News of Amazon.com Inc.’s department store plans sent a shudder through retail stocks just as some of the biggest names in the industry were reporting robust earnings, a signal that new challenges await in the beleaguered sector.

Amazon will open several physical locations that will compete with department stores, the Wall Street Journal reported Thursday, citing unidentified people familiar with the matter. The first stores are expected to be located in Ohio and California and will be about 30,000 square feet in size, which would be smaller than the typical department store, the Journal reported.

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The report sent big-box retailers’ shares abruptly down on Thursday morning before a modest rebound. Target Corp. erased a premarket decline to rise less than 1% at 9:46 a.m. in New York, while Best Buy Co. and Walmart Inc. were little changed. Bed Bath & Beyond slipped 1%. 

Amazon didn’t immediately reply to a request for comment. 

The news raises questions about the partnership between Amazon and Kohl’s Corp., which has accepted returns for the e-commerce giant for several years. Kohl’s Chief Executive Officer Michelle Gass has cited the tie-up as a driver of foot traffic for the chain and said it has helped bring in younger shoppers. 

Kohl’s quarterly results, released early Thursday, outpaced expectations, but the shares slumped before turning positive later in the morning. Macy’s Inc., which raised its sales outlook and reinstated its dividend, also saw its gains ease following the report.

Amazon has a history of spooking investors when it enters a new industry, from groceries to health care. But shares often recover as Amazon’s ambitions run into reality, such as its ill-fated venture with JPMorgan Chase & Co. and Berkshire Hathaway Inc. to remake health insurance. Already, retail shares seemed to be shaking off the impact on Thursday after the initial shock of the Amazon news wore off.

While Amazon is known for e-commerce, it’s no stranger to brick-and-mortar. The company has physical bookstores after debuting in Seattle in 2015 and owns the Whole Foods grocery chain. Amazon also has explored opening discount retail stores selling a mix of home goods and electronics, Bloomberg has reported.

‘Lack of innovation’

Neil Saunders, managing director of GlobalData, said Amazon’s latest move will be “experimental at first” but could end up being “very bad news for traditional department stores.” 

“Kohl’s may suffer, if only because Amazon is likely to favor locations similar to its own,” Saunders said in an email. “Macy’s, which is supposed to be developing its own smaller department store concept called Market by Macy’s, is behind the curve on rolling this out.”  

He added that “the lack of innovation by traditional department stores means their defenses are very weak, so the last thing they need is to fend off a new invader to their space.” 

—Bloomberg News

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