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Why Is Macy's (M) Up 5.2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Macy's (M - Free Report) . Shares have added about 5.2% in that time frame, underperforming the S&P 500.

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

Macy’s Q2 Earnings Miss, FY19 View Cut

After registering eight straight quarter of earnings beat, Macy’s, Inc. 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.

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. Credit card revenues decreased 5.4% to $176 million.

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.

FY19 View

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. Excluding gains of 25 cents a share on sale of real estate, adjusted earnings are expected to come within the range of $2.60-$2.80. The company had reported earnings of $4.18 in fiscal 2018. The company anticipates credit card revenues for the fiscal year between $740 million and $765 million.

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 -73.81% due to these changes.

VGM Scores

Currently, Macy's has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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. It's no surprise Macy's has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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