Deutsche Bank's Bull-Bear Debate On Department Stores

Deutsche Bank hosted a bull versus bear debate on department stores earlier this week. After the meeting, analyst Paul Trussell and his team issued a report breaking down the discussion, which confirmed the generally negative sentiment around the group.

Investors were most interested in: Nordstrom, Inc. JWN, J C Penney Company Inc JCP, Kohl's Corporation KSS and Macy's, Inc. M; There were zero requests to discuss Dillard's, Inc. DDS.

Bulls & Bears

Trussell and his team think the negative sentiment around department stores “reflects market share losses to off-price competitors, fast-fashion retailers, online concepts, and select re-energized specialty players.” Moreover, comp estimates suggest this trend will continue in the near future. The analysts are witnessing a migration of discretionary consumer dollars, from apparel and accessories into experiences, like technology, entertainment, media, restaurants, travel, and even healthcare.

Despite the sluggishness seen in the department stores group, the company’s shares are trading at or above their three-year averages, and have on average already rebounded almost 40 percent from their 52-week lows. At current valuations, bears are questioning how balanced are the multiples.

On the other hand, it should be noted that as weather normalizes, sales in the apparel segment could rise. Deutsche Bank pointed out that, if department stores manage to clear a relatively tougher hurdle in the first half of the year, “stocks could move higher on positive momentum vs. an easier 2H” -- except for J C Penney and Kohl’s, which did not see a drop-off in the second half of 2015.

Bear Case

• A declining market share and changing preferences among consumers will pressure the top line.
• Structural challenges will suppress margins.
• “Valuation could still be too generous.”

Bull Case

• Normalizing weather will provide a tailwind.
• Real initiatives like loyalty programs and omnichannel rollouts will drive growth.
• Business models will evolve.
• The companies are entering fiscal 2016 with sequentially cleaner inventory positions.