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Macy's Earnings Preview: Is the Turnaround Still Alive?

Adam Levine-Weinberg, The Motley Fool

All in all, fiscal 2018 was a good year for Macy's (NYSE: M). The department store giant grew comparable-store sales on a full-year basis for the first time in four years. Operating profit finally stabilized, while adjusted earnings per share rose 10% due to the benefit of tax reform.

However, Macy's sales momentum slowed toward the end of the year, driving renewed earnings pressure. As a result, by early 2019, investors had lost their enthusiasm for the company. Macy's shares -- which briefly surpassed the $40 mark last August -- recently changed hands for around $23 -- more than 20% below where they traded a year ago.

M Chart

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With Macy's set to report its first-quarter earnings results on Wednesday, the company finally has a chance to reassure shareholders about the state of its turnaround.

A solid year with a bad ending

Macy's posted a full-year comp sales gain of 2% in fiscal 2018, easily beating its initial guidance for a flat to 1% increase. This reversed the 1.9% comps decline it logged in fiscal 2017.

The sales outperformance allowed Macy's to surpass its initial earnings outlook for the year. Entering 2018, Macy's management had expected adjusted earnings per share to decline slightly to between $3.55 and $3.75 from $3.79 a year earlier. Instead, adjusted EPS reached $4.18. Higher-than-expected asset sale gains drove about $0.20 that beat, but most of the surplus could be traced to strong results in the core business.

That said, as of November, Macy's was expecting even better results (especially excluding asset sale gains). It had to slash its guidance in early January after sales fell short of expectations in December, putting pressure on revenue and gross margin.

Furthermore, the company's fiscal 2019 forecast is uninspiring. Macy's expects comp sales growth to slow to just 0% to 1% this year. Meanwhile, planned investments are expected to outweigh the impact of cost savings initiatives, driving a decline in earnings (excluding asset sale gains, which will also be significantly lower this year).

The exterior of the Macy's flagship store in Manhattan

Macy's expects meager comp sales growth in fiscal 2019. Image source: Macy's.

Did Macy's make progress last quarter?

During Macy's fourth-quarter earnings call, management indicated that comps growth would likely be somewhat stronger in the second half of fiscal 2019 than in the first half of the year. CFO Paula Price also noted that the retailer had a little too much spring seasonal inventory. Together, these two factors pointed to the likelihood of flat comp sales and lower profitability in the first quarter.

Indeed, analysts currently expect Macy's to report sales of $5.53 billion this quarter -- down just slightly from $5.54 billion a year ago -- and a 29% plunge in adjusted EPS to $0.34.

It's possible that Macy's will outperform these expectations. The company provided its guidance in late February, near the tail end of a three-month domestic retail slump. Furthermore, if fiscal 2018 is any guide, Macy's may have deliberately started the new year with a very conservative forecast.

However, retail sales bounced back in March due to better weather and the arrival of tax refunds. Sales at department stores were still down significantly on a year-over-year basis in March, but the most recent round of store closures at Sears may be skewing the numbers.

Will Macy's update its guidance?

Macy's stock currently trades for less than eight times forward earnings estimates. This is a clear sign that most investors think the company's return to strong comps and earnings growth in the first few quarters of fiscal 2018 was a fluke. Macy's shares are priced for steady earnings erosion in the years ahead.

Thus, even if Macy's first-quarter results were subpar, investors would likely react favorably if management provides concrete evidence that sales trends improved during the quarter. An increase to its sales or earnings guidance would be an even more positive sign.

On the other hand, if Macy's is forced to cut its guidance on Wednesday, chairman and CEO Jeff Gennette will face some tough questions at the company's annual meeting, which will be held just two days later. One way or another, the upcoming week is sure to be eventful for the top U.S. department store operator.

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Adam Levine-Weinberg owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.