In spite of a tough operating environment due to supply chain bottlenecks and elevated inflation, Macy’s, Inc. (M Quick QuoteM - Free Report) reported stronger-than-anticipated first-quarter fiscal 2022 earnings. Impressively, both the top and the bottom lines grew year over year. Effective implementation of Polaris Strategy, tactical allocation of capital, robust omni-channel capabilities, and solid consumer demand helped deliver stellar results.

Management highlighted that the company witnessed a notable shift back to occasion-based apparel and in-store shopping and continued to register strong demand for luxury goods. The department store bellwether witnessed sturdy growth across all three brands, namely; Macy’s, Bloomingdale’s and Bluemercury. While Macy’s retained fiscal 2022 annual sales guidance, it raised adjusted earnings per share view.

Shares of Macy’s were up 19.3% during the trading session on May 26. This Zacks Rank #3 (Hold) company has fallen 11.6% compared with the industry’s decline of 18.7%.

Sales & Earnings Picture

Macy’s reported adjusted earnings of $1.08 per share that surpassed the Zacks Consensus Estimate of 82 cents. The bottom line showcased an improvement from adjusted earnings of 39 cents reported in the year-ago period, thanks to higher net sales and margin expansion.

Net sales of $5,348 million almost came in line with the Zacks Consensus Estimate of $5,345 million. The top line increased 13.6% on a year-over-year basis. Comparable sales rose 12.8% on an owned basis and 12.4% on an owned-plus-licensed basis year over year.

The company’s digital sales increased 2% from the prior-year quarter. The metric surged 34% from first-quarter fiscal 2019 levels. Digital penetration was 33% of net sales in the quarter under review. This reflected a 4-percentage point contraction from the prior-year period’s level but a 9-percentage point improvement over first-quarter fiscal 2019. Approximately 61% of digital demand sales came from mobile devices. Stores fulfilled 25% of the digital sales in the quarter.

Net credit card revenues amounted to $191 million, up $32 million from the year-ago period. The metric represented 3.6% of sales, up 20 basis points year on year.

Brand-Wise Detail

Comparable sales across the Macy’s, Bloomingdale and Bluemercury brands rose 10.7%, 28.1% and 25.2% on an owned basis year over year. On an owned-plus-licensed basis, comparable sales across these brands increased 10.1%, 26.9% and 25.2% year on year, respectively. Digital penetration was 33%, 35% and 18%, respectively.

In the reported quarter, about 44.4 million active customers shopped the Macy’s brand, up 14% year over year. The company witnessed strong growth across categories like fragrances, dresses, men’s clothing, women’s shoes and furnishings.

Management informed that roughly 4 million active customers shopped the Bloomingdale’s brand, reflecting an increase of 21% from the year-ago period. Under the Bloomingdale banner, growth was primarily driven by robust performance in dresses, men’s tailored, men's and women’s contemporary, and luggage. Bluemercury brand benefited from higher store traffic coupled with better-than-expected growth in private brands.

Margins

Gross margin came in at 39.6%, up from 38.6% in the prior-year quarter. The year-over-year upside was driven by a 50 basis points improvement in merchandise margin owing to higher average unit retail driven by lower promotions on regular price merchandise, higher ticket prices and category mix. Delivery expenses, as a percentage of net sales, shriveled 50 basis points to 4.3% on account of lower digital penetration.

SG&A expenses increased 7.5% year over year to $1,879 million. However, as a percentage of net sales, SG&A expense contracted 200 basis points year on year to 35.1%. This can be attributed to effective expense management.

Macy’s reported adjusted EBITDA of $684 million, up considerably from adjusted EBITDA of $473 million in the year-ago quarter. We note that adjusted EBITDA margin expanded 270 basis points to 12.8% from the prior-year period, driven by better-than-expected gross margin and credit card revenues.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $672 million, long-term debt of $2,994 million and shareholders' equity of $3,278 million.

The company redeemed $1.1 billion of its near-term maturity bonds using proceeds from the issuance of $850 million in new unsecured notes along with cash on hand. As a result, the company does not have any material debt maturities for the next five years.

The company repurchased shares worth $600 million under its $2 billion open-ended share repurchase program and paid $45 million in dividends.

During the quarter, Macy’s generated cash flow from operating activities of $248 million and incurred capital expenditures of $261 million. It generated a free cash flow of $60 million. Management expects capital expenditures of approximately $1 billion for fiscal 2022.

Sneak Peek into Guidance

Macy’s continues to expect fiscal 2022 net sales in the bracket of $24,460 million to $24,700 million. This suggests flat to up 1% growth versus fiscal 2021. It guided comparable owned-plus-licensed sales three-year CAGR of approximately 1.1-1.4%. Management forecast digital sales to be about 35% of net sales and credit card revenues, net, to be roughly 3.1% of net sales.

The company projected fiscal 2022 gross margin rate in the band of 38.1-38.3% (versus 38.9% in fiscal 2021) and SG&A expense rate in the range of 33.7-33.9% (versus 32.9% in the prior year). It estimated an adjusted EBITDA margin between 11.2% and 11.7%, compared with 13.6% in fiscal 2021.

Macy’s now envisions fiscal 2022 adjusted earnings between $4.53 and $4.95 per share, up from the prior projection of $4.13 to $4.52 per share. This compared favorably with the Zacks Consensus Estimate of $4.32. However, the current view indicates a decline from adjusted earnings of $5.31 per share reported in fiscal 2021.

For second-quarter fiscal 2022, management anticipates net sales between $5,480 million and $5,550 million. This indicates a decline from net sales of $5,647 million reported in the year-ago period. It guided second-quarter adjusted earnings to be 84-94 cents a share. This suggests a decrease from $1.29 reported in second-quarter fiscal 2021. The Zacks Consensus Estimate for second-quarter earnings per share is pegged at 80 cents.

3 Stocks Hogging the Limelight

Here we highlight three top-ranked stocks, namely, Steven Madden (SHOO Quick QuoteSHOO - Free Report) , G-III Apparel (GIII Quick QuoteGIII - Free Report) and Designer Brands (DBI Quick QuoteDBI - Free Report) .

Steven Madden is a leading designer and marketer of fashion-forward footwear, accessories and apparel for women, men and children. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Steven Madden’s current financial year revenues and EPS suggests growth of 15.2% and 19.6%, respectively, from the year-ago reported figure. SHOO has a trailing four-quarter earnings surprise of 44%, on average.

G-III Apparel designs, sources and markets apparel and accessories under owned, licensed and private label brands. The stock currently carries a Zacks Rank #2 (Buy).

The Zacks Consensus Estimate for G-III Apparel’s current financial year revenues and EPS suggests growth of 10% and 5.4%, respectively, from the year-ago reported figure. G-III Apparel has a trailing four-quarter earnings surprise of 160.6%, on average.

Designer Brands, one of North America's largest designers, producers and retailers of footwear and accessories, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 112.8%, on average.

The Zacks Consensus Estimate for Designer Brands’ current financial year sales and EPS suggests growth of 6.5% and 8.8%, respectively, from the year-ago period.