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How Macy’s Fared on the Profitability Front in Fiscal 2018

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Earnings in fiscal 2018 and Q4

Macy’s (M) adjusted EPS fell 4.2% YoY (year-over-year) to $2.73 in fiscal 2018’s fourth quarter (ended February 2). However, the company’s EPS beat analysts’ estimate of $2.53. A decline in its fourth-quarter sales more than offset the effects of lower interest expenses and a lower effective tax rate. Macy’s adjusted EPS rose 10.3% to $4.18 in fiscal 2018.

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Margins in fiscal Q4

Macy’s gross margin narrowed by ~110 basis points YoY to 37.5% in fiscal 2018’s fourth quarter due to markdowns to clear inventory, higher delivery expenses to support digital sales growth, and Macy’s loyalty program. On a reported basis, the company’s operating margin narrowed YoY to 12.4% from 14.4%. The company’s fourth-quarter operating margin was impacted by its higher selling, general, and administrative expense rate due to dismal holiday sales and investments made to fulfill online orders and higher wages.

Macy’s fourth-quarter gross margin was also impacted its assets sale gains falling, and partially offset by lower restructuring, impairment, and other costs. Macy’s gross margin was consistent YoY at 39.1% in fiscal 2018. The company’s operating margin narrowed by ~50 basis points to 7.0% due to growth initiative expenses and lower asset sales gains.

Outlook

In fiscal 2019, Macy’s expects EPS (excluding the impact of settlement, impairment, and other costs) of $3.05–$3.25. The company expects its gross margin to narrow and its operating margin to be pressured by growth investments.

Macy’s announced a multiyear productivity program set to focus on margin improvement through various initiatives, including enhanced inventory management, supply-chain efficiencies, and pricing optimization. As of part of its productivity program, Macy’s aims to simplify its upper management structure to reduce costs and speed up decisionmaking. The company expects its restructuring initiatives to generate cost savings of $100 million in fiscal 2019.

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