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Why Is Macy's (M) Down 3.9% Since Last Earnings Report?

Zacks Equity Research
Here at Zacks, our focus is on the proven Zacks Rank system, which emphasizes earnings estimates and estimate revisions to find great stocks. Nevertheless, we are always paying attention to the latest value, growth, and momentum trends to underscore strong picks.

A month has gone by since the last earnings report for Macy's (M). Shares have lost about 3.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Macy's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Macy’s Q4 Earnings Beat, Strategic Initiatives on Track

Macy’s, Inc. delivered the seventh straight quarter of positive earnings surprise, when it reported fourth-quarter fiscal 2018 results. Management hinted that while the company registered positive comparable sales, results failed to live up to expectations. Nonetheless, the company witnessed double-digit growth in the digital business.

The company highlighted that going forward it will embark on Backstage, Vendor Direct, Store Pickup, Loyalty Program, Growth150 stores, ‘mobile first’ strategy and Destination Businesses to drive growth. The company plans to double the number of Market @ Macy’s, a store-within-a-store retail concept. The company has undertaken restructuring actions, which involves streamlining the upper management teams, and this is likely to result in annual cost savings of $100 million beginning in fiscal 2019.

Let’s Delve Deep

Macy’s posted adjusted earnings of $2.73 per share that comfortably surpassed the Zacks Consensus Estimate of $2.51 but declined 4.2% from the year-ago period. Fall in earnings may be attributed to lower net sales. This Cincinnati, OH-based company generated net sales of $8,455 million that decreased 2.5% year over year.

Comparable sales (comps) on an owned plus licensed basis rose 0.7%, while on an owned basis, the metric improved 0.4%. This marked the fifth straight quarter of comps growth for the company. Strategic investments across stores, technology and merchandising are aiding comparable sales growth. Total transactions jumped 6.2% in the quarter due to robust customer demand both online and in store. However, average units per transaction declined 4.9%.

The company registered sturdy performance across fragrances skin care, women's shoes, actives, fine jewelry, men's tailored clothing, and furniture. However, performance in women's sportswear collection, handbags and color cosmetics were disappointing.

Gross margin shrunk 110 basis points to 37.5% due to lower merchandise margin on account of clearing the inventory as well as delivery expense. Management expects gross margin to be down moderately in the first half and down marginally in the second half of fiscal 2019. Adjusted EBITDA declined 16.1% to $1,399 million, while adjusted EBITDA margin contracted 270 basis points to 16.5%.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,162 million, long-term debt of $4,708 million, and shareholders’ equity of $6,436 million. Management incurred capital expenditures of about $932 million in fiscal 2018 and projects the same to be approximately $1 billion in fiscal 2019.

FY19 View

Macy’s now anticipates fiscal 2019 net sales to be roughly flat with both comps on an owned plus licensed basis and comps on an owned projected to be flat to up 1%. In fiscal 2018, comps on an owned plus licensed basis grew 2%. Credit revenue is anticipated to be in the band of $740-$765 million.

Management now envisions adjusted earnings in the range of $3.05-$3.25 per share for fiscal 2019, down from $4.18 reported in fiscal 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -28.48% due to these changes.

VGM Scores

Currently, Macy's has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Macy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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