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Macy's (M) Beats on Earnings in Q3, Raises FY21 Guidance

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·8 min read
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  • M
  • TSCO
  • FAST
  • COST

Macy’s, Inc.’s M shares soared 21.2% during the trading session on Nov 18, following robust third-quarter fiscal 2021 results. The company’s top and the bottom line improved year on year as well as surpassed the Zacks Consensus Estimate. The company narrowed and raised its view for fiscal 2021.

The quarterly performance gained from the effective execution of the Polaris Strategy and improved consumer spending across brands. The company continued to offer a wide range of merchandise assortments to meet growing demand conditions. Macy’s gained from accelerated execution of the Polaris strategy and strong omni-channel capabilities. Such strategic efforts keep the company well-positioned for growth in the forthcoming periods. As Macy’s progresses with the fourth quarter, it is optimistic regarding the holiday season. Management expects that its efficient digital capabilities and omni-channel services will help it meet consumers’ needs amid the challenges emerging from labor shortages and supply chain disruptions. The company announced the launch of a curated digital marketplace platform that will fuel customer acquisition and sales growth across all channels.

Shares of this Zacks Rank #2 (Buy) company have surged 72.9% in the past three months compared with the industry's rise of 32.8%.

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Zacks Investment Research

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Q3 in Details

Macy’s reported adjusted earnings of $1.23 per share, which surpassed the Zacks Consensus Estimate of earnings of 35 cents. The bottom line improved from a loss of 19 cents reported in the year-ago quarter. The figure also increased from adjusted earnings of seven cents in third-quarter fiscal 2019.

Net sales of $5,440 million came ahead of the Zacks Consensus Estimate of $5,327 million. The top line surged 36.3% on a year-over-year basis. Comparable sales surged 37.2% on an owned basis and 35.6% on an owned-plus-licensed basis, year over year. Compared with third-quarter fiscal 2019, comparable sales increased 8.9% on an owned basis and 8.7% on an owned-plus-licensed basis. Management highlighted that comparable sales in the reported quarter includes a 200 basis points (bps) gain from the Friends and Family promotional event.

Comparable sales across the Macy’s, Bloomingdale and Bluemercury brands rose 36.4%, 43.4% and 39.5% on an owned basis, year over year. On an owned-plus-licensed basis, comparable sales across these brands increased 35.1%, 38.5% and 39.5% year on year, respectively.

The company’s digital sales increased 19% from the year-ago quarter’s figure. The metric was up 49% from third-quarter fiscal 2019 levels. Digital sales contributed 33% to net sales. In the reported quarter, digital penetration in net sales fell 5-percentage point from the prior-year period’s levels, while it improved 10-percentage points from third-quarter fiscal 2019 tally.

In the reported quarter, the company acquired 4.4 million new customers for the Macy’s brand, up 28% from third-quarter fiscal 2019 level. Of the new customers acquired, 41% came through the digital channel.

During the quarter, the company witnessed Platinum, Gold and Silver customers re-engage in the Star Rewards Loyalty program. Average customers spend rose 16% compared with third-quarter fiscal 2019 levels. The Bronze segment, which comprises the most diverse loyalty tier, continued to grow by adding 2.3 million members.

During the quarter, the company witnessed strong growth across categories like home, fragrances, jewelry, watches and sleepwear. Occasion-based categories like dresses, men’s tailored and luggage continued to recover. Emerging categories like toys and pets, showed encouraging results and the company continues to expand in these areas and related brands. Under the Bloomingdale banner, growth was mainly driven by strong sales of luxury handbags, fine jewelry, home, men’s shoes and contemporary apparel. Bluemercury witnessed strong growth in private brands as well as in home fragrance and treatment.

Net credit card revenues amounted to $213 million, up $30 million from third-quarter fiscal 2019 levels. The metric contributed 3.9% to sales, down 100 bps year on year and up 40 bps from third-quarter fiscal 2019 levels. Improved customer credit health continued to contribute to credit card revenues.

Gross margin came in at 41%, up from 35.6% in the prior-year quarter and 100 bps from third-quarter fiscal 2019 levels. The upside was driven by higher merchandise margin, supported by strong pricing, promotions and solid inventory-productivity initiatives driven by the Polaris Strategy. Delivery expenses, as a percentage of sales, increased 170 bps from third-quarter fiscal 2019 levels.

SG&A expense increased 34.3% year over year to $1,973 million. As a percentage of sales, SG&A expenses were 36.3%, down 700 bps year on year. The quarter gained from disciplined expense management and improved productivity stemming from the Polaris strategy. It also includes permanent cost savings realized in 2020 and reduced labor costs due to elevated job openings in stores.

Macy’s reported adjusted EBITDA of $765 million against adjusted EBITDA loss of $159 million in the year-ago quarter. Adjusted EBITDA amounted to $325 million in third-quarter fiscal 2019.

Macy's, Inc. Price, Consensus and EPS Surprise

Macy's, Inc. Price, Consensus and EPS Surprise
Macy's, Inc. Price, Consensus and EPS Surprise

Macy's, Inc. price-consensus-eps-surprise-chart | Macy's, Inc. Quote

Key Financial Aspects & Other Developments

Macy’s had cash and cash equivalents of $316 million at the end of the fiscal third quarter. Merchandise inventories, as of Oct 30, 2021, amounted to $6,141 million. Long-term debt and shareholders’ equity were $3,295 million and $3,008 million, respectively.

The company’s strong cash position, on a year-to-date basis, encouraged management to invest in growth and de-levering the balance sheet. It repaid $294 million of debt that was due in January 2022 in addition to the early repayment of the previously-announced $1.3-billion senior secured notes in August.

During the third quarter, the company repurchased $300 million of shares. This accounted for 60% of the $500 million authorization. The company paid $46 million in cash dividends to shareholders.

In a separate release, Macy’s announced the launch of a digital marketplace to strengthen its omni-channel retailing capabilities. The new marketplace will help the company expand assortments and introduce new categories. To power the platform, Macy’s is partnering with Mirakl — a leading enterprise marketplace technology company. The platform is expected to be launched in the second half of 2022.

Outlook

Management is impressed with the company’s third-quarter performance. This along with strong market trends as the company heads into the holiday season, led management to raise view for fiscal 2021.

The company expects net sales in the bracket of $24.12-$24.28 billion, up from the previous guidance of $23.55-$23.95 billion. Adjusted earnings are anticipated in the range of $4.57-$4.76 compared with the prior projection of $3.41-$3.75 per share. The Zacks Consensus Estimate for sales and earnings in fiscal 2021 is currently pegged at nearly $24 billion and $3.93 per share, respectively.

As a percentage of sales, adjusted EBITDA is expected to be greater than 12.5% compared with 11-11.5% anticipated earlier.

For the fourth quarter, the company expects comparable sales on an owned-plus-licensed basis to increase 2-4% from fourth-quarter fiscal 2019 levels. The figure includes an adverse impact of nearly 125 bps, due to the shift of the Friends and Family promotional event to the third quarter.

Here are 3 Key Stocks for You

We have highlighted some other top-ranked stocks in the Retail - Wholesale sector, namely Tractor Supply Company TSCO, Fastenal Company FAST and Costco Wholesale Corporation COST.

Tractor Supply Company, a rural lifestyle retailer in the United States, sports a Zacks Rank #1 (Strong Buy). The company has a trailing four-quarter earnings surprise of 22.8%, on average. Shares of TSCO have increased 17.6% in the past three months. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Tractor Supply Company's current financial year sales and earnings per share (EPS) suggests growth of 19% and 23.9%, respectively, from the year-ago quarter's reported figures. TSCO has a long-term earnings growth rate of 9.6%.

Costco, which operates membership warehouses, has a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 7.7%, on average. Shares of the company have increased 16.7% in the past three months.

The Zacks Consensus Estimate for Costco’s current financial year sales and EPS suggests growth of 9.6% and 9.7%, respectively, from the year-ago period’s levels. COST has a long-term earnings growth rate of 8.6%.

Fastenal, a national wholesale distributor of industrial and construction supplies, currently has a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 2%, on average. Shares of FAST have increased 11% in the past three months.

The Zacks Consensus Estimate for Fastenal's current financial year sales and EPS suggests growth of 5.5% and 5.4%, respectively, from the year-ago period’s levels. FAST has a long-term earnings growth rate of 9%.


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