Investors Hope Saks, Macy's and Nordstrom Are Back in Vogue

The retail recovery is still going in fits and starts, but investors are betting that one beaten-down sector really is coming back: upscale department stores.

Wall Street is expecting good news from Nordstrom (JWN), Saks (SKS) and Bloomingdale's parent Macy's (M), which are reporting fourth-quarter results within days of each other early next week. All have been forced to reduce costs to protect profits and rethink their merchandise to attract a more frugal customer, even among the wealthy.Nordstrom, which has been the best-performer of the three during the recession, is expected to post earnings on Monday of 79 cents per share for the quarter, more than doubling the 31 cents it posted in the year-ago period, according to the consensus estimates from Thomson Reuters. But that's still below the 92 cents it posted in 2009.

Nordstrom was quick to react to the recession, lowering prices and adjusting inventory to appeal to a more frugal shopper. It's also benefited from a healthy online business and a chain of Nordstrom Rack outlets that continued to see rising sales through the recession.

The fall of the luxury market hit Saks hard, and it wasn't able to react as quickly as Nordstrom to compensate. It did eventually lower some opening prices on designer merchandise, and focused on merchandising exclusive items to attract the high-end customer. Thanks to the recent upswing in the stock market, those wealthy customers are returning, but Saks continues to struggle to boost sales among the "aspirational" middle class shoppers, who are still in frugalista mode.

Wall Street has modest expectations for Saks this quarter; the Thomson Reuters consensus calls for a loss of 3 cents per share. That's still a far sight better than the 52-cent loss it posted a year earlier. After five losing quarters, Saks posted a profit of one cent per share in the third quarter, beating analysts' forecasts for an 11-cent loss. Considering the better-than-expected sales numbers for the holiday season, Saks could beat analysts' expectations on Monday and wind up flat or even slightly in the black.

But the title of most-improved goes to Macy's, which appears to have gotten the hang of integrating the various moving parts acquired by merging May Co., Macy's and its predecessor, Federated Department Stores. In early February, Macy's management raised its forecast for the quarter to between $1.35 and $1.37 per share, after posting better than expected sales in January. That forecast is better than the analysts' call for $1.31, which is up 23.6% from the year ago period, according to Thomson Reuters consensus estimate.

As Gene Marcial noted in DailyFinance days ago, Macy's had to take its medicine and do some painful restructuring. Now the My Macy's strategy, which localizes the department stores' inventory, is starting to pay off and sales have begun to improve. Macy's is scheduled to release its earnings report on Tuesday.

Investors are starting to show some faith in the department store sector. Nordstrom was upgraded by Morgan Stanley and BMO Capital just before the earnings report. Macy's is still rated mainly neutral among analysts, but investor George Soros, who bought into the stock last year, increased his holdings in the fourth quarter. However, Wall Street remains unimpressed with Saks; most analysts rate it a hold.

The department stores are driven by fashion and apparel, so investors will want to know about initiatives to keep customers coming in once the post-holiday clearances are over. They will ask for specifics on spring merchandise and projections for Easter sales -- the next key holiday for apparel -- as well as where price levels will stand on designer clothes this year and how much promotional activity will be needed to move merchandise off the floor.

Investors want reassurance that those improved holiday sales were not a fluke, but a sign that the sector is truly back in fashion.
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