Macy's, Inc.’s (M - Free Report) shares have underperformed the industry in the past three months. Notably, shares of this Cincinnati, OH-based company have tumbled approximately 30% in the past three months, wider than the industry’s decline of 11.2%. This Zacks Rank #5 (Strong Sell) stock has also underperformed the Retail-Wholesale sector and S&P 500 Index that declined 3.2% and 2.4%, respectively, in the said time frame. Further, the stock is trading close to its 52-week low of $14.11.
Dismal second-quarter fiscal 2019 results can be attributed to the stock’s bearish run. The company’s earnings beat streak ended during the quarter. The bottom line lagged the Zacks Consensus Estimate after surpassing the same in the preceding eight quarters. Net sales also missed the Zacks Consensus Estimate for the third quarter in a row. Moreover, both the top and bottom lines declined year over year. Results were 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 accelerated decline in international tourism.” Nonetheless, the company resorted to markdowns to clean the excess inventory and enter Fall season with right size. However, this weighed upon its gross margin.
Management’s soft view for fiscal 2019 negatively impacted investor sentiment. Macy’s continues to anticipate fiscal 2019 net sales to be roughly flat with both comps on an owned plus licensed basis and on an owned basis projected to be flat to up 1%. In fiscal 2018, comps on an owned plus licensed basis grew 2% from a year ago. Management now envisions adjusted earnings between $2.85 and $3.05 (including asset sale gains of 25 cents), 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. Moreover, management expects gross margin to decline marginally in the second half of the year.
Worryingly, the company has been witnessing higher SG&A expenses. During the second quarter, selling, general & administrative (SG&A) expenses increased roughly 0.6% year over year to $2,177 million. Notably, as a percentage of net sales, SG&A expenses increased 50 basis points to 39.3% during the quarter. Analysts expect SG&A expenses to increase on account of strategic investments. We believe that any significant increase in its SG&A expenses may hurt margins and in turn the bottom line. Management expects SG&A rate to up slightly in fiscal 2019. Also, concerns related to trade war cannot be ignored.
Nevertheless, Macy’s sustained focus on price optimization, inventory management, merchandise planning and private label offering is the primary catalyst that facilitates the company in meeting customer-oriented demand and improving in-store shopping experience. In an attempt to increase sales, profitability and cash flows, the company has been taking steps such as integration of operations, as well as developing omnichannel capabilities and online order fulfillment centers. Also, Macy’s Growth50 stores initiative and Backstage is aiding performance. The company registered positive comps in second-quarter fiscal 2019, albeit at a slower rate, and witnessed double-digit growth in the digital business.
However, we believe that such efforts will take time to yield results and win back investors’ confidence in the stock. That said, the company’s ongoing dismal performance is a woe.
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