance in the upper $70s in 2007, giving way to a steep decline that hit a 10-year low in the mid-$20s in 2008. It took more than six years for the stock to complete a round trip into long-term resistance, triggering a 2015 reversal and downtrend that found support in the low $30s in the second quarter of 2016. It tested that level one year later, completing a double bottom reversal.
The uptrend into 2018 reached 2002, 2007 and 2015 resistance in June 2017, generating a downturn that found support at the 50-day exponential moving average (EMA). It is now trading about five points under resistance and could reach that level quickly following a bullish report. In turn, that price action would complete a multi-decade inverse head and shoulders pattern, raising the odds for a long-term breakout that reaches the $120s in the next two or three years. (See also: 6 Retail Stocks to Lead as Economy Picks Up Speed.)
The Bottom Line
Mall anchors have carved bullish patterns heading into quarterly earnings but need to report strong metrics to mount overhead supply generated by multi-year downtrends. (For additional reading, check out: Retail Stores Aren't Dead in Amazon Era: Moody's.)
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>