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Macy's (M) Misses Q3 Earnings Estimates, Retains EPS View

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Macy’s Inc. (M - Free Report) succumbed to a negative earnings surprise after four straight quarter of earnings beat, as it reported third-quarter fiscal 2016 results. The company posted adjusted earnings of 17 cents a share that fell short of the Zacks Consensus Estimate of 40 cents, and declined sharply from 56 cents reported in the year-ago period.

Including one-time items, earnings came in at 5 cents a share significantly down from 36 cents delivered in the year-ago quarter.

This Cincinnati, OH-based company generated net sales of $5,626 million that came marginally ahead of the Zacks Consensus Estimate of $5,625 million. However, it fell 4.2% year over year. Comparable sales (comps) on an owned plus licensed basis dipped 2.7%, while on an owned basis comps fell 3.3%.

We observed that Macy’s continues with its dwindling top- and bottom-line performance, as both declined for the third straight quarter this fiscal. Macy’s – which partnered with Brookfield Asset Management to create increased value in its real estate portfolio – retained its earlier announced earnings projection but provided an improved sales guidance for fiscal 2016.

Management stated that sales performance in the quarter was better than the first half of the fiscal year and added that its initiatives were showing results. The company also remains optimistic about the fourth quarter given the robust trend across the apparel businesses along with new endeavors such as tech watches from Apple, Michael Kors and others.

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. (AMZN - Free Report) .

Coming back to results, gross profit in the quarter declined 4.2% year over year to $2,240 million, whereas gross profit margin remained flat at 39.8%. Adjusted operating income plunged over 50% to $169 million, while adjusted operating margin contracted 330 basis points to 3%.

MACYS INC Price and EPS Surprise

MACYS INC Price and EPS Surprise | MACYS INC Quote

Store Update

During the quarter under review, the company opened a new Macy’s outlet in Kapolei, HI, a Macy’s Backstage outlet in San Antonio, TX, and seven Bluemercury freestanding specialty stores. Earlier this month, the company inaugurated a Bloomingdale’s Outlet in Orange County, CA.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $457 million, long-term debt of $6,563 million, and shareholders’ equity of $3,789 million, excluding non-controlling interest of $2 million.

During the quarter, the company recommenced its share buyback program and repurchased about 3 million shares for an aggregate amount of approximately $108 million. The company suspended its buyback program following the first quarter results. As of Oct 29, 2016, the company still had $1.8 billion remaining under its share buyback program.

Guidance

Macy’s now projects comps on an owned plus licensed basis to decrease in the band of 2.5–3%, reflecting an improvement over the previous provided view of 3–4% decline during fiscal 2016. On an owned basis, comps are expected to be roughly 50 basis points below. However, management reiterated its fiscal 2016 earnings guidance of $3.15–$3.40 per share. The current Zacks Consensus Estimate now stands at $3.38.

Stocks to Consider

Better-ranked stocks in the retail sector include Zumiez, Inc. (ZUMZ - Free Report) and Foot Locker, Inc. (FL - Free Report) both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zumiez delivered an average positive earnings surprise of 32% over the trailing four quarters and has a long-term earnings growth rate of 15%.

Foot Locker delivered an average positive earnings surprise of 3.1% over the trailing four quarters and has a long-term earnings growth rate of 9.9%.

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