Macy's Fails to Sway Skeptical Investors
- By John Kinsellagh
Despite posting respectable results on Wednesday, Macy's (NYSE:M) stock did not respond in kind, falling 3% as investors viewed its store closing strategy as a potential omen that could bode ill for the company.
By all measures, Macy's turned in a solid third quarter that should have pleased analysts as the store heads into the holiday season. The company reported earnings of 20 cents per share, an increase of 10 cents from the same period last year. Revenue was $5.4 billion, up from $5.28 billion in the prior-year period. Total sales grew 2.3% to $5.4 billion. Net income doubled to $62 million from $30 million a year earlier.
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Same-store sales saw a 3.3% increase. The company's sustained investments in online shopping boosted digital sales. Based on its projections for same-store sales growth between 2.3% to 2.5%, Macy's raised its earnings per share guidance to $4.10 to $4.30 through the end of the year.
It should be noted that at this time last year, Macy's stock was at its lowest point since the 2008 financial meltdown. The company implemented a turnaround strategy that yielded solid results. The stock reacted favorably, with consistent earnings growth that either met or exceeded analysts' expectations. Its stock shot up 80% -- an impressive showing for a company who many viewed as being on life support.
Macy's, like many other companies, stock shot up dramatically over the past year to a point where the current price, in the minds of some investors, isn't warranted in view of the risk factors going forward, even if those identical risk factors were always present prior to the substantial rise in its stock price.
The department store could do little to overcome the haunting specter of ultimately following in the footsteps of Sears (SHLDQ). In short, Macy's couldn't have picked a more inopportune moment to announce it was closing some of its stores. Sears' recent bankruptcy filing did little to convert skeptics who have questioned the viability of the brick-and-mortar retail sector. For these investors, Exhibit A in support of their contention was the Chapter 11 filing of Sears, once a dynamo of the American retail sector.
Even though there are substantial differences with the plight of Sears in terms of profitability of many of its existing stores, for far too many investors, an announcement that you are closing stores is not a sign of health for any company. A legitimate cost-cutting measure is perceived as a weakness of the long-established Macy's brand. Prior to its earnings call, some analysts were harshly critical of the closing store strategy, calling it an attempt to staunch the bleeding.
Steve Dennis, a former executive who worked at Sears and Neiman Marcus, said that no retailer he could think of had successfully shrunk its way to growth.
"If you've got too much space, it means your brand isn't resonating," Dennis said. "It's not a real estate problem, it's a brand problem."
The reasoning behind this particular view is somewhat suspect because it is based on the state of retail both pre- and post-Amazon. In order to survive, every single large retailer in business today has had to adopt and change the way they do business. Closing stores as a way to respond to the new challenges in a new 21stcentury online retail environment does not necessarily mean imminent death.
It remains to be seen whether Macy's store closing quest for profitability will succeed, but given all the company has achieved over the past year, far too many analysts' undue pessimism is clearly unwarranted.
Disclosure: I have no position in any of the securities referenced in this article.
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This article first appeared on GuruFocus.
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