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Bear of the Day: Macys (M)

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Despite low gas prices and improving labor market, consumers remain reluctant to spend much. Further, their rising preference for online shopping is adding to the headwinds for traditional department store operators like Macy’s (M - Free Report) . The company reported its worst quarterly results since 2009 and also slashed guidance for the current year, sending shares sharply lower after the report.
About the Company
Based in Cincinnati, Ohio with a corporate office in New York, Macy’s is the biggest department store chain in the country. The company operates approximately 870 stores under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Bluemercury.
Weak Results and Downgraded Guidance
The company reported its Q1 results on May 11. Adjusted earnings of $0.40 per share were slightly ahead of the Zacks Consensus Estimate of $0.35. However sales of $5,771 million fell short of the Zacks Consensus Estimate of $5,955 million. Sales declined 5.6% from the same quarter year ago. Shares plunged about 13% after the results release.
The management expects same-store sales to decline about 4% this year, compared with a 2.5% decline last year, and adjusted earnings for the year to be between $3.15 and $3.40 per share. 
Falling Estimates
Analysts have slashed their estimates for the company after weak resultsZacks Consensus Estimates for the current and next fiscal year have fallen to $3.25 per share and $3.38 per share from $3.83 and $3.96 respectively, before the results.
The following chart shows negative earnings and price momentum for Macy’s:

The Bottom Line

In addition to disappointing consumer spending and mall traffic, the retail space is going through a shift toward online shopping and cheaper fast-fashion chains. Macy’s has taken a number of measures of late to reduce costs, including closing underperforming stores and cutting jobs. Activist investor Starboard Value LP has been asking the company to spin-off its massive real estate holdings to unlock value for shareholders. It remains to be seen if the management will agree as so far they have rejected such calls and said they were exploring joint-venture partnerships to take minority stakes in some properties.
Currently trading at a forward earnings multiple of 10.07, the stock looks attractive from a valuation perspective and that’s the reason why it has earned the Zacks Value Score of “A”. But in view of challenging environment for the retailer, it is safer to stay away for the time being.
Further, the industry is currently ranked 257 out of 265 Zacks industries (bottom 3%), suggesting potential underperformance in the short-to-medium term. There is no Zacks Rank #1 or #2 stock in the industry.
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