Why Macy's, Penney, Gap, other retailers may have to close even more stores

Last Updated May 24, 2018 1:11 PM EDT

For retailers, recent headlines are showing both disappointment and optimism. 

Shares of JCPenney (JCP) slumped more than 6 percent on Tuesday after the surprise departure of CEO Marvin Ellison raised fresh concerns about the struggling 110-year-old retailer's future. But Macy's (M), which has faced its share of challenges, is on the upswing after reporting better-than-expected results last week and issuing bullish earnings guidance. That's stoking investors' hopes of a possible turnaround at the largest U.S. department store chain. 

Shares of Macy's have surged more than 31 percent this year, outperforming the S&P 500 index, which has gained about 2 percent. Penney shares have slumped more than 25 percent.  

In the category of retail disappointments, shares of Target (TGT) plunged nearly 6 percent on Wednesday after the big-box retailer's results fell short because of unseasonably cool spring weather. Performance was also hurt by price discounts and its $7 billion investment in revamping its 600 stores. Luxury brand Tiffany (TIF) wound up on the plus side, reporting a blowout quarter that launched it shares by more than 23 percent. It also approved a $1 billion share-buyback plan and  forecast 2018 results that exceeded Wall Street's expectations. 

Overall, however, retailers' problems abound. During the recent Penney earnings conference call, Ellison described the industry as the "most challenging and competitive" it has been in 50 years. 

Cowen retail analyst Oliver Chen expects both Penney and Macy's to announce additional store closures this year along with Gap (GPS) and jewelry chain operator Signet (SIG) as they look to stay relevant in the increasingly competitive retail market.

In the case of Plano, Texas-based Penney, some of its pain was self-inflicted due to mismanagement including the disastrous tenure of former Apple (AAPL) executive Ron Johnson as CEO, according to Mark Cohen, director of retail studies at Columbia Business School.

"I don't know if JCPenney has any future whatsoever," Cohen said. "The company now is in desperate shape."

Penney was already in Wall Street's doghouse after its recent quarterly earnings report disappointed investors and management slashed its earnings outlook for the year. And finding a replacement for Ellison may take up to six months and won't be easy, Cowen's Chen wrote in a recent note to clients.

"We are cautious because in our view securing new retail talent is exceptionally difficult -- particularly in the apparel and department store industry given an unexciting need for store closures, difficulty in obtaining sustainable physical store traffic growth, and long-term apparel deflation trends," wrote Chen, who has a "market perform" rating on Penney.

A Penney spokesman declined to comment for this story, saying the company wouldn't address analyst speculation. The company announced in February that it would close eight stores this year after shuttering 138 last year. 

San Francisco-based Gap, whose brands include Old Navy and Banana Republic, plans to close 200 locations this year, while Signet, parent company of Kay and Zales jewelers, plans to close 200 stores in its fiscal 2018.

Macy's and Gap couldn't immediately be reached. A spokesman for Signet reiterated the company's existing store closure statements.

However, Macy's isn't in as dire circumstances as Penney because it reported better-than-expected results both during the holiday period and the first quarter, traditionally a slow time for the chains.

Cohen, though, cautions against reading too much in the department store's recent results and argues that Macy's is struggling to find its groove.

"They too have no earthly idea how to position themselves in the marketplace," he said. "People are talking about how Macy's has resurged. ... That's bull. It hasn't happened yet. In a year, if their performance continues to improve, you might be able to describe what's going on as a turnaround."

Editor's note: An earlier version of this story wrongly attributed a quote critical of J.C. Penney's future to Cowen retail industry analyst Oliver Chen. The quote was from Mark Cohen, a professor and retail expert at Columbia Business School.

  • Jonathan Berr On Twitter»

    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.