Clean Up On Aisle Retail: 2 Stocks To Short To Oblivion

| About: Macy's Inc. (M)

Macy's (NYSE:M) is a retail store operator responsible for both the Macy's and Bloomingdales name. From their website "Macy's, Inc. is one of the nation's premier retailers, with fiscal 2011 sales of $26.4 billion. The company operates the Macy's and Bloomingdale's brands with about 840 department stores in 45 states, the District of Columbia, Guam and Puerto Rico, and the and websites. The company also operates 12 Bloomingdale's Outlet stores."

J.C. Penney is yet another retail store/department store operator. From their website, "J.C. Penney Company, Inc. (JCP) boldly transforms the retail experience across 1,100 stores and to become America's favorite store. Focused on making the customer experience better every day, J.C. Penney is dreaming up new ways to make customers love shopping again. On every visit, customers will discover great prices every day in a unique Shops environment that features exceptionally curated merchandise, a dynamic presentation and unmatched customer service."

  • Macy's Reports Good Earnings Earlier Today

Macy's is up 4% this morning in pre-market trading after announcing better than expected earnings this morning. CNBC reported as follows:

Revenue rose seven percent to $9.35 billion from $8.72 billion a year ago.

Analysts had expected the department store chain, which also operates Bloomingdale's stores, to report earnings excluding items of $1.99 a share on $9.30 billion in revenue, according to a consensus estimate from Thomson Reuters.

During the quarter, same-store sales rose 3.9 percent. For the full fiscal year, same-store sales rose by 3.7 percent for the year, down from 5.3 percent in 2011.

Looking ahead, the company said it expects revenue at stores open a year to rise 3.5 percent in 2013.

This trader is bearish on retail in general. Stores like J.C. Penney, Sears (NASDAQ:SHLD) and Macy's all seem to be losing serious traction to the big box retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) (yes, even for clothing; but definitely for housewares).

In an article about competitor J.C. Penney, I spoke about my general sentiments regarding retail and department stores. I'll take those sentiments, compare and apply them to Macy's -- and tell you why I'm still bearish on both companies.

  • Both Stores are Years Past their Retail Prime

J.C. Penney was the leading affordable middle class retail clothing vendor. Its stores were fresh looking, usually packed, and the company had supplemental sales coming from catalog orders. There was consistent hustle and bustle in its department stores long before Internet shopping. J.C. Penney's stores are now often understaffed, undermaintained, deserted and sometimes simply look like demilitarized zones.

You could make the same argument for Macy's. I've lived in three major cities over the past 10 years, all of which have had a Macy's located relatively close to where I was living. The stores continue to be unkempt, understaffed and outdated looking. J.C. Penney is at least trying to address the problem of looks, with Ron Johnson coming on and dividing his stores up into "mini-stores". However, it remains a tall task ahead of both stores to improve the aesthetics of walking through their stores and not feeling like it's 1995.

  • Both Stores are Failing to Make Business Saving Changes

J.C. Penney is in a mad dash to stop its sales downtrend and it is furiously throwing cash at its in-store improvements. This can only keep up for so long with its current cash burn before the company must show a marked sales and margin improvement.

J.C. Penney's long-term hopes of success rely on Johnson's new plan to create sub-sections of the store in different departments. He's taking a huge risk in segmenting the stores by brand, giving major brands their own individual sections. Big risk sometimes pays off, and therein hangs the balance of the company's corporate strategy going forward.

This Macy's earnings news comes a couple days after the news of a lawsuit broke, due to J.C. Penney CEO Ron Johnson "wooing" Martha Stewart away from Macy's to J.C. Penney. MSN Money reported on the recent lawsuit:

Macy's is trying to show that Johnson (pictured), a former Apple (NASDAQ:AAPL) (AAPL 0.00%) executive, schemed to lure domestic diva Martha Stewart away from her long-standing merchandising deal with the department store.

Johnson's emails paint him as gloating over his score against Macy's, reports The New York Post. Macy's attorneys are trying to prove that Johnson had a scheme to trick Macy's CEO Terry Lundgren into dropping its Stewart products.

"We put Terry in a corner," Johnson wrote to Bill Ackman, a hedge-fund manager and a major shareholder of Penney's, the day after he announced a $200 million licensing deal with Stewart.

Johnson also appeared to exult over his department-store rival, writing in the same email, "Normally when that happens and you get someone on the defensive they make bad decisions." He added, "This is good."

How many times do you see startup or smaller companies lose their traction and burn through their capital, either going through legal battles or settling personal vendettas? The latter even holds true for one of two billionaires (billion, with a "b"), who is undoubtedly going to lose billions (billions, with a "b") playing a game of "who's got the bigger Ron Johnson" over Herbalife (NYSE:HLF). Folks, investors and hedge fund managers are guaranteed to lose billions (billions, with a "b"), over settling a personal score from many years back that's already been settled. Not exactly an efficient way to invest money and resources, right? Who could be this stupid? Macy's and J.C. Penney are heading down that same path.

These two companies are spinning their wheels here, kicking up money, time and resources like mud from underneath tires after it rains in Alabama ("Let me ask you a question: how do you get mud INTO the tires?"). What they're both failing to see is that the answer to success isn't going to lie in which of the two stores winds up with Martha Stewart -- these stores need radical rebranding and major internal changes to continue onward through 2013. The more time, money and resources these two spend battling each other, especially if this feud becomes even more personal between the two CEOs, make this a red flag for investors.

While I realize it's a "kill or be killed" mentality between the two CEOs right now, neither company has the capital allocation or time to focus on anything aside from changing their own corporate strategies to save their respective companies.

  • Macy's Has Major Resistance at $41
  • J.C. Penney is Due for Technical Pullback

(Click to enlarge)

Macy's chart is giving me whiplash just looking at it. In technical stock trading terms, it's like you gave a sailor instructions to sail from September '12 at $40 and get to February 15th at $40, then pumped him full of spiced rum, watched him pass out drunk, and let his vessel steer itself to the other side.

The one thing you'll notice from this chart is that there is a major resistance level at $41. Even after opening around this area this morning on the heels of their earnings, Macy's has already pulled back. It entered today in a technical downtrend and could easily find itself at $36.50 shortly.

I haven't seen a chart that screams out volatility like this in a very long time. I'm upset with myself for not noticing earlier, but options traders like myself and day-traders have likely been cleaning up swing trading Macy's.

Another thing to note is that the 200DMA and 50DMA are riding parallel to each other. This denotes that the next big move to the up or downsides is going to cause a cross, which usually signals the beginning of a longer trend.

(Click to enlarge)

J.C. Penney looks ready to make a technical pullback and faces the same long-term fate as the 50DMA and 200DMA get closer and closer to each other. We'll likely see a condensation between the averages, which will act as support and resistance, followed by a breakout to the downward side that will be substantially sustained, pending any news coming in the meantime from the company.

  • Bullish Arguments

Alright, to be fair, there are some bullish arguments here that I want to acknowledge, because there is risk involved in shorting both of these companies.

  1. Macy's expects a 3.5% rise and sales for 2013
  2. The feud between the two companies is bringing serious media attention
  3. J.C. Penney has just as much chance of a "golden cross" coming up as they consolidate, a very bullish technical indicator.
  4. J.C. Penney is already heavily shorted, good news and progress could trigger a squeeze.


I'm bearish on the retail sector and basically the market as a whole, so it's tough for me to get behind two retailers that both need serious help. The bet here for me is going to be bearish, but I wish all traders good luck.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in M over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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