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Macy's Q3 Earnings Preview: Is the Department Store's Decline Set to Continue?

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Macy’s (M - Free Report) downturn is one that helped spark broader fears that traditional brick and mortar retail’s days were numbered in the Amazon (AMZN - Free Report) era. Giants Walmart (WMT - Free Report) and Target (TGT - Free Report) and others have, of course, proven that those worries were more than overblown through e-commerce focused initiatives and delivery offerings.

But Macy’s and other department stores have not been able to find success or inspire much Wall Street confidence.

Quick Retail Overview

All three major U.S. indexes touched new highs Friday, as the Dow, S&P 500, and Nasdaq continue their strong November on the back of stronger-than-feared quarterly earnings results, another interest rate cut, and some U.S.-China trade war progress. On top of that, solid U.S. jobs data has helped boost Wall Street. And the Commerce Department said Friday that retail sales climbed in October after slipping slightly in September.

Meanwhile, Walmart’s quarterly results Thursday helped show that U.S. consumer spending remains solid. The world’s largest retailer saw its U.S. comp sales jump 3.2%, while e-commerce sales surged 41%. Shares of high-flying Target, which is set to report next week, got a boost as well.

Friday morning, J.C. Penney (JCP - Free Report) posted Q3 results that stood in stark contrast to Walmart. The struggling department store’s comp sales sunk 9.3%. JCP shares did surge over 7% on the back of some signs of progress. But investors should note that JCP stock is trading at around $1 per share and is down 90% in the past three years.







What’s Wrong with Macy’s?

Macy’s has tried to adapt to the e-commerce focused retail age through its omnichannel offerings that integrates its brick-and-mortar infrastructure with digital. The company, which also owns Bloomingdale’s and Bluemercury, has spent on various initiatives, with varying success. But in a retail age where brands can pop up online overnight and can find success on platforms such as Instagram (FB - Free Report) , Macy’s struggles have become increasingly amplified.

Macy’s full revenue fell three years in a row until it posted a marginal climb in 2018. But as the American mall fades further and companies such as Lululemon (LULU - Free Report) soar to success through their own direct-to-consumer business, it is unclear when or if the historic department store will return to growth or glory.

The chart above shows that Macy’s stock began to tumble in the summer of 2015 and despite a brief comeback, it has taken a nosedive ever since. M shares have fallen over 72% in the past five years, as the broader retail industry climbed 80%—Nordstrom (JWN - Free Report) fell 50%.





Q3 Outlook & Beyond

Looking ahead, our current Zacks Consensus Estimates call for the company’s Q3 revenue to fall 1.7% from the year-ago period to $5.31 billion. This would come in below Q2’s 0.60% decline. Meanwhile, Macy’s third-quarter comparable store sales are projected to fall 1.2%, after they rose 0.20% last quarter.  

The company’s full-year fiscal 2019 sales are then projected to dip 0.60%, with 2020 expected to sink another 0.71%. And the bottom end of the income statement appears even worse.

Macy’s adjusted quarterly earnings are projected to tumble 96% from $0.27 per share in the prior-year quarter to $0.01. M’s fourth-quarter EPS figure is then expected to fall nearly 24% to help pull its full-year fiscal 2019 earnings down over 32%. Peaking further ahead, Macy’s fiscal 2020 earnings are expected to fall 9% below our current-year estimate.





Bottom Line

M stock is down 50% over the last 12 months. Macy’s is currently a Zacks Rank #4 (Sell) based on its recent negative earnings estimate revision trends. The company does still pay a dividend, but its yield is artificially inflated by its downturn.

With all of this said, Macy’s could see a post-earnings release pop if it is able to show investors and Wall Street any signs of progress, similar to JCP. However, Macy’s seems to be much more of a trader’s stock than a longer-term investment even at its current price.

Macy’s is set to release its Q3 results on Thursday, November 21, as part of a busy stretch for retailers.

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