Macy's (NYSE: M) has taken shareholders on a roller-coaster ride since late 2017, as investors have tried to make sense of the department store giant's turnaround effort. The stock hit a multiyear low below $20 in November 2017, rallied to a peak above $40 last summer, and has now given up most of those gains, falling to a recent trading range around $25.
On Tuesday, Macy's further confused investors. It reported fourth-quarter earnings results that beat the reduced guidance management had provided last month, but its fiscal 2019 earnings-per-share forecast fell short of the analyst consensus. Let's look at what these mixed signals mean for shareholders.
The fourth quarter was better than feared
Back in November, Macy's raised its full-year sales and earnings guidance, calling for comp sales growth between 2.3% and 2.5% and adjusted EPS between $4.10 and $4.30. That implied a roughly 2% comp sales increase in the fourth quarter and quarterly adjusted EPS between $2.65 and $2.85.
However, in January, Macy's reported disappointing results for the holiday selling season. Comp sales rose just 1.1% for the combined November-December period. As a result, Macy's reduced its full-year comp sales forecast, calling for 2% growth. Furthermore, it slashed its earnings guidance -- despite increasing its forecast for asset sale gains -- calling for full-year adjusted EPS between $3.95 and $4.00.
Macy's ended fiscal 2018 with sales right in line with its updated forecast. Comp sales rose 0.7% in the fourth quarter and 2% for the full fiscal year. Management said comp sales might have risen as much as 1.4% last quarter but for the impact of a late-November fire at Macy's West Virginia fulfillment center and an ill-advised change to a promotional event in December.
Macy's posted its fifth consecutive quarter of comp sales growth in Q4. Image source: Macy's.
Meanwhile, adjusted EPS came in at $2.73 for the quarter and $4.18 for the year, in line with the company's November guidance and well ahead of the revised figures provided in January.
Higher-than-expected asset sale gains and credit card revenue contributed to the earnings beat. Gross margin also appears to have come in a little better than management had projected back in January.
Is Macy's lowballing its guidance?
For fiscal 2019, Macy's expects total sales to be roughly flat on a 0% to 1% comp sales increase. The company forecast full-year adjusted EPS between $3.05 and $3.25, including $100 million ($0.25 per share after tax) of asset sale gains. On average, analysts had expected adjusted EPS of $3.30.
Lower expected asset sale gains account for about 70% of the projected EPS decline. (Macy's reaped asset sale gains of $389 million last year.) Still, if this outlook turns out to be accurate, it would be disappointing for Macy's shareholders.
However, investors should remember that Macy's entered fiscal 2018 expecting 0% to 1% comp sales growth and adjusted EPS between $3.55 and $3.75. It easily surpassed its initial guidance on both of those metrics despite some miscues during the key holiday period. If Macy's has been similarly conservative with its fiscal 2019 forecast, its full-year adjusted EPS could come in flat or up modestly year over year, excluding asset sale gains.
Macy's is improving -- albeit slowly
Investors won't know until this time next year whether the guidance provided this week was overly optimistic, too conservative, or just about right. (The fact that the updated EPS forecast Macy's provided just last month was off by 5% highlights how difficult it is to make accurate projections in the retail business.)
However, in many ways, Macy's is moving in the right direction. Perhaps most importantly, the company repaid $1.1 billion of debt last year and plans to continue strengthening its balance sheet in 2019, which will put it in good position to weather the next economic downturn.
Macy's also continues to move forward with various sales-driving initiatives that already started to boost sales last year. In 2019, it will open 45 more Backstage off-price stores within its full-line store base, upgrade another 100 stores following the example of last year's "Growth50" program, continue expanding its online assortment, and invest in its most successful merchandise categories to gain market share there.
There's no guarantee that these efforts will succeed in driving consistent growth in the future. But with the stock trading for just eight times forward earnings, the risk-reward balance is very favorable for shareholders.
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