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Macy's Huge Earnings Miss: Are Department Stores Dying?

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Macy’s (M - Free Report) stock dropped 12.55% in trading Wednesday after reporting disappointing earnings before the bell. The stock is down a total of 45.1% YTD. However, from Q3 2017 through Q2 2018, the stock jumped 114.4%.

Let’s see why Macy’s stock has taken such a large hit and what this means for investors.

Q2 Overview

Macy’s reported second quarter earnings of $0.28 per share, a 37.8% negative surprise compared to our Consensus Estimate of $0.45 per share. For revenues, the company edged out estimates of $5.542 billion to report $5.546 billion. This marked a 3.68% revenue shrinkage from a year earlier.

So far this year, Macy’s has closed more than 20% of its stores, going from 863 stores in April to 680 stores in July. However, comparable store sales year over year rose by 0.3%.

Also this quarter, Macy’s took markdowns on a significant chuck of its inventory to clear shelves for the fall. This resulted in a full point drop in gross margins, as the company stated in its earnings report.

Outlook

Q3 is not projected to be any better, as trade war impacts and changing sales channels hit the retailer. Earnings estimates for the current quarter show $0.14 per share, which would be a 48.15% tumble from a year earlier. Revenues for this quarter are projected to grow by 1.1% year over year to $5.46 billion.

Macy’s lowered its full year earnings guidance by $0.20, and not expects its bottom line to fall between $2.85 to $3.05 per share.

Industry Issues

Brick and mortar retail across the country, and especially department stores, have taken a serious sales hit in the past 4 years. In June 2015, department stores sold $13.66 billion worth of goods, while in June 2019, sales dropped to $11.35 billion. This constitutes a 17% sales decline nationwide, a significant regression from a sales model over 150 years old.

For Macy’s, this summer was particularly rough on sales, leaving inventories bloated heading into the important back-to-school and holiday seasons; Citi analyst Paul Lejuez estimated inventories are up 5% per square foot. Chief Executive Jeff Gennette said in a statement this was due to “a combination of factors: a fashion miss in our key women’s sportswear private brands, slow sell-through of warm-weather apparel and the accelerated decline in international tourism.”

Macy’s is also at risk from the impending additional 10% tariffs on China set to come into effect in December. With sales already declining, the retailer must figure out how to get around these extra costs and avoid passing them on to consumers. If prices were to increase, consumers would likely turn to budget retailers or online shopping. Macy’s has already tried raising prices on some goods, such as luggage, housewares, and furniture, but the CEO said consumers had no appetite for price increases.

Gennette also stated that while some shipments of holiday goods had been moved up to beat the tariffs, the majority of goods were still offshore.

After Macy’s released their Q2 earnings, other department store stocks dropped as well, likely due to fears that the segment is facing increased pressure from online retail. At market close on Wednesday, Nordstrom (JWN - Free Report) is down 10.46%, Kohl’s (KSS - Free Report) is down 10.8%, and J.C. Penney (JCP - Free Report) is down 3.79%. Of these competitors, two hold Zacks Rank #4 (Sell), providing further evidence of a likely dying segment.

Bottom Line

Macy’s currently holds a Zacks Rank #3 (Hold), recently up from a Zacks Rank #4 (Sell). A disappointing earnings report and lowered guidance do not bode well for this storied company. A rough summer coupled with impending trade war tariffs could possibly knock Macy’s even further throughout the fall. Investors should be wary of department store stocks for the near term as consumers trend away from the sales model and other pressures put stress on earnings.

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