After delivering eight straight quarters of earnings beat, Macy’s, Inc. (M - Free Report) reported negative earnings surprise during the second quarter of fiscal 2019. Net sales also fell short of the Zacks Consensus Estimate for the third quarter in row. Moreover, both the top and the bottom line continued to decline year over year. Following the results, management kept its fiscal 2019 sales guidance intact but slashed its earnings forecast.
Lower-than-expected performance and trimmed view gravely hurt investor sentiment. As a result, shares of this Cincinnati, OH-based company were down roughly 15% during the pre-market trading hours. We note that this Zacks Rank #3 (Hold) stock has slid 11% in the past three months compared with the industry's decline of 17%.
Management highlighted that results came below expectations due to inventory challenges in Spring on account of “fashion miss in key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism.” Nonetheless, the company resorted to markdowns to clean the excess inventory and enter Fall season with right size.
Looking at the brighter aspect, Macy’s pointed that its Growth50 stores initiative and Backstage is aiding its brick-and-mortar performance. The company continued to register positive comparable sales, albeit at a slower rate and witnessed double-digit growth in the digital business for fortieth successive quarter.
Let’s Delve Deep
Macy’s posted adjusted earnings of 28 cents a share, including a gain of 1 cent from sale of assets. This is sharply down from adjusted earnings of 70 cents, including a gain of 11 cents from sale of assets, reported in the year-ago period. The quarterly figure fell short of the Zacks Consensus Estimate of 45 cents. Inventory cleaning process and markdowns hurt the bottom line to an extent. Fall in earnings can also be attributed to higher cost of sales and increased SG&A expenses.
The company generated net sales of $5,546 million that missed the Zacks Consensus Estimate of $5,628.7 million and decreased marginally by 0.5% year over year. Given its strategic endeavors, the company anticipates sales growth in the back half of the fiscal year with improvement in gross margin.
Comparable sales (comps) on an owned plus licensed basis rose 0.3%, while on an owned basis, the metric improved 0.2%. This marked the seventh straight quarter of comps growth for the company. Strategic investments across stores, technology and merchandising are aiding comparable sales growth.
Adjusted EBITDA declined 29% to $402 million, while adjusted EBITDA margin contracted 300 basis points to 7.2%.
Other Financial Aspects
Macy’s ended the quarter with cash and cash equivalents of $674 million, long-term debt of $4,680 million, and shareholders’ equity of $6,315 million.
Macy’s continues to anticipate fiscal 2019 net sales to be roughly flat with both comps on an owned plus licensed basis and comps on an owned basis projected to be flat to up 1%. Management now envisions adjusted earnings between $2.85 and $3.05, down from the prior view of $3.05-$3.25 per share for fiscal 2019. The company had reported earnings of $4.18 in fiscal 2018. The Zacks Consensus Estimate for the fiscal year is pegged at $3.11, which is likely to witness downward revision in the coming days.
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