Back to top

Image: Bigstock

Macy's Slumps on Margin Woes: 3 Retailers that Followed Suit

Read MoreHide Full Article

The stock market runs on sentiment and any unforeseen event in a particular sector has a rippling effect on others with a clear reflection on major indices that bear the brunt. The case is more or less the same for specific sectors that often see good or bad performance by one player influencing the performance of others. Yesterday, the major indices – Dow Jones Industrial Average, Nasdaq and S&P 500 shed 47.81, 20.63, and 6.77 points, respectively. A host of reasons may have influenced the entire trading session. But for now we are concentrating on one stock, Macy's, Inc. (M - Free Report) that kept investors on tenterhooks.

Macy’s Flop Show

Shares of Macy’s nosedived 8.2% yesterday and even hit a 52-week low of $21.86 – before recovering by just 4 cents – after this department store retailer warned investors that its margins may continue to feel the pinch. Management now envisions fiscal 2017 gross margin to contract 60–80 basis points, while for the second quarter it expects the same to shrivel by 100 basis points from the year-ago period.

A glimpse of Macy's share price movement reveals that it has plunged 49.2% in the past six months compared with the Zacks categorized Retail – Regional Department Stores industry’s decline of 46%. In contrast, the Zacks categorized Retail-Wholesale sector has advanced 10.7%.

What’s Giving it a Hard Time?

A challenging retail landscape, soft store traffic and stiff competition from online retailers, particularly Amazon.com, Inc. (AMZN - Free Report) , have been hurting Macy’s performance. This is quite visible from its first-quarter fiscal 2017 results, wherein sales and earnings per share declined 7.5% and 40% year over year, respectively. While net sales decreased 7.4%, 3.9%, 4.2% and 4% in the first, second, third and fourth quarters of fiscal 2016, respectively; earnings per share declined 28.6%, 15.6%, 69.6% and 3.3% during the respective quarters.

Additionally, management at its first quarter conference call had stated that it expects total sales to decline in the band of 3.2–4.3% and expects comps on an owned plus licensed basis to decrease in the range of 2–3% during fiscal 2017. This Zacks Rank #3 (Hold) company also projected adjusted earnings in the range of $2.90–$3.15 per share compared with $3.11 posted in fiscal 2016.

Macy’s Plan of Action

Macy’s has announced a slew of measures revolving around stores closures, cost containment, real estate strategy and investment in omni-channel capabilities to enhance sales, profitability and cash flows. Additionally, management is developing its e-commerce business, Macy’s Backstage off-price business and expanding Bluemercury and online order fulfillment centers.

Management is realigning operations and focusing on curtailing costs. It informed that these measures are likely to result in annual savings of about $550 million, and would allow the company to invest an additional $250 million in enhancing digital business, store-related growth initiatives, Bluemercury, Macy’s Backstage and China.

Domino Effect

Had the impact of Macy’s gross margin warning remained confined to the stock alone, it would have been less of a concern. Instead, investors pressed the panic button that took a toll on other retail stocks.

Shares of Kohl's Corporation (KSS - Free Report) , which operates department stores, dropped 5.8% yesterday. Last month, this Zacks Rank #3 company came up with first-quarter fiscal 2017 adjusted earnings of 39 cents a share that surpassed the Zacks Consensus Estimate of 28 cents.

J. C. Penney Company, Inc. also felt the heat as its shares tumbled 4.1%. The operator of department stores had posted better-than-expected first-quarter fiscal 2017 results last month. This Zacks Rank #3 company delivered quarterly earnings of 6 cents that were far better than the Zacks Consensus Estimate of a loss of 22 cents.

Shares of Dillard's, Inc. (DDS - Free Report) , which operates as fashion apparel, cosmetics, and home furnishing retailer, declined 3.4%. This Zacks Rank #3 company reported first-quarter fiscal 2017 results last month, wherein earnings of $2.12 beat the Zacks Consensus Estimate of $1.98.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Were Investors too Hasty?

Macy’s cautionary outlook about gross margin rung an alarm for other department store retailers and even did not spare the broader retail sector. We note that gross margin in the first quarter had contracted 100 basis points to 38.1%, and management expects the deterioration to continue, albeit at an equivalent rate. Nevertheless, Macy’s kept its comps and earnings per share projection intact, and investors should have acknowledged the same before punishing the stocks.

3 Stocks to Ride a 588% Revenue Explosion

At Zacks, we're mostly focused on short-term profit cycles, but the hottest of all technology mega-trends is starting to take hold...

By last year, it was already generating $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for those who make the right trades early. See Zacks' Top 3 Stocks to Ride This Space >>


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Amazon.com, Inc. (AMZN) - free report >>

Macy's, Inc. (M) - free report >>

Kohl's Corporation (KSS) - free report >>

Dillard's, Inc. (DDS) - free report >>

Published in