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Why Is Macy's (M) Down 12.3% Since the Last Earnings Report?

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It has been about a month since the last earnings report for Macy's Inc. (M - Free Report) . Shares have lost about 12.3% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Macy's Beats on Q4 Earnings, Lags Sales; Gives FY17 View

After witnessing a negative earnings surprise of 57.5% in the third quarter, Macy’s, Inc. ended fiscal 2016 with earnings beat. The company posted fourth-quarter adjusted earnings of $2.02 per share that beat the Zacks Consensus Estimate of $1.97 but declined 3.3% from $2.09 reported in the year-ago period.

Including one-time items, earnings came in at $1.54 per share, significantly down from $1.73 delivered in the year-ago quarter.

This Cincinnati, OH-based company generated net sales of $8,515 million that marginally came below the Zacks Consensus Estimate of $8,582 million, and also fell 4% year over year. Comparable sales (comps) on an owned plus licensed basis dipped 2.1%, while on an owned basis comps fell 2.7%. Digital sales witnessed double digit growth.

Apparel, fine jewelry, shoes, intimate apparel, and fragrances were strong, while handbags, fashion watches and fashion jewelry witness soft performance. Transactions in the quarter fell 4%, while average unit retail rose 2%.

We observed that Macy’s – which partnered with Brookfield Asset Management to create increased value in its real estate portfolio – continues with its dwindling top- and bottom-line performance, as both declined for the fourth straight quarter this fiscal.

In an attempt to augment sales, profitability and cash flows, the company has been taking steps such as cost containment, integration of operations as well as developing its eCommerce business and Macy’s Backstage off-price business, along with the expansion of Bluemercury and online order fulfillment centers. Moreover, as a part of store rationalization program, the company plans to shut down underperforming stores. These are seen as a part of the company’s endeavors to better withstand competitive pressure from both brick-and-mortar discount stores and online retailers, such as Amazon.com, Inc.

Coming back to results, gross profit in the quarter declined 1.7% year over year to $3,264 million, however, gross profit margin expanded 90 basis points to 38.3%. Adjusted operating income decreased 4.6% to $1,062 million, while adjusted operating margin contracted 10 basis points to 12.5%.

Store Update

Macy’s opened 27 outlets and shuttered 66 stores in fiscal 2016. The company plans to shutter about 34 more stores over the next few years for a total of about 100 stores. The company opened one Macy’s store in Kapolei, HI, 24 Bluemercury freestanding stores, one Macy’s Backstage freestanding store in San Antonio, TX, and one Bloomingdale’s Outlet in Orange, CA in the fiscal year.

The company expects to open Macy’s stores in Westfield Century City, Los Angeles, CA, and Fashion Place, Murray, UT, as well as about 30 more Bluemercury locations and approximately 30 Macy’s Backstage locations inside Macy’s stores in fiscal 2017. The company also plans to open Bloomingdale’s in San Jose, CA (2019) and Norwalk, CT (2019).

Under the license agreements with Al Tayer Group, a new Bloomingdale’s outlet is planned to open in 360 Mall in Al Zahra, Kuwait in spring 2017 and new Macy’s and Bloomingdale’s stores are planned to open in Al Maryah Central in Abu Dhabi, UAE in 2018.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,297 million, long-term debt of $6,562 million, and shareholders’ equity of $4,323 million, excluding non-controlling interest of $1 million. During the fiscal year, the company repaid debt of $751 million and paid dividend of $459 million.

During fiscal 2016, the company bought back about 7.9 million shares for an aggregate amount of approximately $316 million. As of Jan 28, 2017, the company still had $1.716 billion remaining under its share buyback program. Management expects to incur capital expenditures of approximately $900 million in fiscal 2017.

Guidance

Macy’s now projects comps on an owned plus licensed basis to decrease in the band of 2–3% during fiscal 2017. On an owned basis, comps are expected to decline between 2.2% and 3.3%. Management now envisions total sales to decline in the band of 3.2–4.3% in fiscal 2017, on account of 66 stores closed in fiscal 2016. The company now projects adjusted earnings of $2.90 to $3.15 per share for fiscal 2017.

Management expects contraction in gross margin for the year as a whole and in every quarter. The company also aims to attain debt to EBITDA ratio targeted range of 2.5 to 2.8. Macy’s projects interest expense in the band of approximately $320 million to $325 million for fiscal 2017, down from $363 million in fiscal 2016.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been three upward revisions for the current quarter. In the past month, the consensus estimate has shifted upward by 11% due to these changes.

Macy's Inc Price and Consensus

 

Macy's Inc Price and Consensus | Macy's Inc Quote

VGM Scores

At this time, Macy's stock has a strong Growth Score of 'A', a grade with the same score on the momentum front. Following the exact same course, the stock was allocated also a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value, growth, and momentum investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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