Macy’s (M - Free Report) will report its third quarter financial performance before the market opens on Thursday, November 21. The once-storied retailer has seen its shares plummet over 49% in 2019 as top and bottom-line declines continue to plague Macy’s.
However, fellow struggling retailer JC Penney provided hope for Macy’s and the department store industry when it reported a solid quarter last Friday that sent its shares up over 11% in intraday trading. However, JC Penney is still trading for around $1 which may demean its large jump. Can Macy’s follow in JC Penney’s footsteps and make up some of its losses in the closing months of the year?
Long Recovery Road
Macy’s definitely has its work cut out if it wishes to get its business back on the right track. The department store giant is coming off a quarter where it marked its seventh consecutive quarter of same store sales growth. However, the comparable store sales growth came at the expense of the firm’s gross profit margin, which led Macy’s to slash its full year bottom-line guidance. The company’s probability issues and lowered full year EPS guidance prompted investors to flee the stock.
Macy’s is also weighed down by heavy debt, which dims the outlook for the department store. The retailer’s outstanding debt in August 2019 was $4.7 billion, with $674 million in cash on the balance sheet. Earnings before interest and taxes fell 21% in the past year and if this continues the company might have a hard time paying off its debt.
Macy’s is tasked with mitigating the aforementioned headwinds to survive the retail apocalypse that has consumed department stores. Amazon (AMZN - Free Report) has captivated users with the convenience of next day delivery thanks to the company’s logistics network, which has helped move about 25% of clothing sales in the US to the digital marketplace. Consumers are now visiting malls for food and time with friends, instead of discovering new fashion trends at big box stores.
Macy’s must figure out a way to drive traffic in its stores in a cost-efficient manner instead of sacrificing its bottom-line to sustain its comp sales growth. Younger consumers often prioritize experience and ambiance, which department stores like Macy’s can try to cater to.
For example, some retailers often have workers who help customers create an outfit which is something that can’t be easily replicated online. The friendly experience of having a fashion inclined worker help an indecisive customer pick out an outfit is something that could resonate with customers and Macy’s could consider trying out.
Brick-and-mortar chains also can look to offer an optimized omnichannel experience that can combine the conveniences of both realms. However, implementing such changes may be difficult for Macy’s as its outstanding debt may make it more difficult to allocate capital to costly initiatives.
Investors should note that Macy’s faces a difficult Y/Y comp sales comparison in the upcoming third quarter after it posted a 3.3% jump in comps in Q3 2018. Macy’s CFO, Paula Price, acknowledged that this means the company's Q3 results could be "outside of our annual guidance range." However, in the fourth quarter, management expects same store sales to pick back up again, as in Q4 2018 comp sales rose a moderate 0.7%.
Our Q3 consensus estimates call for earnings to plummet over 96% to $0.01 per share and for net sales to slip 1.74% to $5.31 billion. Same store sales for the third quarter are projected to come in at -1.2% and 190 stores are expected to be added onto Q2 2019’s figure. Looking ahead to the full fiscal year, earnings are forecasted to fall 32.54% to $2.82 per share and net revenue is projected to miss last year’s figure by 0.59%.
Macy’s has been hit with an onslaught of headwinds that have sent the stock spiraling downward over the year. The firm’s eroding margins are a cause for concern, which the company should address in the coming report. The diminishing forward guidance continues to deter investors from the stock even as it trades below 6X its forward earnings and pays out a dividend with an 8.95% yield.
For the time being, Macy’s hasn’t given Wall Street much hope about mounting a comeback any time soon. Macy’s sits at a Zacks Rank #4 (Sell) and has underperformed other retailers like JC Penney, Nordstrom (JWN - Free Report) , and Dillard’s (DDS - Free Report) YTD.
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