A month has gone by since the last earnings report for Macy's (M Quick QuoteM - Free Report) . Shares have lost about 11.3% in that time frame, underperforming the S&P 500.

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

Macy's Q2 Earnings Top, Comp Sales Decline, View Cut

Macy’s, Inc. came up with second-quarter fiscal 2022 results, wherein both the top and bottom lines beat the Zacks Consensus Estimate but declined year over year. Comparable sales also fell on an owned basis and an owned-plus-licensed basis. Inflationary headwinds, changing consumer behavior and inventory gluts hurt the company’s performance. Following the results, Macy’s trimmed the full-year sales and earnings view due to markdowns and promotions needed to offload excess inventories.

Macro-economic pressures, waning consumer confidence and a pullback in spending activity have hit consumer discretionary stocks, and Macy’s is not immune to the same. The company’s inventories were higher 7% at the end of the quarter. Management informed that the inventory remained elevated in certain categories due to lower sales since Father's Day.

Macy’s is resorting to markdowns in seasonal goods, private brand merchandise and pandemic-related categories, such as active, casual sportswear, sleepwear and soft home. On the flip side, the company intends to focus on in-demand categories and is targeting the optimum inventory level by the end of the fiscal year.

The company believes that the Polaris Strategy positions it well to navigate through the dynamic retail landscape. Management highlighted that consumers continued to shop Macy's. Also, both Bloomingdale’s and Bluemercury brands outperformed in the said quarter.

Sales & Earnings Picture

Macy’s reported adjusted earnings of $1.00 per share, which surpassed the Zacks Consensus Estimate of 85 cents and our estimate of 87 cents. However, the bottom line declined sharply from the adjusted earnings of $1.29 reported in the year-ago period.

Net sales of $5,600 million came ahead of the Zacks Consensus Estimate of $5,481 million and our estimate of $5,527 million. However, the top line decreased 0.8% on a year-over-year basis. Comparable sales fell 1.5% on an owned basis and 1.6% on an owned-plus-licensed basis year over year. The metric fared better than our estimate of down 2.1% on an owned basis and down 2.5% on an owned-plus-licensed basis.

The company’s digital sales dropped 5% from the prior-year quarter and conversion was down 3%. The metric surged 37% from second-quarter fiscal 2019 level, while conversion was up 14%. Digital penetration was 30% of net sales in the quarter under review. This reflected a 2-percentage point contraction from the prior-year period’s level but an 8-percentage point improvement over the second quarter of fiscal 2019. Approximately 64% of digital demand sales came from mobile devices. Stores fulfilled 23% of digital sales in the quarter. The second-half digital penetration is anticipated at about 35.5% considering the trends seen at the end of the second quarter.

Digital penetration was 30%, 32% and 19%, respectively, at Macy’s, Bloomingdale’s and Bluemercury brands during the quarter under discussion.

Net credit card revenues amounted to $204 million, up $7 million from the year-ago period. The metric represented 3.6% of sales, up 10 basis points year over year.

Brand-Wise Details

Comparable sales across Macy’s declined 2.9% on an owned basis and 2.8% on an owned-plus-licensed basis. On a trailing 12-month basis, 43.9 million active customers shopped the Macy’s brand, up 7% year over year. The company continued to witness a stellar performance in occasion-based categories, including career and tailored sportswear, fragrances, shoes, dresses and luggage.

At the Bloomingdale’s brand, comparable sales increased 8.8% on an owned basis and 5.8% on an owned-plus-licensed basis. Management informed that roughly four million active customers shopped the Bloomingdale’s brand on a trailing 12-month basis, reflecting an increase of 14% from the year-ago period. Under the Bloomingdale’s banner, growth was driven by the robust performance in women’s, men’s and kid’s contemporary and dressy apparel as well as luggage.

Comparable sales at the Bluemercury brand were up 7.6% on an owned and owned-plus-licensed basis driven by continued strength in color and skincare. About 700,000 active customers shopped the Bluemercury brand on a trailing 12-month basis, representing a year-over-year increase of 9%.

The company plans to open five to six off mall locations in fiscal 2022, a mix of Market by Macy’s, Freestanding Backstage, Bloomie’s and Bloomingdale’s the Outlet.

Margins

The gross margin came in at 38.9%, down from 40.6% in the prior-year quarter. The year-over-year decline was driven by a 160-basis point contraction in the merchandise margin due to an increase in permanent markdowns within the Macy’s brand, stemming from pandemic-related categories, seasonal goods and private brand merchandise. Delivery expenses, as a percentage of net sales, climbed 10 basis points to 4.5% due to a rise in fuel costs and an increase in the percentage of digital sales fulfilled by the vendor direct channel.

SG&A expenses increased 4.4% year over year to $1,981 million. As a percentage of net sales, SG&A expenses increased 180 basis points year over year to 35.4%.

Macy’s reported adjusted EBITDA of $616 million, down significantly from adjusted EBITDA of $836 million in the year-ago quarter. We note that the adjusted EBITDA margin shriveled 380 basis points to 11% from the prior-year period.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $300 million, long-term debt of $2,995 million and shareholders' equity of $3,531 million.

Year to date, the company repurchased shares worth $600 million and paid $87 million in dividends. The company has $1.4 billion remaining under its share repurchase authorization.

During the 26-week period ended Jul 30, 2022, Macy’s generated cash flow from operating activities of $303 million and incurred capital expenditures of $582 million. It generated negative free cash flow of $206 million. Management expects capital expenditures of approximately $1 billion for fiscal 2022.

Sneak Peek Into Guidance

Macy’s now envisions fiscal 2022 net sales in the bracket of $24,340 million-$24,580 million, down from its prior view of $24,460 million to $24,700 million. It projected comparable owned-plus-licensed sales to be flat to up 1%. Management forecast credit card revenues, net, to be roughly 3.3% of net sales, up from the previous expectation of 3.1% of net sales.

Macy’s foresees the fiscal 2022 gross margin rate to contract approximately 150 basis points from the last year due to the additional markdowns. It expects the SG&A expense rate to be up 120 basis points from the prior year.

It now estimates the fiscal 2022 adjusted EBITDA margin to be 10.5% compared with 13.6% in fiscal 2021. The company earlier projected the adjusted EBITDA margin between 11.2% and 11.7%.

Macy’s now envisions fiscal 2022 adjusted earnings between $4.00 and $4.20 per share, down from the prior projection of $4.53 to $4.95 per share. The current view indicates a decline from the adjusted earnings of $5.31 per share reported in fiscal 2021.

For the third quarter of fiscal 2022, management anticipates net sales between $5,160 million and $5,230 million. This indicates a decline from net sales of $5,440 million reported in the year-ago period. It guided third-quarter adjusted earnings to be 15 to 21 cents a share. This suggests a decrease from the $1.23 reported in the third quarter of fiscal 2021. Macy’s expects the gross margin rate to shrivel no more than 350 basis points from the prior-year period, reflecting the impacts of markdowns, a promotional environment and higher fuel costs.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

The consensus estimate has shifted -61.45% due to these changes.

VGM Scores

At this time, Macy's has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Macy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.