2 Department Store Stocks to Buy on Saks Fifth Avenue E-Commerce Valuation

Earlier this week, luxury retailer Saks Fifth Avenue announced its plans for a $6-billion IPO of its online business. This prompted Jana Partner LLC, an activist shareholder, to call for Macy’s to spin off its e-commerce business. The COVID-19 pandemic has propelled the growth of major retailers' digital units, leading investors to predict that these businesses could see high e-commerce sales in the coming months and spin-off their online business segments for better growth.

Despite shifting sentiments, consumer spending remains resilient, thanks to strong household wealth and rising wages driven by a tight labor market. The Commerce Department reported an unexpected increase in September retail sales. Retail sales climbed by 0.7% in September after jumping by an upwardly revised 0.9% in August. Furthermore, economists forecast that customers will begin their holiday shopping early to avoid bare shelves, resulting in greater October retail sales.

Given this backdrop, we think shares of leading department store operators Macy’s Inc. (M) and Kohl’s Corporation (KSS) could be ideal bets now.

Macy’s Inc. (M)

M is a Cincinnati, Ohio-based omnichannel retailer that operates stores, websites, and mobile applications under the Macy's, Bloomingdale's, and Bluemercury brands. It offers a range of merchandise, including apparel and accessories for men, women, and kids; cosmetics; home furnishings; and other consumer goods. The company operated 727 store locations in 43 states as of January 30, 2021.

This month, Jeannie Mai, the Emmy-winning TV host and producer of "The Real," launched a collection with Macy's private brand, I.N.C. International Concepts. With a laser focus on providing a unique shopping experience both in-store and online, the company intends to boost its commitment to integrate more varied brands and design expertise into its assortments.

For its second quarter, ended July 31, 2021, M's sales rose 58.7% from their year-ago value to $5.65 billion. Its operating profit came in at $597 million, compared to a$631 million operating loss in the prior-year quarter. The company reported $345 million in net income, compared to a $431 million net loss in the second quarter of 2020. Its EPS amounted to $1.08, compared to a $1.39 loss per share during the same quarter last year.

Analysts expect M’s EPS to increase 272.4% year-over-year to $3.81 in the current year. In addition, the company’s revenue is projected to grow 36.4% in its fiscal year 2021. The stock has gained 289.5% in price over the past year and 133.7% so far this year. In addition, the company’s shares surged 18% after its rival Saks Fifth Avenue announced its plan to seek an IPO for its online business segment.

M's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

M is also rated an A grade for Growth and Value, and a B for Quality. Within the A-rated Fashion & Luxury industry, it is ranked #21 of 63 stocks. To see additional POWR Ratings for Momentum, Stability, and Sentiment for M, click here.

Kohl’s Corporation (KSS)

KSS offers branded apparel, footwear, accessories, beauty, and home products through its stores and website. The Menomonee Falls, Wis., company sells its products primarily under the Apt. 9, Croft & Barrow, Jumping Beans, SO, Sonoma Goods for Life, and Food Network, LC Lauren Conrad, and Simply Vera Vera Wang brand names.

For its fiscal second quarter, ended July 31, 2021, KSS’ total revenue increased 30.5% year-over-year to $4.45 billion. Its operating income grew 383.1% from its year-ago value to $570 million, while its net income surged 712.8% from the prior-year period to $382 million. In addition, the company’s EPS increased 726.7% from its year-ago value to $2.48.

A $6.05 consensus EPS estimate for the current year represents a 356.4% increase year-over-year. The $18.55 billion consensus revenue estimate for the current year represents a 23.4% increase from the same period last year. The stock has gained 113.5% in price over the past year. Also, its shares gained 2% on Monday on the back of Saks Fifth Avenue’s plans to go public with its online business segment.

KSS' POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. KSS also has an A grade for Growth, Value, and Quality. Within the same industry, it is ranked #22.

Click here to see additional POWR Ratings for Sentiment, Momentum, and Stability for KSS.

M shares rose $0.06 (+0.23%) in premarket trading Wednesday. Year-to-date, M has gained 135.27%, versus a 23.27% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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