Photo: RetailWire
Macy’s shares get crushed after it beats expectations
Publicly traded companies are frequently rewarded when their sales and earnings performance for a given quarter comes in higher than Wall Street’s expectations. That was not the case for Macy’s, Inc. yesterday as the department store retailer saw its share price fall nearly 17 percent in trading after posting positive comps and increasing its outlook for the current fiscal year.
Macy’s posted a 0.5 percent increase in same-store sales in the second quarter. Analysts were looking for the retailer to report a 0.9 percent decline. The chain’s modest increase follows same-store gains of 3.9 percent and 1.3 percent in the previous two quarters after multi-year declines.
Macy’s earnings for the quarter also outperformed expectations at 70 cents per share after excluding one-time items. The Wall Street consensus prior to Macy’s reporting was 51 cents per share.
For the first half of 2018, Macy’s reported same-store sales growth of 2.3 percent, with Bloomingdales’s, Bluemercury and Macy’s all performing well, according to the company’s chairman and CEO Jeff Gennette.
“The combination of healthy stores, robust e-commerce and a great mobile experience is Macy’s recipe for success. We are focused on improving our customer journey every step of the way because we know that our customers expect a great experience whenever and wherever they engage with our brands,” said Mr. Gennette in a statement. “We also continue to be disciplined with inventory management, which allows us to give our customers more fashion and freshness, while increasing sales and improving gross margin.”
Most industry watchers seem to see yesterday’s dramatic drop as more of a reaction to how well Macy’s stock has performed this year than disappointment in its reported results.
The retailer does face challenges, as Neil Saunders, managing director of GlobalData and a RetailWire BrainTrust panelist, told CNBC in an interview.
“[Macy’s] is still losing market share across a number of categories,” said Mr. Saunders. “Moreover, with the closure of underperforming stores, a natural bounce to comparables is to be expected — especially as some of the trade from shuttered shops finds its way to both other locations and to the digital channel.”
- Macy’s, Inc. Reports Second Quarter 2018 Earnings – Macy’s, Inc.
- Macy’s plunges 16 percent, leads rout in retail stocks sell-off – CNBC
- Macy’s shares tumble as department store struggles to grow sales – CNBC
- Good Isn’t Good Enough at Macy’s – The Wall Street Journal
- CEO thinks momentum is on Macy’s side – RetailWire
- Is Macy’s heading for a rebound? – RetailWire
Discussion Questions
DISCUSSION QUESTIONS: Are you more bullish or bearish on the prospects for Macy’s business over the rest of the year? Where do you see the greatest challenges and opportunities for the company?
Poll
BrainTrust
Neil Saunders
Managing Director, GlobalData
Dick Seesel
Principal, Retailing In Focus LLC
Yes, I saw this as more profit taking than anything else. They started turning around last fall and those numbers will be harder to match. With year-over-year sales essentially flat and their paying more to get shoppers without a customer service plan to increase items per sale, I think it is less likely that the retailer and its stock will continue to be the darling of Wall Street that it has been for the past eight months.
Macy’s recent positive performance is encouraging, but given the strong macro-economic conditions, it’s hard to say how much of the performance is a function of market conditions. The department store category is still fragile and vulnerable, and while Macy’s appears to be moving in the right direction with a number of their initiatives, it’s too soon to declare victory.
Given the share price rise over the past few months, there was definitely some profit taking behind the stock price shift. However, investors are also reacting to the fact that although Macy’s grew sales, they did so at a pace that was lower than the overall market. That means it has lost market share and is, technically, underperforming.
In my view, Macy’s has made progress and is doing many things right. However there are also many problems left to fix, including a long tail of stores that are stuck in the 1980s. This is not a firm that’s back to full health.
I see Macy’s still having more positives than negatives. They’re continuing to make significant improvements and their e-commerce sales are growing. However the best opportunity is to increase store sales and, at the risk of sounding like a broken record, the simplest thing they should do is add staff and make sure they are well-trained.
I cannot express how many times when shopping Macy’s there isn’t an associate around anywhere. What we see are closed registers, and you find yourself walking around the floor looking for some help when needed to the point of often just giving up and leaving. I myself have had this experience, and I have watched other customers get disgusted and leave the store. Just last week I was at a local Macy’s and a customer asked me if I knew where something was — I politely said I didn’t know, and the customer responded with “you’d think they’d hire some people.” I watched as she and her husband walked out.
Stores’ most significant advantage over e-commerce is human interaction, and when done correctly it becomes a compelling customer experience. A .05 percent increase in comp sales is nothing to be excited about, but if Macy’s invested in well-trained staff I would expect to see numbers a lot higher than that.
I read it more that they could have done better given the macro conditions of the market. And now that we have J.C. Penney’s numbers it is difficult to be bullish about mall retailing. So the market takes a deep breath — really deep. Exercise extreme caution when buying a mall retailer these days, especially when they have bounced like Macy’s has in the last year.
Neil nailed it: The second quarter comps were well behind the number for the entire first half — suggesting a real slowdown in trend compared to Q1. Whether this is a warning sign for consumer spending in the second half is hard to tell, but it may be the only rational explanation for the price dip. I’m no stock expert, but Macy’s P/E ratio still looks like a value if it can continue to show modest improvement in its sales and earnings later this year.
One headwind to consider: The accelerated trend toward “zombie malls” may hurt Macy’s traffic instead of offering a market share opportunity. An example from here in Milwaukee: The Southridge Mall (a Simon property) is now without three of its five anchors — Sears, Bon Ton and Kohl’s, which is relocating to a nearby power center instead. This leaves Macy’s and J.C. Penney to fend for themselves, and it’s a phenomenon happening all over the country.
You couldn’t get a more stark statement about why stock markets are wrong in their evaluation of businesses. The market punishes big retailer positives and rewards big digital negatives.
Does this mean I think Macy’s is solid for the long run? No. They have major challenges. But how the stock market votes no longer connects with reality (if it ever did — thinking of the tulip bubble a couple centuries ago).
There are issues with Macy’s controls, sales and operations. That has been well covered in the comments here. I also think there was “emotional selling,” as buyer perceptions get really nervous in this “tough retail market” and then they see a bump in the value of a stock. I think it was driven by emotion.
There are ways to justify this market reaction as others have stated — while quarter-to-quarter performance looks good, when you spread your view across a year-to-year view it starts to give an impression that there may have been a bubble effect at play and therefore you have investors scurrying to take profits today. At the same time, however, this does demonstrate how the market treats traditional retailers with a completely different rule book than digital native retailers. Digital retailers are still rewarded for showing positive hope for the future in the face of poor performance while traditional retailers can potentially hit it out of the park and still be punished for not being “good enough.”
That said, I’m still hopeful that Macy’s can pull off a turnaround similar to Best Buy (and they’ve done it with electronics, arguably a more difficult space than apparel). Macy’s still has issues to resolve in the apparel side of the business and while we see lots of seemingly innovative decisions being made (acquiring Story, relationship with b8ta, VR for furniture shoppers, etc.) it still isn’t clear how these innovations will be used to maintain continued sales growth at a pace equal to or better than the industry as a whole.
“Bullish” and “bearish” need to be put in perspective. I think almost everyone on RW and elsewhere feels that department stores are (still) in a long-term decline, and that will continue — if not in fact accelerate — as more sales move online (and to new or different companies). So “bullish” is perhaps expressed better as “less bearish” i.e. the decline will slow and Macy’s will be able to transition successfully into a more omni-channel retailer with something close to its current market shares.
Whether I have this view I don’t know. Macy’s has plenty of “initiatives” and (often code-worded) concepts — e.g. “Grow 50” — but nothing so far has made me go WOW! Of more interest to me, was that this was the first call with the new CFO … slowly but surely, the old guard of the pre-digital/federated universe is retiring.
Just curious, but why do we continue to focus on a dinosaur retail model experiencing an on-going slow and painful morph into something completely different in 20 years (like real estate for something new)? It must be a New York PR thing, where they still have a somewhat relevant physical location. Don’t mean to be a downer, but maybe we should be talking about Nike and how their 3 tiers of DTC; e-com, multi-brand physical and marketplace will replace department stores.
Department stores: over. Fresh DTC ideas: just the beginning. Anyone with me?