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Why Did Macy’s 1Q16 Earnings Drop Sharply?

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Earnings declined in 1Q16

Macy’s (M) reported a significant decline of 28.6% in its adjusted EPS (earnings per share) for 1Q16 ended April 30, 2016. Despite this decline, the company’s adjusted EPS of $0.40 in 1Q16 beat the consensus analyst estimate of $0.36. The adjusted EPS excludes the impact of non-recurring items.

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What impacted earnings?

The 28.6% decline in Macy’s 1Q16 adjusted EPS was higher compared to a 14.2% decline in 4Q15 adjusted EPS and a 6.7% decline in 1Q15 adjusted EPS. The decline in Macy’s 1Q16 earnings was a result of lower sales and a drop in operating margin. We discussed the factors that caused lower sales in part one of this series. We’ll discuss the factors that impacted Macy’s operating margin in the next part of this series.

Macy’s adjusted EPS in 1Q16 excludes $13 million of non-cash settlement charges related to the company’s retirement plans.

1Q16 was the fifth consecutive quarter in which Macy’s earnings declined on an adjusted basis. Macy’s also delivered a dismal performance in the previous fiscal year. In fiscal 2015 ended January 30, 2016, Macy’s adjusted EPS declined by 14.3%. The fiscal 2015 adjusted EPS of peers Nordstrom (JWN), Dillard’s (DDS), and Kohl’s (KSS) declined by 10.8%, 14%, and 5.4%, respectively. Subdued sales, pressure on margins, and growth investments have been adversely impacting the bottom line of department stores.

Impact of share repurchases

Macy’s adjusted EPS in 1Q16 was favorably impacted by a reduction in the number of outstanding shares due to share repurchases. The average diluted share count in 1Q16 was down by 9.5% to 313.5 million shares compared to 346.5 million shares in the comparable quarter of the previous year.

In 1Q16, Macy’s repurchased $129 million of stock, or 3 million shares, under its repurchase program. As of the end of 1Q16, the company has a remaining authorization of $1.9 billion under its share repurchase program. The iShares U.S. Consumer Services ETF (IYC) has 0.4% exposure to Macy’s.

We’ll discuss Macy’s margins in the next part of this series.

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