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Weak Home Depot, Kohl’s Results Unnerve the Retail Industry

Janet Freund, Matt Townsend and Jordyn Holman

(Bloomberg) -- Home Depot Inc. and Kohl’s Corp. both posted disappointing results on Tuesday, raising fresh doubts about whether American consumers can keep up robust spending as the crucial holiday season approaches.

The two retailers cut their annual forecasts for the second time this year. While the companies blamed shortfalls on specific issues -- including lumber prices at Home Depot and lower demand for women’s apparel at Kohl’s -- the weak results sent jitters across an industry that has been scrutinized for any sign of weakness amid a record streak of economic growth.

The concerns were reflected in a broad decline in consumer stocks, with the S&P 500 Retailing Index down as much 1.5%. Home Depot’s stock dropped as much as 5.6%, the biggest decline since February 2018. Rival Lowe’s Cos., which reports earnings Wednesday morning, fell 0.8%. And an S&P 500 department stores index plunged by the most intraday since the start of 2017 following Kohl’s results.

Kohl’s, whose stock plunged as much as 19%, is particularly worrisome ahead of the gift-giving season. The company has made investments that it said would draw in more customers -- specifically millennials.

“Top-line sales weakness raises concern for the retailers to deliver in the all-important holiday quarter,” Bloomberg Intelligence’s Poonam Goyal said in an email. A deep cut to Kohl’s profit forecast calls into question “the effectiveness of management’s initiatives and suggests more may still be needed.”

TJX Cos. Chief Executive Officer Ernie Herrman added to concerns, pointing to the uncertainty about tariffs talks between the U.S. and China. The comments followed an otherwise strong quarter for the operator of the TJ Maxx and Marshalls chains.

“We don’t have as much visibility moving forward to whether or not we can keep mitigating as we have,” Herrman said on a conference call with analysts. “For next year, it’s a bit of a wait-and-see when we get closer to that time period.”

The outlook for retailers will come into sharper focus as more companies report quarterly earnings this week, with results from Target Corp., Macy’s Inc., Gap Inc., Ross Stores Inc., Nordstrom Inc. and L Brands Inc. -- the owner of Victoria’s Secret.

‘Cold Wind’

Neil Saunders, an analyst at GlobalData Retail, said Kohl’s results weren’t all negative, since the company managed positive comparable sales. But apparel weakness and aggressive discounting across the industry illustrate “a challenging backdrop.”

“Kohl’s felt the cold wind of this and struggled to generate growth,” Saunders said in an email.

Walmart Inc.’s report last week pointed to investors’ nervousness. Although Walmart posted quarterly sales matched estimates and raised its outlook, the shares fell on concerns about persistent weakness at Sam’s Club and the high cost of new initiatives and slow progress in diversifying sales beyond groceries.

Consumer spending has been fueling U.S. economic growth at a time when the global economy weakened, prompting concerns over when the record expansion will inevitably come to an end. Evidence that American households are starting to feel stretched is showing up in debt data, as serious delinquencies on credit cards and auto debt have crept up.

Over at Home Depot, some online investments didn’t pan out as early as expected, and the benefits will take longer to materialize. The weak performance was all the more surprising since the Atlanta-based company had told investors that the second half of the year would be better. Same-store sales have now trailed projections for three straight quarters, a concerning trend for a retailer that’s been a consistent top performer this decade, according to Brian Yarbrough, an analyst for Edward Jones.

“Housing is good, but not great like it was,” said Yarbrough, who downgraded Home Depot’s stock to hold last week. “It’s going to be harder for Home Depot to show those outsized gains.”

The company now sees same-store sales growth of 3.5% for the full year, down from 4% previously.

(Adds TJX CEO’s comments in sixth pargaraph.)

--With assistance from Matthew Boyle.

To contact the reporters on this story: Janet Freund in New York at jfreund11@bloomberg.net;Matt Townsend in New York at mtownsend9@bloomberg.net;Jordyn Holman in New York at jholman19@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, ;Crayton Harrison at tharrison5@bloomberg.net, Jonathan Roeder, Cécile Daurat

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